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EX-10.1 - EX-10.1 - DEX ONE Corp | g26985exv10w1.htm |
EX-10.2 - EX-10.2 - DEX ONE Corp | g26985exv10w2.htm |
EX-10.3 - EX-10.3 - DEX ONE Corp | g26985exv10w3.htm |
EX-32.1 - EX-32.1 - DEX ONE Corp | g26985exv32w1.htm |
EX-31.2 - EX-31.2 - DEX ONE Corp | g26985exv31w2.htm |
EX-31.1 - EX-31.1 - DEX ONE Corp | g26985exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-07155
DEX ONE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 13-2740040 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
1001 Winstead Drive, Cary, N.C. | 27513 | |
(Address of principal executive offices) | (Zip Code) |
(919) 297-1600
(Registrants telephone number, including area code)
N/A
(Former Name, Former Address and Former
Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the Registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o
|
Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes þ No o
Indicate the number of shares outstanding of the issuers classes of common stock, as of the latest
practicable date:
Title of class | Shares Outstanding at April 15, 2011 | |
Common Stock, par value $.001 per share | 50,058,556 |
DEX ONE CORPORATION
INDEX TO FORM 10-Q
2
Table of Contents
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Dex One Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except share data) | March 31, 2011 | December 31, 2010 | |||||||
Assets |
|||||||||
Current Assets |
|||||||||
Cash and cash equivalents |
$ | 136,642 | $ | 127,852 | |||||
Accounts receivable: |
|||||||||
Billed |
194,716 | 186,477 | |||||||
Unbilled |
546,635 | 567,839 | |||||||
Allowance for doubtful accounts |
(79,065 | ) | (75,891 | ) | |||||
Net accounts receivable |
662,286 | 678,425 | |||||||
Deferred directory costs |
136,477 | 147,025 | |||||||
Short-term deferred income taxes, net |
58,630 | 84,149 | |||||||
Prepaid expenses and other current assets |
67,894 | 82,656 | |||||||
Total current assets |
1,061,929 | 1,120,107 | |||||||
Fixed assets and computer software, net |
177,303 | 188,749 | |||||||
Other non-current assets |
10,785 | 9,762 | |||||||
Intangible assets, net |
2,330,958 | 2,369,156 | |||||||
Goodwill, net |
801,074 | 801,074 | |||||||
Total Assets |
$ | 4,382,049 | $ | 4,488,848 | |||||
Liabilities and Shareholders Equity |
|||||||||
Current Liabilities |
|||||||||
Accounts payable and accrued liabilities |
$ | 143,834 | $ | 154,540 | |||||
Accrued interest |
18,499 | 30,905 | |||||||
Deferred directory revenues |
701,117 | 722,566 | |||||||
Current portion of long-term debt |
224,555 | 249,301 | |||||||
Total current liabilities |
1,088,005 | 1,157,312 | |||||||
Long-term debt |
2,425,110 | 2,487,920 | |||||||
Deferred income taxes, net |
195,335 | 205,812 | |||||||
Other non-current liabilities |
91,425 | 111,888 | |||||||
Total liabilities |
3,799,875 | 3,962,932 | |||||||
Commitments and contingencies |
|||||||||
Shareholders Equity |
|||||||||
Common stock, par value $.001 per share, authorized 300,000,000 shares;
issued and outstanding 50,058,556 shares at March 31,
2011 and 50,031,441 shares
at December 31, 2010 |
50 | 50 | |||||||
Additional paid-in capital |
1,456,071 | 1,455,223 | |||||||
Accumulated deficit |
(868,182 | ) | (923,592 | ) | |||||
Accumulated other comprehensive loss |
(5,765 | ) | (5,765 | ) | |||||
Total shareholders equity |
582,174 | 525,916 | |||||||
Total Liabilities and Shareholders Equity |
$ | 4,382,049 | $ | 4,488,848 | |||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Table of Contents
Dex One Corporation and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
Successor Company | Predecessor Company | ||||||||||||
Three Months Ended | Two Months Ended | One Month Ended | |||||||||||
(in thousands, except per share data) | March 31, 2011 | March 31, 2010 | January 31, 2010 | ||||||||||
Net revenues |
$ | 391,235 | $ | 53,145 | $ | 160,372 | |||||||
Expenses: |
|||||||||||||
Production and distribution expenses
(exclusive of depreciation and
amortization shown separately below) |
75,059 | 27,564 | 26,949 | ||||||||||
Selling and support expenses |
104,059 | 59,335 | 40,866 | ||||||||||
General and administrative expenses |
38,097 | 22,191 | 8,322 | ||||||||||
Depreciation and amortization |
54,082 | 39,425 | 20,161 | ||||||||||
Total expenses |
271,297 | 148,515 | 96,298 | ||||||||||
Operating income (loss) |
119,938 | (95,370 | ) | 64,074 | |||||||||
Gain on sale of assets |
13,437 | | | ||||||||||
Interest expense, net |
(57,720 | ) | (48,934 | ) | (19,656 | ) | |||||||
Income (loss) before reorganization items,
net and income taxes |
75,655 | (144,304 | ) | 44,418 | |||||||||
Reorganization items, net |
| | 7,793,132 | ||||||||||
Income (loss) before income taxes |
75,655 | (144,304 | ) | 7,837,550 | |||||||||
(Provision) benefit for income taxes |
(20,245 | ) | 401,522 | (917,541 | ) | ||||||||
Net income |
$ | 55,410 | $ | 257,218 | $ | 6,920,009 | |||||||
Earnings per share: |
|||||||||||||
Basic |
$ | 1.11 | $ | 5.14 | $ | 100.3 | |||||||
Diluted |
$ | 1.11 | $ | 5.14 | $ | 100.2 | |||||||
Shares used in computing earnings per share: |
|||||||||||||
Basic |
50,040 | 50,008 | 69,013 | ||||||||||
Diluted |
50,040 | 50,008 | 69,052 | ||||||||||
Comprehensive Income |
|||||||||||||
Net income |
$ | 55,410 | $ | 257,218 | $ | 6,920,009 | |||||||
Amortization of gain on interest rate swaps,
net of tax |
| | 1,083 | ||||||||||
Benefit plans adjustment, net of tax |
| | (4,535 | ) | |||||||||
Comprehensive income |
$ | 55,410 | $ | 257,218 | $ | 6,916,557 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
Table of Contents
Dex One Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Successor Company | Predecessor Company | ||||||||||||
Three Months | Two Months | One Month | |||||||||||
Ended | Ended | Ended | |||||||||||
March 31, | March 31, | January 31, | |||||||||||
(in thousands) | 2011 | 2010 | 2010 | ||||||||||
Cash Flows Provided By Operating Activities |
$ | 109,533 | $ | 105,283 | $ | 71,741 | |||||||
Cash Flows from Investing Activities |
|||||||||||||
Additions to fixed assets and computer software |
(4,860 | ) | (6,386 | ) | (1,766 | ) | |||||||
Proceeds from sale of assets |
15,391 | | | ||||||||||
Net cash provided by (used in) investing activities |
10,531 | (6,386 | ) | (1,766 | ) | ||||||||
Cash Flows from Financing Activities |
|||||||||||||
Credit facilities repayments |
(94,846 | ) | (153,179 | ) | (511,272 | ) | |||||||
Debt issuance costs and other financing items, net |
315 | (949 | ) | (22,096 | ) | ||||||||
(Decrease) increase in checks not yet presented for payment |
(16,743 | ) | 3,303 | (3,092 | ) | ||||||||
Net cash used in financing activities |
(111,274 | ) | (150,825 | ) | (536,460 | ) | |||||||
Increase (decrease) in cash and cash equivalents |
8,790 | (51,928 | ) | (466,485 | ) | ||||||||
Cash and cash equivalents, beginning of period |
127,852 | 199,455 | 665,940 | ||||||||||
Cash and cash equivalents, end of period |
$ | 136,642 | $ | 147,527 | $ | 199,455 | |||||||
Supplemental Information: |
|||||||||||||
Cash paid (received): |
|||||||||||||
Interest, net |
$ | 63,716 | $ | 19,208 | $ | 15,460 | |||||||
Income taxes, net |
$ | (626 | ) | $ | 2,002 | $ | | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
Table of Contents
Dex One Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(tabular amounts in thousands, except share and per share data and where otherwise indicated)
1. Business and Basis of Presentation
The interim condensed consolidated financial statements of Dex One Corporation and its direct and
indirect wholly-owned subsidiaries (Dex One, the Successor Company, the Company, we, us and our) have been prepared in accordance with the Securities and Exchange
Commissions (SEC) instructions to this Quarterly Report on Form 10-Q and should be read in
conjunction with the financial statements and related notes included in our Annual Report on Form
10-K for the year ended December 31, 2010. The interim condensed consolidated financial statements
include the accounts of Dex One and its direct and indirect wholly-owned subsidiaries. As of March
31, 2011, R.H. Donnelley Corporation, R.H. Donnelley Inc. (RHDI), Dex Media, Inc. (Dex Media),
the legal entity of Business.com, Inc. (Business.com) and Dex One Service, Inc. (Dex One
Service) were our only direct wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated. The results of interim periods are not necessarily indicative of
results for the full year or any subsequent period. In the opinion of management, all material
adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement
of financial position, results of operations and cash flows at the dates and for the periods
presented have been included.
Dex One became the successor registrant to R.H. Donnelley Corporation (RHD or the Predecessor
Company) upon emergence from Chapter 11 relief under Title 11 of the United States Code (Chapter
11) on January 29, 2010 (the Effective Date). References to the Predecessor Company in this
Quarterly Report on Form 10-Q pertain to periods prior to the Effective Date.
In conjunction with our restructuring plan that commenced during the fourth quarter of 2010 and the
resulting changes in our organizational structure, certain prior period amounts included in the
unaudited condensed consolidated statements of operations have been reclassified to conform to the
current periods presentation. See Note 4, Restructuring Charges for additional information.
Corporate Overview
We are a marketing solutions company that helps local businesses generate leads and manage their
presence among consumers in the markets we serve. Our marketing solutions combine multiple media
platforms that drive large volumes of leads to our clients. Our locally based marketing consultants
offer local businesses personalized marketing consulting services and exposure across these media
platforms, including our print, online and mobile yellow pages and search solutions, as well as
major search engines.
Our proprietary marketing solutions include our Dex published yellow pages directories, which we
co-brand with other recognizable brands in the industry such as Qwest, CenturyLink and AT&T, our
Internet yellow pages site, DexKnows.com ® and our mobile application, Dex Mobile
®. Our growing list of marketing solutions also includes local business and market
analysis, message and image creation, target market identification, advertising and digital profile
creation, keyword and search engine optimization strategies and programs, distribution strategies,
social strategies, and tracking and reporting. Our digital affiliate marketing solutions are
powered by our search engine marketing product, DexNet, which extends our clients reach to our
leading Internet and mobile partners to attract consumers searching for local products and services
within our markets.
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Table of Contents
2. Summary of Significant Accounting Policies
Revenue Recognition
Our advertising revenues are earned primarily from the sale of advertising in yellow pages
directories we publish. Advertising revenues also include revenues from our Internet-based
marketing solutions including online directories, such as DexKnows.com and DexNet. Advertising
revenues are affected by several factors, including changes in the quantity, size and
characteristics of advertisements, acquisition of new clients, renewal rates of existing clients,
premium advertisements sold, changes in advertisement pricing, the introduction of new marketing
solutions, an increase in competition and more fragmentation in the local business search market
and general economic factors. Revenues with respect to print advertising and Internet-based
marketing solutions that are sold with print advertising are recognized under the deferral and
amortization method whereby revenues are initially deferred when a directory is published, net of
sales claims and allowances, and recognized ratably over the directorys life, which is typically
12 months. Revenues with respect to Internet-based marketing solutions that are sold standalone,
such as DexNet, are recognized ratably over the life of the contract commencing when they are first
delivered or fulfilled. Revenues with respect to our marketing solutions that are non-performance
based are recognized ratably over the life of the contract commencing when they are first delivered
or fulfilled. Revenues with respect to our marketing solutions that are performance-based are
recognized as the service is delivered or fulfilled.
More specifically, we recognize revenue when all of the following criteria have been met:
| Persuasive evidence of an arrangement exists: This criterion is satisfied with the execution of a signed contract between the Company and our client. This contract includes specifications that must be adhered to over the term of the agreement by both parties. | ||
| Delivery has occurred: This criterion is satisfied for our print marketing solutions when physical distribution of a given print directory is substantially complete. This criterion is satisfied for our Internet-based marketing solutions upon fulfillment. | ||
| The fee is fixed or determinable: This criterion is satisfied with the execution of a signed contract between the Company and our client including the final negotiated price. | ||
| Collectability is reasonably assured: This criterion is satisfied by performing credit evaluations of our clients before the signed contract is executed or by requiring our clients to prepay in full for our marketing solutions. Reasonable assurance of collection is also evidenced by a review of the clients payment history. |
Revenue and deferred revenue from the sale of advertising is recorded net of an allowance for sales
claims, estimated based primarily on historical experience. We increase or decrease this estimate
as information or circumstances indicate that the estimate may no longer represent the amount of
claims we may incur in the future.
In September 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements,
a consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 amends the current
guidance pertaining to multiple-deliverable revenue arrangements included in FASB Accounting
Standards Codification (ASC) 605-25, Revenue Recognition Multiple Element Arrangements to:
| Provide updated guidance on determining whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how consideration should be allocated; | ||
| Require an entity to allocate revenue in a multiple element arrangement using a selling price hierarchy of (1) vendor specific objective evidence of selling price (VSOE), if available; (2) third party evidence of selling price (TPE), if VSOE is not available; or (3) estimated selling price (ESP), if a vendor does not have either VSOE or TPE; and | ||
| Eliminate the use of the residual method for revenue recognition and require an entity to allocate revenue using the relative selling price method. |
The Company adopted ASU 2009-13 effective January 1, 2011 on a prospective basis. The adoption of
ASU 2009-13 did not have any impact on our financial position, results of operations or cash flows.
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Table of Contents
We enter into multiple-deliverable revenue arrangements that may include any combination of our
print or Internet-based marketing solutions and that are designed specifically to meet the needs
of our clients. Our print and Internet-based marketing solutions are also sold on a stand-alone
basis. The timing of delivery or fulfillment of our marketing solutions in a
multiple-deliverable arrangement may differ, whereby the fulfillment of Internet-based marketing
solutions typically precedes delivery of our print marketing solutions due to the length of time
required to produce the final print product. In addition, multiple print directories included in
a multiple-deliverable arrangement may be published at different times throughout the year. We
limit the amount of revenue recognized for delivered elements to the amount that is not
contingent on the future delivery or fulfillment of other marketing solutions included in a
multiple-deliverable arrangement. Our print and Internet-based marketing solutions are not
inter-dependent. We account for multiple arrangements with a single client as one arrangement if
the contractual terms and/or substance of those arrangements indicate that they may be so closely
related that they are, in effect, parts of a single arrangement.
We evaluate each deliverable in a multiple-deliverable revenue arrangement to determine whether
they represent separate units of accounting using the following criteria:
| The delivered item(s) has value to the customer on a stand-alone basis; and | ||
| If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. |
All of our print and Internet-based marketing solutions qualify as separate units of accounting
since they are sold on a stand-alone basis and we allocate multiple-deliverable arrangement
consideration to each deliverable based on its relative selling price, which is determined using
VSOE. Our sales contracts generally do not include any provisions for cancellation, termination,
right of return or refunds that would significantly impact recognized revenue.
The objective of VSOE is to determine the price at which a company would transact a sale if the
product or service were sold on a stand-alone basis. In determining VSOE, we require that a
substantial majority of our selling prices are consistent with our normal pricing and discounting
policies, which have been established by management having relevant authority, for the specific
marketing solution when sold on a stand-alone basis. We ensure this consistency by performing an
analysis on an annual basis or more often if necessary. In determining relative selling prices of
our marketing solutions sold on a stand-alone basis, we consider, among other things, (1) the
geographies in which our marketing solutions are sold, (2) economic factors, (3) local business
conditions, (4) competition in our markets, (5) advertiser and consumer behavior and
classifications, (6) gross margin objectives and (7) historical pricing practices. Selling prices
are analyzed on a more frequent basis if changes in any of these factors have a material impact on
our pricing and discounting policies. There have been no significant changes to our selling prices
or methods used to determine VSOE during the three months ended March 31, 2011. However, we may
modify our pricing and discounting policies or implement new go-to-market strategies in the future,
which could result in changes in selling prices, the methodology used to determine VSOE or use of
another method in the selling price hierarchy to allocate arrangement consideration. As a result,
our future revenue recognition for multiple-deliverable arrangements could differ significantly
from our historical results.
For multiple-deliverable arrangements entered into prior to January 1, 2011, our marketing
solutions qualified as separate units of accounting and arrangement consideration was allocated to
each respective deliverable based on the relative fair value method using VSOE, which was
determined using the same methodology described above. Had ASU 2009-13 been effective and applied
to multiple-deliverable arrangements in prior reporting periods, there would not have been any
impact on revenue recognized in those periods.
8
Table of Contents
Identifiable Intangible Assets and Goodwill
The Company reviews the carrying value of goodwill, definite-lived intangible assets and other
long-lived assets whenever events or circumstances indicate that their carrying amount may not be
recoverable. The Company reviewed the following information, estimates and assumptions to determine
if any indicators of impairment existed during the three months ended March 31, 2011:
| Historical financial information, including revenue, profit margins, customer attrition data and price premiums enjoyed relative to competing independent publishers; | ||
| Long-term financial projections, including, but not limited to, revenue trends and profit margin trends; | ||
| Intangible asset carrying values; | ||
| Trading values of our debt and equity securities; and | ||
| Other Company-specific information. |
The Company concluded there were no triggering events to further measure for impairment during the
three months ended March 31, 2011.
As of March 31, 2011, the Companys reporting units are RHDI, Dex Media East, Inc. (DME Inc.) and
Dex Media West, Inc. (DMW Inc.). The allocation of goodwill by reporting unit at March 31, 2011
is as follows:
Allocation of Goodwill at | ||||
Reporting Unit | March 31, 2011 | |||
RHDI |
$ | 250,518 | ||
DME Inc. |
236,159 | |||
DMW Inc. |
314,397 | |||
Total |
$ | 801,074 | ||
The change in the carrying amount of goodwill since it was established in fresh start accounting as
of February 1, 2010 (Fresh Start Reporting Date) is as follows:
Balance at February 1, 2010 |
$ | 2,097,124 | ||
Goodwill impairment charges during 2010 |
(1,137,623 | ) | ||
Reduction in goodwill during 2010 |
(158,427 | ) | ||
Balance at March 31, 2011 |
$ | 801,074 | ||
The Company recognized goodwill impairment charges of $752.3 million and $385.3 million during the
second and third quarters of 2010 for a total goodwill impairment charge of $1,137.6 million during
the year ended December 31, 2010. During the fourth quarter of 2010, the Company recognized a
reduction in goodwill of $158.4 million related to the finalization of cancellation of indebtedness
income (CODI) and tax attribute reduction calculations required to be performed at December 31,
2010 associated with fresh start accounting.
Our identifiable intangible assets and their respective book values at March 31, 2011 are shown in
the following table:
Technology, | ||||||||||||||||||||||||
Directory | Local | National | Trade | Advertising | ||||||||||||||||||||
Services | Customer | Customer | Names and | Commitments | ||||||||||||||||||||
Agreements | Relationships | Relationships | Trademarks | & Other | Total | |||||||||||||||||||
Net intangible
assets carrying
value |
$ | 1,330,000 | $ | 560,000 | $ | 175,000 | $ | 380,000 | $ | 85,500 | $ | 2,530,500 | ||||||||||||
Accumulated
amortization |
(98,013 | ) | (60,511 | ) | (8,118 | ) | (24,437 | ) | (8,463 | ) | (199,542 | ) | ||||||||||||
Net intangible
assets at March 31,
2011 |
$ | 1,231,987 | $ | 499,489 | $ | 166,882 | $ | 355,563 | $ | 77,037 | $ | 2,330,958 | ||||||||||||
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Amortization expense related to the Companys intangible assets was $38.2 million and $30.8 million
for the three months ended March 31, 2011 and two months ended March 31, 2010, respectively.
Amortization expense related to the Predecessor Companys intangible assets was $15.6 million for
the one month ended January 31, 2010.
The combined weighted average useful life of our identifiable intangible assets at March 31, 2011
is 21 years. The weighted average useful lives and amortization methodology for each of our
identifiable intangible assets at March 31, 2011 are shown in the following table:
Weighted Average | Amortization | |||
Intangible Asset | Useful Lives | Methodology | ||
Directory services agreements
|
26 years | Income forecast method (1) | ||
Local customer relationships
|
14 years | Income forecast method (1) | ||
National customer relationships |
25 years | Income forecast method (1) | ||
Trade names and trademarks |
14 years | Straight-line method | ||
Technology, advertising commitments and other |
8 years | Income forecast method (1) |
(1) | These identifiable intangible assets are being amortized under the income forecast method, which assumes the value derived from these intangible assets is greater in the earlier years and steadily declines over time. |
The Company evaluates the remaining useful lives of identifiable intangible assets and other
long-lived assets whenever events or circumstances indicate that a revision to the remaining period
of amortization is warranted. If the estimated remaining useful lives change, the remaining
carrying amount of the intangible assets and other long-lived assets would be amortized
prospectively over that revised remaining useful life. The Company evaluated the remaining useful
lives of identifiable intangible assets and other long-lived assets during the three months ended
March 31, 2011 by considering, among other things, the effects of obsolescence, demand,
competition, which takes into consideration the price premium benefit we have over competing
independent publishers in our markets as a result of directory services agreements acquired in
prior acquisitions, and other economic factors, including the stability of the industry in which we
operate, known technological advances, legislative actions that result in an uncertain or changing
regulatory environment, and expected changes in distribution channels. Based on this evaluation,
the Company has determined that the estimated useful lives of intangible assets presented above
reflect the period they are expected to contribute to future cash flows and therefore continue to
be deemed appropriate.
If industry and local business conditions in our markets deteriorate in excess of current
estimates, potentially resulting in further declines in advertising sales and operating results,
and if the trading value of our debt and equity securities decline significantly, we will be
required to assess the recoverability of goodwill in addition to our annual evaluation and
recoverability and useful lives of our intangible assets and other long-lived assets. These
factors, including changes to assumptions used in our impairment analysis as a result of these
factors, could result in future impairment charges, a reduction of remaining useful lives
associated with our intangible assets and other long-lived assets and acceleration of amortization
expense.
Interest Expense
Successor Company
In conjunction with our adoption of fresh start accounting and reporting on the Fresh Start
Reporting Date, an adjustment was established to record our outstanding debt at fair value on the
Fresh Start Reporting Date. This fair value adjustment will be amortized as an increase to interest
expense over the remaining term of the respective debt agreements using the effective interest
method and does not impact future scheduled interest or principal payments. Amortization of the
fair value adjustment included as an increase to interest expense was $7.3 million and $5.5 million
for the three months ended March 31, 2011 and two months ended March 31, 2010, respectively.
During the first quarter of 2010, we entered into interest rate swap and interest rate cap
agreements that were not designated as cash flow hedges. The Companys interest expense for the
three months ended March 31, 2011 and two months ended March 31, 2010 includes income of $0.7
million and expense of $1.1 million, respectively, resulting from the change in fair value of these
interest rate swaps and interest rate caps.
Predecessor Company
Contractual interest expense that would have appeared on the Predecessor Companys condensed
consolidated statement of operations if not for the filing of the Chapter 11 petitions was $65.9
million for the one month ended January 31, 2010.
10
Table of Contents
Advertising Expense
We recognize advertising expenses as incurred. These expenses include media, public relations,
promotional, branding and sponsorship costs and on-line advertising. Total advertising expense for
the Company was $3.1 million and $4.2 million for the three months ended March 31, 2011 and two
months ended March 31, 2010, respectively. Total advertising expense for the Predecessor Company
was $1.0 million for the one month ended January 31, 2010.
Concentration of Credit Risk
Trade Receivables
Approximately 85% of our advertising revenues are derived from the sale of our marketing solutions
to local businesses. Most new clients and clients desiring to expand their advertising programs
are subject to a credit review. If the clients qualify, we may extend credit to them in the form of
a trade receivable for their advertising purchase. We do not require collateral from our clients,
although we do charge late fees to clients that do not pay by specified due dates. The remaining
approximately 15% of our advertising revenues are derived from the sale of our marketing solutions
to national or large regional chains. Substantially all of the revenues derived through national
accounts are serviced through certified marketing representatives (CMRs) from which we accept
orders. We receive payment for the value of advertising placed in our directories, net of the CMRs
commission, directly from the CMR. While we are still exposed to credit risk associated with trade
receivables, the amount of credit losses from these accounts has historically been less than our
credit losses on local accounts because the clients, and in some cases the CMRs, tend to be larger
companies with greater financial resources than local clients. However, during the fourth quarter
of 2010, our bad debt provision was negatively impacted by delinquent balances associated with a
CMR.
Derivative Financial Instruments
At March 31, 2011, we had interest rate swap and interest rate cap agreements with major financial
institutions with a notional amount of $500.0 million and $400.0 million, respectively. We are
exposed to credit risk in the event that one or more of the counterparties to the agreements does
not, or cannot, meet their obligation. The notional amount for interest rate swaps is used to
measure interest to be paid or received and does not represent the amount of exposure to credit
loss. Any loss would be limited to the amount that would have been received over the remaining
life of the interest rate swap agreement. Under the terms of the interest rate cap agreements, the
Company will receive payments based on the spread in rates if the three-month LIBOR rate increases
above the negotiated cap rates. Any loss would be limited to the amount that would have been
received based on the spread in rates over the remaining life of the interest rate cap agreement.
The counterparties to the interest rate swap and interest rate cap agreements are major financial
institutions with credit ratings of AA- or higher, or the equivalent dependent upon the credit
rating agency.
Earnings Per Share
The calculation of basic and diluted earnings per share (EPS) is presented below.
Successor Company | Predecessor Company | ||||||||||||
Three Months | Two Months | One Month | |||||||||||
Ended | Ended | Ended | |||||||||||
March 31, 2011 | March 31, 2010 | January 31, 2010 | |||||||||||
Basic EPS |
|||||||||||||
Net income |
$ | 55,410 | $ | 257,218 | $ | 6,920,009 | |||||||
Weighted average common shares outstanding |
50,040 | 50,008 | 69,013 | ||||||||||
Basic EPS |
$ | 1.11 | $ | 5.14 | $ | 100.3 | |||||||
Diluted EPS |
|||||||||||||
Net income |
$ | 55,410 | $ | 257,218 | $ | 6,920,009 | |||||||
Weighted average common shares outstanding |
50,040 | 50,008 | 69,013 | ||||||||||
Dilutive effect of stock awards |
| | 39 | ||||||||||
Weighted average diluted shares outstanding |
50,040 | 50,008 | 69,052 | ||||||||||
Diluted EPS |
$ | 1.11 | $ | 5.14 | $ | 100.2 | |||||||
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For the three months ended March 31, 2011 and two months ended March 31, 2010, 1.8 million
shares and 1.3 million shares of the Companys stock-based awards had exercise prices that exceeded
the average market price of the Companys common stock for the respective period. For the one month
ended January 31, 2010, 4.6 million shares of the Predecessor Companys stock-based awards had
exercise prices that exceeded the average market price of the Predecessor Companys common stock
for the period.
Fair Value of Financial Instruments
At March 31, 2011 and December 31, 2010, the fair value of cash and cash equivalents, accounts
receivable, net and accounts payable and accrued liabilities approximated their carrying value
based on the net short-term nature of these instruments. The Company has utilized quoted market
prices, where available, to compute the fair market value of our long-term debt at March 31, 2011
as disclosed in Note 5, Long-Term Debt. These estimates of fair value may be affected by
assumptions made and, accordingly, are not necessarily indicative of the amounts the Company could
realize in a current market exchange.
As required by FASB ASC 820, Fair Value Measurements and Disclosures (FASB ASC 820), assets and
liabilities are classified based on the lowest level of input that is significant to the fair value
measurement. The Companys assessment of the significance of a particular input to the fair value
measurement requires judgment, and may affect the valuation of the fair value of assets and
liabilities and their placement within the fair value hierarchy levels. The Company had interest
rate swaps with a notional amount of $500.0 million and interest rate caps with a notional amount
of $400.0 million at March 31, 2011 and December 31, 2010 that are measured at fair value on a
recurring basis. The following table presents the Companys assets and liabilities that are
measured at fair value on a recurring basis at March 31, 2011 and December 31, 2010, respectively,
and the level within the fair value hierarchy in which the fair value measurements were included.
Fair Value Measurements | |||||||||
Using Significant Other Observable Inputs (Level 2) | |||||||||
Derivatives: | March 31, 2011 | December 31, 2010 | |||||||
Interest Rate Swap
Liabilities |
$ | (5,513 | ) | $ | (6,365 | ) | |||
Interest Rate Cap Assets |
$ | 163 | $ | 308 |
There were no transfers of assets or liabilities into or out of Level 2 as of March 31, 2011 or
December 31, 2010. The Company has established a policy of recognizing transfers between levels in
the fair value hierarchy as of the end of a reporting period.
Valuation Techniques Interest Rate Swaps and Interest Rate Caps
Fair value is a market-based measure considered from the perspective of a market participant who
holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when
market assumptions are not readily available, the Companys own assumptions are set to reflect
those that market participants would use in pricing the asset or liability at the measurement date.
The Company uses prices and inputs that are current as of the measurement date.
Fair value for our derivative instruments was derived using pricing models based on a market
approach. Pricing models take into account relevant observable market inputs that market
participants would use in pricing the asset or liability. The pricing models used to determine fair
value for each of our derivative instruments incorporate specific contract terms for valuation
inputs, including effective dates, maturity dates, interest rate swap pay rates, interest rate cap
rates and notional amounts, as disclosed and presented in Note 6, Derivative Financial
Instruments, interest rate yield curves, and the creditworthiness of the counterparty and the
Company. Counterparty credit risk and the Companys credit risk could have a material impact on the
fair value of our derivative instruments, our results of operations or financial condition in a
particular reporting period. At March 31, 2011, the impact of applying counterparty credit risk in
determining the fair value of our derivative instruments was an increase to our derivative
instruments liability of less than $0.1 million. At March 31, 2011, the impact of applying the
Companys credit risk in determining the fair value of our derivative instruments was a decrease to
our derivative instruments liability of $0.9 million. Many pricing models do not entail material
subjectivity because the methodologies employed do not necessitate significant judgment, and the
pricing inputs are observed from actively quoted markets, as is the case for our derivative
instruments. The pricing models used by the Company are widely accepted by the financial services
industry. As such and as noted above, our derivative instruments are categorized within Level 2 of
the fair value hierarchy.
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Table of Contents
Fair Value Control Processes Interest Rate Swaps and Interest Rate Caps
The Company employs control processes to validate the fair value of its derivative instruments
derived from the pricing models. These control processes are designed to assure that the values
used for financial reporting are based on observable inputs wherever possible. In the event that
observable inputs are not available, the control processes are designed to assure that the
valuation approach utilized is appropriate and consistently applied and that the assumptions are
reasonable.
Estimates
The preparation of financial statements in conformity with generally accepted accounting principles
(GAAP) requires management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and certain expenses and the disclosure of contingent assets and
liabilities. Actual results could differ materially from those estimates and assumptions.
Estimates and assumptions are used in the determination of recoverability of long-lived assets,
sales allowances, allowances for doubtful accounts, depreciation and amortization, employee benefit
plans expense, restructuring expense and accruals, deferred income taxes, certain assumptions
pertaining to our stock-based awards, and certain estimates and assumptions used in our impairment
evaluation of goodwill, definite-lived intangible assets and other long-lived assets, among others.
New Accounting Pronouncements
We have reviewed accounting pronouncements that were issued as of March 31, 2011, which the Company
has not yet adopted, and do not believe that these pronouncements will have a material impact on
our financial position or operating results.
3. Reorganization Items, Net
Predecessor Company
Reorganization items directly associated with the process of reorganizing the business under
Chapter 11 were recorded on a separate line item on the condensed consolidated statement of
operations. The Predecessor Company had recorded $7.8 billion of reorganization items during the
one month ended January 31, 2010 comprised of a $4.5 billion gain on reorganization / settlement of
liabilities subject to compromise and fresh start accounting adjustments of $3.3 billion. The
following table displays the details of reorganization items for the one month ended January 31,
2010:
Predecessor Company | ||||
One Month Ended | ||||
January 31, 2010 | ||||
Liabilities subject to compromise |
$ | 6,352,813 | ||
Issuance of new Dex One common stock (par value) |
(50 | ) | ||
Dex One additional paid-in capital |
(1,450,734 | ) | ||
Dex One Senior Subordinated Notes |
(300,000 | ) | ||
Reclassified into other balance sheet liability accounts |
(39,471 | ) | ||
Professional fees and other |
(38,403 | ) | ||
Gain on reorganization / settlement of liabilities subject to compromise |
4,524,155 | |||
Fresh start accounting adjustments: |
||||
Goodwill |
2,097,124 | |||
Write off of deferred revenue and deferred directory costs |
655,555 | |||
Fair value adjustment to intangible assets |
415,132 | |||
Fair value adjustment to the amended and restated credit facilities |
120,245 | |||
Fair value adjustment to fixed assets and computer software |
49,814 | |||
Write-off of deferred financing costs |
(48,443 | ) | ||
Other fresh start accounting adjustments |
(20,450 | ) | ||
Total fresh start accounting adjustments |
3,268,977 | |||
Total reorganization items, net |
$ | 7,793,132 | ||
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4. Restructuring Charges
During the fourth quarter of 2010, the Company initiated a restructuring plan that includes
headcount reductions, consolidation of responsibilities and vacating leased facilities (2010
Actions), which has continued into 2011. Employees impacted by the 2010 Actions were notified of
their termination during the fourth quarter of 2010 and first quarter of 2011. In addition, the
Company finalized a plan to vacate a portion of our corporate headquarters in Cary, North Carolina
during the first quarter of 2011. As a result of the 2010 Actions, we have recognized a
restructuring charge to earnings of $6.0 million and made payments of $8.5 million during the three
months ended March 31, 2011 related to severance and vacating leased facilities. The following
table shows the activity in our restructuring reserve associated with the 2010 Actions during the
three months ended March 31, 2011.
2010 Actions | ||||
Balance at January 1, 2011 |
$ | 17,858 | ||
Additions to reserve charged to earnings |
6,012 | |||
Payments |
(8,457 | ) | ||
Balance at March 31, 2011 |
$ | 15,413 | ||
The Company anticipates additional charges to earnings related to severance and vacating leased
facilities in conjunction with the 2010 Actions during 2011. These amounts have not been determined
at this time. Restructuring charges that are charged to earnings are included in production and
distribution expenses, selling and support expenses or general and administrative expenses on the
consolidated statements of operations, as applicable.
5. Long-Term Debt
The following table presents the fair market value of our long-term debt at March 31, 2011 based on
quoted market prices on that date, as well as the carrying value of our long-term debt at March 31,
2011, which includes $83.7 million of unamortized fair value adjustments required by GAAP in
connection with the Companys adoption of fresh start accounting on the Fresh Start Reporting Date.
Fair Market Value | Carrying Value | |||||||
March 31, 2011 | March 31, 2011 | |||||||
RHDI Amended and Restated Credit Facility |
$ | 767,204 | $ | 986,073 | ||||
Dex Media East Amended and Restated Credit Facility |
558,879 | 717,081 | ||||||
Dex Media West Amended and Restated Credit Facility |
571,218 | 646,511 | ||||||
Dex One 12%/14% Senior Subordinated Notes due 2017 |
190,500 | 300,000 | ||||||
Total Dex One consolidated |
2,087,801 | 2,649,665 | ||||||
Less current portion |
181,961 | 224,555 | ||||||
Long-term debt |
$ | 1,905,840 | $ | 2,425,110 | ||||
RHDI Amended and Restated Credit Facility
As of March 31, 2011, the outstanding carrying value under the amended and restated RHDI credit
facility (RHDI Amended and Restated Credit Facility) totaled $986.1 million. The RHDI Amended and
Restated Credit Facility requires quarterly principal and interest payments and matures on October
24, 2014. The weighted average interest rate of outstanding debt under the RHDI Amended and
Restated Credit Facility was 9.0% at March 31, 2011.
Dex Media East Amended and Restated Credit Facility
As of March 31, 2011, the outstanding carrying value under the amended and restated Dex Media East
credit facility (Dex Media East Amended and Restated Credit Facility) totaled $717.1 million. The
Dex Media East Amended and Restated Credit Facility requires quarterly principal and interest
payments and matures on October 24, 2014. The weighted average interest rate of outstanding debt
under the Dex Media East Amended and Restated Credit Facility was 2.8% at March 31, 2011.
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Dex Media West Amended and Restated Credit Facility
As of March 31, 2011, the outstanding carrying value under the amended and restated Dex Media West
credit facility (Dex Media West Amended and Restated Credit Facility) totaled $646.5 million. The
Dex Media West Amended and Restated Credit Facility requires quarterly principal and interest
payments and matures on October 24, 2014. The weighted average interest rate of outstanding debt
under the Dex Media West Amended and Restated Credit Facility was 7.0% at March 31, 2011.
Impact of Fresh Start Accounting
In conjunction with our adoption of fresh start accounting, an adjustment was established to record
our outstanding debt at fair value on the Fresh Start Reporting Date. The Company was required to
record our amended and restated credit facilities at a discount as a result of their fair value on
the Fresh Start Reporting Date. Therefore, the carrying amount of these debt obligations is lower
than the principal amount due at maturity. A total discount of $120.2 million was recorded upon
adoption of fresh start accounting associated with our amended and restated credit facilities, of
which $83.7 million remains unamortized at March 31, 2011, as shown in the following table.
Outstanding Debt at | ||||||||||||
Unamortized Fair | March 31, 2011 Excluding | |||||||||||
Carrying Value at | Value Adjustments | the Impact of Unamortized | ||||||||||
March 31, 2011 | at March 31, 2011 | Fair Value Adjustments | ||||||||||
RHDI Amended and Restated Credit Facility |
$ | 986,073 | $ | 13,514 | $ | 999,587 | ||||||
Dex Media East Amended and Restated
Credit Facility |
717,081 | 59,320 | 776,401 | |||||||||
Dex Media West Amended and Restated
Credit Facility |
646,511 | 10,844 | 657,355 | |||||||||
Dex One 12%/14% Senior Subordinated
Notes due 2017 |
300,000 | | 300,000 | |||||||||
Total |
$ | 2,649,665 | $ | 83,678 | $ | 2,733,343 | ||||||
6. Derivative Financial Instruments
We do not use derivative financial instruments for trading or speculative purposes and our
derivative financial instruments are limited to interest rate swap and interest rate cap
agreements. The Company utilizes a combination of fixed rate debt and variable rate debt to
finance its operations. The variable rate debt exposes the Company to variability in interest
payments due to changes in interest rates. Management believes that it is prudent to mitigate the
interest rate risk on a portion of its variable rate borrowings. To satisfy our objectives and
requirements, the Company has entered into interest rate swap and interest rate cap agreements,
which have not been designated as cash flow hedges, to manage our exposure to interest rate
fluctuations on our variable rate debt.
All derivative financial instruments are recognized as either assets or liabilities on the
condensed consolidated balance sheets with measurement at fair value. On a quarterly basis, the
fair values of our interest rate swaps and interest rate caps are determined based on observable
inputs. These derivative instruments have not been designated as cash flow hedges and as such, the
initial fair value and any subsequent gains or losses on the change in the fair value of the
interest rate swaps and interest rate caps are reported in earnings as a component of interest
expense. Any gains or losses related to the quarterly fair value adjustments are presented as a
non-cash operating activity on the condensed consolidated statements of cash flows.
By using derivative financial instruments to hedge exposures to changes in interest rates, the
Company exposes itself to credit risk and market risk. Credit risk is the possible failure of the
counterparty to perform under the terms of the derivative contract. When the fair value of a
derivative contract is positive, the counterparty owes the Company, which creates credit risk for
the Company. When the fair value of a derivative contract is negative, the Company owes the
counterparty and, therefore, it is not subject to credit risk. The Company minimizes the credit
risk in derivative financial instruments by entering into transactions with major financial
institutions with credit ratings of AA- or higher, or the equivalent dependent upon the credit
rating agency.
Market risk is the adverse effect on the value of a financial instrument that results from a change
in interest rates. The market risk associated with interest-rate contracts is managed by
establishing and monitoring parameters that limit the types and degree of market risk that may be
undertaken.
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Table of Contents
See Note 2, Summary of Significant Accounting Policies Fair Value of Financial Instruments for
additional information regarding our interest rate swaps and interest rate caps.
Successor Company
The Company has entered into the following interest rate swaps that effectively convert $500.0
million, or approximately 21%, of the Companys variable rate debt to fixed rate debt as of March
31, 2011. Since the RHDI Amended and Restated Credit Facility and the Dex Media West Amended and
Restated Credit Facility are subject to a LIBOR floor of 3.00% and the LIBOR rate is below that
floor at March 31, 2011, both credit facilities are effectively fixed rate debt until such time
LIBOR exceeds the stated floor. At March 31, 2011, approximately 89% of our total debt outstanding
consisted of variable rate debt, excluding the effect of our interest rate swaps. Including the
effect of our interest rate swaps, total fixed rate debt comprised approximately 30% of our total
debt portfolio as of March 31, 2011. The interest rate swaps mature at varying dates from February
2012 through February 2013.
Interest Rate Swaps Dex Media East
Effective Dates | Notional Amount | Pay Rates | Maturity Dates | |||||||||
(amounts in millions) | ||||||||||||
February 26, 2010 |
$ | 300 | (2) | 1.20% - 1.796 | % | February 29, 2012 February 28, 2013 | ||||||
March 5, 2010 |
100 | (1) | 1.688 | % | January 31, 2013 | |||||||
March 10, 2010 |
100 | (1) | 1.75 | % | January 31, 2013 | |||||||
Total |
$ | 500 | ||||||||||
Under the terms of the interest rate swap agreements, we receive variable interest based on the
three-month LIBOR and pay a weighted average fixed rate of 1.5%. The weighted average rate received
on our interest rate swaps was 0.3% for the three months ended March 31, 2011. These periodic
payments and receipts are recorded as interest expense.
Under the terms of the interest rate cap agreements, the Company will receive payments based on the
spread in rates if the three-month LIBOR rate increases above the cap rates noted in the table
below. The Company paid $2.1 million for the interest rate cap agreements entered into during the
first quarter of 2010. We are not required to make any future payments related to these interest
rate cap agreements.
Interest Rate Caps RHDI
Effective Dates | Notional Amount | Cap Rates | Maturity Dates | |||||||||
(amounts in millions) | ||||||||||||
February 26, 2010 |
$ | 200 | (3) | 3.0% - 3.5 | % | February 29, 2012 February 28, 2013 | ||||||
March 8, 2010 |
100 | (4) | 3.5 | % | January 31, 2013 | |||||||
March 10, 2010 |
100 | (4) | 3.0 | % | April 30, 2012 | |||||||
Total |
$ | 400 | ||||||||||
(1) | Consists of one swap | |
(2) | Consists of three swaps | |
(3) | Consists of two caps | |
(4) | Consists of one cap |
The following tables present the fair value of our interest rate swaps and interest rate caps at
March 31, 2011 and December 31, 2010. The fair value of our interest rate swaps is presented in
accounts payable and accrued liabilities and other non-current liabilities and the fair value of
our interest rate caps is presented in prepaid expenses and other current assets and other
non-current assets on the condensed consolidated balance sheet at March 31, 2011 and December 31,
2010. The following tables also present the (gain) loss recognized in interest expense from the
change in fair value of our interest rate swaps and interest rate caps for the three months ended
March 31, 2011 and two months ended March 31, 2010.
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(Gain) Loss Recognized in | ||||||||||||||||
Interest Expense | ||||||||||||||||
From the Change in Fair Value of | ||||||||||||||||
Interest Rate Swaps | ||||||||||||||||
Three Months | Two Months | |||||||||||||||
Fair Value Measurements at | Ended | Ended | ||||||||||||||
March 31, 2011 | December 31, 2010 | March 31, 2011 | March 31, 2010 | |||||||||||||
Interest Rate Swaps: |
||||||||||||||||
Accounts payable and accrued
liabilities |
$ | (4,343 | ) | $ | (4,376 | ) | $ | (33 | ) | $ | (2,511 | ) | ||||
Other non-current liabilities |
(1,170 | ) | (1,989 | ) | (819 | ) | 3,134 | |||||||||
Total |
$ | (5,513 | ) | $ | (6,365 | ) | $ | (852 | ) | $ | 623 | |||||
Loss Recognized in | ||||||||||||||||
Interest Expense | ||||||||||||||||
From the Change in Fair Value of | ||||||||||||||||
Interest Rate Caps | ||||||||||||||||
Three Months | Two Months | |||||||||||||||
Fair Value Measurements at | Ended | Ended | ||||||||||||||
March 31, 2011 | December 31, 2010 | March 31, 2011 | March 31, 2010 | |||||||||||||
Interest Rate Caps: |
||||||||||||||||
Prepaid expenses and other current assets |
$ | 2 | $ | 5 | $ | 3 | $ | 43 | ||||||||
Other non-current assets |
161 | 303 | 142 | 429 | ||||||||||||
Total |
$ | 163 | $ | 308 | $ | 145 | $ | 472 | ||||||||
During the three months ended March 31, 2011 and two months ended March 31, 2010, the Company
recorded $0.8 million and $1.6 million, respectively, of losses related to our interest rate swaps
and interest rate caps into earnings, including accrued interest.
Predecessor Company
During the one month ended January 31, 2010, the Predecessor Company recognized a loss to interest
expense of $2.3 million associated with the change in fair value of interest rate swaps. In
addition, the Predecessor Company recorded $3.0 million of losses related to interest rate swaps
into earnings, including accrued interest, during the one month ended January 31, 2010.
7. Income Taxes
Successor Company
Our
quarterly income tax (provision) benefit for income taxes is measured using an estimated annual
effective tax rate for the period, adjusted for discrete items that occurred within the periods
presented. For the three months ended March 31, 2011, we recorded an income tax provision of
$(20.2) million, which represents an effective tax rate of 26.8%. The effective tax rate for the
three months ended March 31, 2011 differs from the federal statutory rate of 35.0% primarily due to
changes in deferred tax liabilities related to the stock basis of
subsidiaries (discussed below), the impact of state
income taxes, and a
valuation allowance that has been recorded.
Upon
emergence from bankruptcy, where required pursuant to FASB
ASC 740-30-25-7, Income Taxes, the Company recorded deferred tax liabilities
related to the excess of the financial statement carrying amount over
the tax basis of investments in certain subsidiaries. The estimated
annual effective tax rate for the current year includes an estimate
of the change in these deferred tax liabilities for the year. The
resulting reduction in income tax expense allocated to the three months ended March 31, 2011
relating to the change in these deferred tax liabilities is
$6.4 million, which reduces the effective tax rate for the three
months ended March 31, 2011 by approximately 8.4%.
For the two months ended March 31, 2010, we recorded an income tax benefit of $401.5 million, which
represents an effective tax rate of 278.2%. Internal Revenue Code Section 382 (Section 382)
imposes limitations on the availability of net operating losses and other corporate tax attributes
as ownership changes occur. Under Section 382, potential limitations are triggered when there has
been an ownership change, which is generally defined as a greater than 50% change in stock
ownership (by value) over a three-year prescribed testing period. Such change in ownership will restrict the
Companys ability to use certain net operating losses and other corporate tax attributes in the
future.
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Table of Contents
However, the ownership change does not constitute a change in control under any of the Companys
debt agreements or other contracts. The Company experienced an
ownership change in March 2009.
Based upon the closing of the SEC filing period for Schedules 13-G and review of these schedules
filed through February 15, 2010, the Company determined that, more likely than not, a certain
check-the-box election was effective prior to the date of the 2009 ownership change under Section
382. As a result, the Company recorded a tax benefit for the reversal of a liability for
unrecognized tax benefit of $351.9 million in the condensed consolidated statement of operations
for the two months ended March 31, 2010, which was the primary driver of our effective tax rate for
the period.
Predecessor Company
For the one month ended January 31, 2010, the Predecessor Company recorded an income tax provision
of $(917.5) million which represents an effective tax rate of 11.7%.
8. Benefit Plans
The following tables provide the components of the Companys net periodic benefit (credit) cost for
the three months ended March 31, 2011 and two months ended March 31, 2010 and the Predecessor
Companys net periodic benefit (credit) for the one month ended January 31, 2010.
Pension Benefits | |||||||||||||
Successor Company | Predecessor Company | ||||||||||||
Three Months Ended | Two Months Ended | One Month Ended | |||||||||||
March 31, 2011 | March 31, 2010 | January 31, 2010 | |||||||||||
Interest cost |
$ | 3,190 | $ | 2,235 | $ | 1,124 | |||||||
Expected return on plan assets |
(3,523 | ) | (2,424 | ) | (1,385 | ) | |||||||
Amortization of prior service cost |
| | 81 | ||||||||||
Amortization of net loss |
| | 122 | ||||||||||
Net periodic benefit (credit) |
$ | (333 | ) | $ | (189 | ) | $ | (58 | ) | ||||
Postretirement Benefits | |||||||||||||
Successor Company | Predecessor Company | ||||||||||||
Three Months Ended | Two Months Ended | One Month Ended | |||||||||||
March 31, 2011 | March 31, 2010 | January 31, 2010 | |||||||||||
Interest cost |
$ | 6 | $ | 25 | $ | 10 | |||||||
Amortization of net (gain) |
| | (21 | ) | |||||||||
Net periodic benefit cost (credit) |
$ | 6 | $ | 25 | $ | (11 | ) | ||||||
The Company made contributions to its pension plans of $11.4 million and $6.2 million during the
three months ended March 31, 2011 and two months ended March 31, 2010, respectively. The
Predecessor Company did not make any contributions to its pension plans during the one month ended
January 31, 2010.
During the three months ended March 31, 2011 and two months ended March 31, 2010, the Company made
contributions of $0.5 million and $0.6 million, respectively, to its postretirement plans. During
the one month ended January 31, 2010, the Predecessor Company made contributions of $0.4 million to
its postretirement plans. We expect to make total contributions of approximately $16.7 million and
$1.1 million to our pension plans and postretirement plans, respectively, in 2011.
9. Business Segments
Management reviews and analyzes its business of providing marketing solutions as one operating
segment.
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10. Legal Proceedings
We are subject to various lawsuits, claims, and regulatory and administrative proceedings arising
out of our business covering matters such as general commercial, governmental regulations,
intellectual property, employment, tax and other actions. In the opinion of management, the
ultimate resolution of these matters will not have a
material adverse effect on our results of operations, cash flows or financial position.
11. Other Information
On February 14, 2011, we completed the sale of substantially all net assets of Business.com,
including long-lived assets, domain names, trademarks, brands, intellectual property, related
content and technology platform. As a result, we recognized a gain on the sale of these assets of
$13.4 million during the three months ended March 31, 2011.
19
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking Information
Certain statements contained in this Quarterly Report on Form 10-Q regarding Dex One Corporation
and its direct and indirect wholly-owned subsidiaries (Dex One, the Successor Company, the
Company, Parent Company, we, us and our) future operating results, performance, business
plans or prospects and any other statements not constituting historical fact are forward-looking
statements subject to the safe harbor created by the Private Securities Litigation Reform Act of
1995. Where possible, words such as believe, expect, anticipate, should, will, would,
planned, estimated, potential, goal, outlook, may, predicts, could, or the negative
of those words and other comparable expressions, are used to identify such forward-looking
statements. All forward-looking statements reflect our current beliefs and assumptions with
respect to our future results, business plans and prospects, based on information currently
available to us and are subject to significant risks and uncertainties. Accordingly, these
statements are subject to significant risks and uncertainties and our actual results, business
plans and prospects could differ significantly from those expressed in, or implied by, these
statements. We caution readers not to place undue reliance on, and we undertake no obligation to
update, other than as imposed by law, any forward-looking statements. Such risks, uncertainties
and contingencies include, but are not limited to, statements about Dex Ones future financial and
operating results, our plans, objectives, expectations and intentions and other statements that are
not historical facts. The following factors, among others, could cause actual results to differ
from those set forth in the forward-looking statements: (1) the continuing decline in the use of
print directories; (2) increased competition, particularly from existing and emerging online
technologies; (3) ongoing weak economic conditions and continued decline in advertising sales; (4)
our ability to collect trade receivables from customers to whom we extend
credit; (5) our ability to generate sufficient cash to service our debt; (6) our ability to comply
with the financial covenants contained in our debt agreements and the potential impact to
operations and liquidity as a result of restrictive covenants in such debt agreements; (7) our
ability to refinance or restructure our debt on reasonable terms and conditions as might be
necessary from time to time; (8) increasing interest rates; (9) changes in the Companys and the
Companys subsidiaries credit ratings; (10) changes in accounting standards; (11) regulatory
changes and judicial rulings impacting our business; (12) adverse results from litigation,
governmental investigations or tax related proceedings or audits; (13) the effect of labor strikes,
lock-outs and negotiations; (14) successful realization of the expected benefits of acquisitions,
divestitures and joint ventures; (15) our ability to maintain agreements with Qwest, CenturyLink
and AT&T and other major Internet search and local media companies; (16) our reliance on
third-party vendors for various services; and (17) other events beyond our control that may result
in unexpected adverse operating results. Additional risks and uncertainties are described in detail
in Part I Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December
31, 2010.
Dex One became the successor registrant to R.H. Donnelley Corporation (RHD or the Predecessor
Company) upon emergence from Chapter 11 relief under Title 11 of the United States Code (Chapter
11) on January 29, 2010 (the Effective Date). References to the Predecessor Company in this
Quarterly Report on Form 10-Q pertain to periods prior to the Effective Date.
In conjunction with our restructuring plan that commenced during the fourth quarter of 2010 and the
resulting changes in our organizational structure, certain prior period amounts included in the
unaudited condensed consolidated statements of operations have been reclassified to conform to the
current periods presentation.
Recent Trends and Developments Related to Our Business
Results of Operations
As discussed in Results of Operations below, we have been experiencing lower advertising sales
primarily as a result of declines in new and recurring business, including both renewal and
incremental sales to existing advertisers, mainly driven by (1) customer attrition, (2) declines in
overall advertising spending by our clients, (3) the significant impact of the weak local business
conditions on consumer spending in our clients markets and (4) an increase in competition and more
fragmentation in local business search. This was evidenced by the continued decline in our net
revenues and cash flows for the three months ended March 31, 2011 as compared to the prior
corresponding period, apart from the impact on net revenues as a result of fresh start accounting
that is discussed below.
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The Company currently projects that these challenging conditions will continue for the foreseeable
future, and, as such, our advertising sales, operating results, cash flow and liquidity will
continue to be adversely impacted. Therefore, the Companys historical operating results will not
be indicative of future operating performance, although our long-term financial forecast currently
anticipates a gradual improvement in local business conditions in our clients markets commencing
in the second half of 2011.
As more fully described below in Results of Operations Net Revenues, our method of recognizing
revenue under the deferral and amortization method results in delayed recognition of advertising
sales whereby recognized revenues reflect the amortization of advertising sales consummated in
prior periods as well as advertising sales consummated in the current period. Accordingly, the
Companys projected decline in advertising sales will result in a decline in revenue recognized in
future periods. In addition, improvements in local business conditions that are anticipated in our
long-term financial forecast noted above will not have a significant immediate impact on our
revenues.
Our Plan
As more fully described in Part I Item 1, Business of our Annual Report on Form 10-K for the
year ended December 31, 2010, we are a marketing solutions company that helps local businesses
generate leads and manage their presence among consumers in the ever changing, complex and
fragmented markets we serve. Our proprietary marketing solutions include our Dex published yellow
pages directories, our Internet yellow pages site, DexKnows.com ® and our mobile
application, Dex Mobile ®. Our digital affiliate marketing solutions are powered by our
search engine marketing product, DexNet, which extends our clients reach to our leading Internet
and mobile partners to attract consumers searching for local products and services within our
markets.
In response to the challenges noted above, we are working to improve the value we deliver to our
clients by expanding the number of platforms and media through which we deliver their message to
consumers. Our growing list of marketing solutions includes local business and market analysis,
message and image creation, target market identification, advertising and digital profile creation,
keyword and search engine optimization strategies and programs, distribution strategies, social
strategies, voice search platforms and tracking and reporting. We continue to invest in our future
through initiatives such as sales force automation, a client self-service system and portal and
training and development of our locally based marketing consultants. We are opening a new client
contact center in Overland Park, Kansas, which we expect to be fully operational in the second
quarter of 2011. This facility will help ensure we are able to get the right resource in front of
the right clients and prospects and secure our local relationships by focusing on selling the value
provided to local businesses through these expanded platforms. As local business conditions recover
in our markets, we believe these investments will help us drive future revenue.
We also continue to actively manage expenses and are considering and acting upon various
initiatives and opportunities to streamline operations and reduce our cost structure. We commenced
our most significant initiative during the fourth quarter of 2010 by implementing a restructuring
plan that realigns internal resources to better support our base of business and ensure we have an
organizational structure that is optimized to compete in a rapidly evolving marketplace. This
restructuring plan, which has continued into 2011, includes headcount reductions, consolidation of
responsibilities and vacating leased facilities. As a result of this restructuring plan, the
Company recorded a restructuring charge to earnings of $18.6 million during the fourth quarter of
2010 related to severance of which $0.7 million was paid in cash. During the first quarter of 2011,
the Company recorded an additional restructuring charge to earnings of $6.0 million related to
severance and vacating leased facilities and made cash payments of $8.5 million. The Company
anticipates additional charges to earnings and cash payments related to severance and vacating
leased facilities in conjunction with this restructuring plan during the remainder of 2011. These
amounts have not been determined at this time. See Item 1, Financial Statements (Unaudited) -
Note 4, Restructuring Charges for additional information.
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Liquidity and Going Concern Analysis
As more fully described below in Liquidity and Capital Resources, the Companys primary sources
of liquidity are existing cash on hand and cash flows generated from operations and our primary
liquidity requirements are to fund operations and service our indebtedness. The Companys projected
decline in advertising sales will result in a decline in cash flows in future periods. In addition,
while improvements in local business conditions are anticipated in our long-term financial forecast
as noted above, these improvements will not have a significant impact on our cash flows. However,
despite the projected decline in advertising sales and cash flows, as a result of our emergence
from the Chapter 11 proceedings and the restructuring of the Predecessor Companys outstanding debt
and based on current financial projections, the Company expects to be able to continue to generate
cash flows from operations in amounts sufficient to fund operations and meet debt service
requirements for at least the next 12-15 months.
Impairment Analysis
The Company reviews the carrying value of goodwill, definite-lived intangible assets and other
long-lived assets whenever events or circumstances indicate that their carrying amount may not be
recoverable. We concluded there were no triggering events to further measure for impairment during
the three months ended March 31, 2011. As such, there have been no changes to the percentages by
which the fair value of our reporting units exceeded their carrying value, to assumptions used in
determining the fair value of the reporting units or to any uncertainty inherent in those
assumptions, from what was disclosed in our Annual Report on Form 10-K for the year ended December
31, 2010. See Item 1, Financial Statements (Unaudited) Note 2, Summary of Significant
Accounting Policies Identifiable Intangible Assets and Goodwill for additional information.
If industry and local business conditions in our markets deteriorate in excess of current
estimates, potentially resulting in further declines in advertising sales and operating results,
and if the trading value of our debt and equity securities decline significantly, we will be
required to assess the recoverability of goodwill in addition to our annual evaluation and
recoverability and useful lives of our intangible assets and other long-lived assets. These
factors, including changes to assumptions used in our impairment analysis as a result of these
factors, could result in future impairment charges, a reduction of remaining useful lives
associated with our intangible assets and other long-lived assets and acceleration of amortization
expense.
Fresh Start Accounting
The Company adopted fresh start accounting and reporting on February 1, 2010 (Fresh
Start Reporting Date). Our net revenues and operating results were significantly impacted during
2010 by our adoption of fresh start accounting on the Fresh Start Reporting Date. See Results of
Operations Factors Affecting Comparability below for additional information on the impact of
fresh start accounting and the Companys presentation of Non-GAAP Combined Adjusted results for
2010.
Climate Change
There is a growing concern about global climate change and the emissions of carbon dioxide. This
concern has led to the possibility of federal climate change legislation as well as litigation
relating to greenhouse gas emissions. While we cannot predict the impact of any proposed
legislation until final, we do not believe current regulation or litigation related to global
climate change is likely to have a material impact on our business, future financial position,
results of operations and cash flow. Accordingly, our current financial projections do not include
any impact of climate change regulation or litigation.
Healthcare Reform Legislation
During March 2010, the Patient Protection and Affordable Care Act and the Healthcare and Education
Reconciliation Act of 2010 were signed into law. There has been no significant impact on our
financial position, results of operations or cash flows as a result of this new legislation and we
do not anticipate any significant impact in the foreseeable future.
Segment Reporting
Management reviews and analyzes its business of providing marketing solutions as one operating
segment.
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New Accounting Pronouncements
We have reviewed accounting pronouncements that were issued as of March 31, 2011, which the Company
has not yet adopted, and do not believe that these pronouncements will have a material impact on
our financial position or operating results.
RESULTS OF OPERATIONS
Factors Affecting Comparability
Fresh Start Accounting Adjustments
The Company adopted fresh start accounting and reporting on the Fresh Start Reporting Date. The
financial statements as of the Fresh Start Reporting Date report the results of Dex One with no
beginning retained earnings or accumulated deficit. Any presentation of Dex One represents the
financial position and results of operations of a new reporting entity and is not comparable to
prior periods presented by the Predecessor Company. The financial statements for periods ended
prior to the Fresh Start Reporting Date do not include the effect of any changes in the Predecessor
Companys capital structure or changes in the fair value of assets and liabilities as a result of
fresh start accounting.
As a result of the deferral and amortization method of revenue recognition, recognized gross
advertising revenues reflect the amortization of advertising sales consummated in prior periods as
well as in the current period. The adoption of fresh start accounting had a significant impact on
the financial position and results of operations of the Company commencing on the Fresh Start
Reporting Date. Consistent with the Predecessor Companys historical application of the purchase
method of accounting for business combinations included in Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 805, Business Combinations, fresh start
accounting precluded us from recognizing advertising revenue and certain expenses associated with
advertising sales fulfilled prior to the Fresh Start Reporting Date. Thus, our reported results for
the two months ended March 31, 2010 were not indicative of our underlying operating and financial
performance and are not comparable to any current period presentation. The adoption of fresh start
accounting did not have any impact on cash flows from operations.
Accordingly, management has provided a non-GAAP analysis below that compares the Companys GAAP
results for the three months ended March 31, 2011 to Non-GAAP Combined Adjusted Results for the
three months ended March 31, 2010 for net revenues through operating income (loss). Non-GAAP
Combined Adjusted Results (1) combines GAAP results of the Company for the two months ended March
31, 2010 and GAAP results of the Predecessor Company for the one month ended January 31, 2010 and
(2) adjusts these combined amounts to (i) eliminate the fresh start accounting impact on revenue
and certain related expenses noted above and (ii) exclude cost-uplift recorded under fresh start
accounting. Deferred directory costs that are included in prepaid expenses and other current assets
on the consolidated balance sheet, such as print, paper, distribution and commissions, relate to
directories that have not yet been published. Deferred directory costs have been recorded at fair
value, determined as (a) the estimated billable value of the published directory less (b) the
expected costs to complete the directory, plus (c) a normal profit margin. This incremental fresh
start accounting adjustment to step up the recorded value of the deferred directory costs to fair
value is hereby referred to as cost-uplift. Cost-uplift has been amortized over the terms of the
applicable directories, not to exceed twelve months, and has been allocated between production and
distribution expenses and selling and support expenses based upon the category of the deferred
directory costs that were fair valued. Fresh start accounting had an immaterial impact on our
results of operations for the three months ended March 31, 2011 and therefore, we have not adjusted
our GAAP results for this period in the non-GAAP analysis below.
Management believes that the presentation of Non-GAAP Combined Adjusted Results will help financial
statement users better understand the material impact fresh start accounting had on the Companys
results of operations for the two months ended March 31, 2010 and also offers a non-GAAP normalized
comparison to GAAP results of the Company for the three months ended March 31, 2011. The Non-GAAP
Combined Adjusted Results presented below are reconciled to the most comparable GAAP measures.
While the Non-GAAP Combined Adjusted Results exclude the effects of fresh start accounting, it must
be noted that the Non-GAAP Combined Adjusted Results are not comparable to the Companys GAAP
results for the three months ended March 31, 2011 and should not be treated as such.
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Management has also provided a separate GAAP analysis for line items below operating income (loss)
on the condensed consolidated statements of operations for each reporting period presented.
Management believes these line items should not be combined or compared for the non-GAAP analysis
based upon distinct differences in their composition between the Successor Company and Predecessor
Company and the reporting periods presented. Please refer to our Quarterly Report on Form 10-Q for
the period ended March 31, 2010 for a separate GAAP analysis of net revenues through operating
income (loss) for the two months ended March 31, 2010 and one month ended January 31, 2010,
respectively.
GAAP
Results for the Three Months Ended March 31, 2011 compared to Non-GAAP Combined Adjusted
Results for the Three Months Ended March 31, 2010 Net Revenues Through Operating Income
(Loss)
Net Revenues
The components of our GAAP net revenues for the three months ended March 31, 2011 and non-GAAP
combined adjusted net revenues for the three months ended March 31, 2010 were as follows:
Non-GAAP | |||||||||||||||||||||||||||||
Successor | Successor | Predecessor | Combined | ||||||||||||||||||||||||||
Company | Company | Company | Adjusted | ||||||||||||||||||||||||||
Three Months Ended | Two Months Ended | One Month Ended | Three Months Ended | ||||||||||||||||||||||||||
March 31, | March 31, | January 31, | Fresh Start | March 31, | |||||||||||||||||||||||||
(amounts in millions) | 2011 | 2010 | 2010 | Adjustments | 2010 | $ Change | % Change | ||||||||||||||||||||||
Gross advertising revenues |
$ | 390.6 | $ | 53.3 | $ | 161.4 | $ | 257.9 | (1) | $ | 472.6 | $ | (82.0 | ) | (17.4 | )% | |||||||||||||
Sales claims and allowances |
(4.7 | ) | (2.5 | ) | (3.5 | ) | (4.6 | )(1) | (10.6 | ) | 5.9 | 55.7 | |||||||||||||||||
Net advertising revenues |
385.9 | 50.8 | 157.9 | 253.3 | 462.0 | (76.1 | ) | (16.5 | ) | ||||||||||||||||||||
Other revenues |
5.3 | 2.3 | 2.5 | 1.8 | (1) | 6.6 | (1.3 | ) | (19.7 | ) | |||||||||||||||||||
Total |
$ | 391.2 | $ | 53.1 | $ | 160.4 | $ | 255.1 | $ | 468.6 | $ | (77.4 | ) | (16.5 | )% | ||||||||||||||
(1) | Represents gross advertising revenues, sales claims and allowances and other revenues for advertising sales fulfilled prior to the Fresh Start Reporting Date, which would have been recognized during the two months ended March 31, 2010 absent our adoption of fresh start accounting required under GAAP. |
Our advertising revenues are earned primarily from the sale of advertising in yellow pages
directories we publish. Advertising revenues also include revenues from our Internet-based
marketing solutions including online directories, such as DexKnows.com and DexNet. Advertising
revenues are affected by several factors, including changes in the quantity, size and
characteristics of advertisements, acquisition of new clients, renewal rates of existing clients,
premium advertisements sold, changes in advertisement pricing, the introduction of new marketing
solutions, an increase in competition and more fragmentation in the local business search market
and general economic factors. Revenues with respect to print advertising and Internet-based
marketing solutions that are sold with print advertising are recognized under the deferral and
amortization method whereby revenues are initially deferred when a directory is published, net of
sales claims and allowances, and recognized ratably over the directorys life, which is typically
12 months. Revenues with respect to Internet-based marketing solutions that are sold standalone,
such as DexNet, are recognized ratably over the life of the contract commencing when they are first
delivered or fulfilled. Revenues with respect to our marketing solutions that are non-performance
based are recognized ratably over the life of the contract commencing when they are first delivered
or fulfilled. Revenues with respect to our marketing solutions that are performance-based are
recognized as the service is delivered or fulfilled.
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GAAP gross advertising revenues for the three months ended March 31, 2011 decreased $82.0 million,
or 17.4%, from non-GAAP combined adjusted gross advertising revenues for the three months ended
March 31, 2010. The decline in GAAP gross advertising revenues for the three months ended March
31, 2011 is primarily due to declines in advertising sales over the past twelve months, primarily
as a result of declines in new and recurring business, mainly driven by (1) customer attrition, (2)
declines in overall advertising spending by our clients, (3) the significant impact of the weak
local business conditions on consumer spending in our clients markets and (4) an increase in
competition and more fragmentation in local business search. The decline in GAAP gross advertising
revenues is also a result of recognizing approximately one month of revenues from Business.com
compared to three months of revenues in the prior corresponding period due to the sale of
substantially all net assets of Business.com in February 2011, as well as not recognizing revenues
associated with a delinquent CMR during the three months ended March 31, 2011.
GAAP sales claims and allowances for the three months ended March 31, 2011 decreased $5.9 million,
or 55.7%, from non-GAAP combined adjusted sales claims and allowances for the three months ended
March 31, 2010. The decline in GAAP sales claims and allowances for the three months ended March
31, 2011 is primarily due to lower claims experience as a result of process improvements and
operating efficiencies, which improved print copy quality in certain of our markets, as well as
lower advertising sales volume.
Expenses
The components of our GAAP expenses for the three months ended March 31, 2011 and non-GAAP combined
adjusted expenses for the three months ended March 31, 2010 were as follows:
Non- | |||||||||||||||||||||||||||||
GAAP | |||||||||||||||||||||||||||||
Successor | Successor | Predecessor | Combined | ||||||||||||||||||||||||||
Company | Company | Company | Adjusted | ||||||||||||||||||||||||||
Three Months Ended | Two Months Ended | One Month Ended | Three Months Ended | ||||||||||||||||||||||||||
March 31, | March 31, | January 31, | Fresh Start | March 31, | |||||||||||||||||||||||||
(amounts in millions) | 2011 | 2010 | 2010 | Adjustments | 2010 | $ Change | % Change | ||||||||||||||||||||||
Production and distribution expenses |
$ | 75.0 | $ | 27.6 | $ | 26.9 | $ | 27.1 | (1) | $ | 81.6 | $ | (6.6 | ) | (8.1 | )% | |||||||||||||
Selling and support expenses |
104.1 | 59.3 | 40.9 | 27.9 | (1) | 128.1 | (24.0 | ) | (18.7 | ) | |||||||||||||||||||
General and administrative expenses |
38.1 | 22.2 | 8.3 | | 30.5 | 7.6 | 24.9 | ||||||||||||||||||||||
Depreciation and amortization expenses |
54.1 | 39.4 | 20.2 | | 59.6 | (5.5 | ) | (9.2 | ) | ||||||||||||||||||||
Total |
$ | 271.3 | $ | 148.5 | $ | 96.3 | $ | 55.0 | $ | 299.8 | $ | (28.5 | ) | (9.5 | )% | ||||||||||||||
(1) | Represents (a) certain deferred expenses for advertising sales fulfilled prior to the Fresh Start Reporting Date, which would have been recognized during the two months ended March 31, 2010 absent our adoption of fresh start accounting required under GAAP and (b) the exclusion of cost-uplift recorded under fresh start accounting. |
Certain costs directly related to the selling and production of directories are initially
deferred and then amortized ratably over the life of the directories under the deferral and
amortization method of accounting to match revenue recognized relating to such directories, with
cost recognition commencing in the month directory distribution is substantially complete. These
costs are specifically identifiable to a particular directory and include sales commissions and
print, paper and initial distribution costs. Sales commissions include amounts paid to employees
for sales to local clients and to certified marketing representatives (CMRs), which act as our
channel to national clients. All other expenses, such as sales person salaries, sales manager
compensation, sales office occupancy, publishing and information technology services, are not
specifically identifiable to a particular directory and are recognized as incurred. Except for
certain expenses associated with advertising sales fulfilled prior to the Fresh Start Reporting
Date, which fresh start accounting precluded us from recognizing, our costs recognized in a
reporting period consist of: (i) costs incurred in that period and fully recognized in that period;
(ii) costs incurred in a prior period, a portion of which is amortized and recognized in the
current period; and (iii) costs incurred in the current period, a portion of which is amortized and
recognized in the current period and the balance of which is deferred until future periods.
Consequently, there will be a difference between costs recognized in any given period and
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costs incurred in the given period, which may be significant.
Production and Distribution Expenses
GAAP production and distribution expenses for the three months ended March 31, 2011 were $75.0
million, compared to non-GAAP combined adjusted production and distribution expenses of $81.6
million for the three months ended March 31, 2010. The primary components of the $6.6 million, or
8.1%, decrease in GAAP production and distribution expenses for the three months ended March 31,
2011 were as follows:
Three | ||||
Months Ended | ||||
(amounts in millions) | March 31, 2011 | |||
Lower Internet production and distribution expenses |
$ | (3.6 | ) | |
Lower print, paper and distribution expenses |
(2.8 | ) | ||
All other, net |
(0.2 | ) | ||
Total decrease in GAAP
production and distribution
expenses for the three
months ended March 31, 2011 |
$ | (6.6 | ) | |
GAAP Internet production and distribution expenses for the three months ended March 31, 2011
declined $3.6 million, compared to non-GAAP combined adjusted Internet production and distribution
expenses for the three months ended March 31, 2010, due to purchasing efficiencies, lower headcount
and a reduction in DexNet customers. The decline in GAAP Internet production and distribution
expenses is also a result of recognizing approximately one month of expenses from Business.com
compared to three months of expenses in the prior corresponding period due to the sale of
substantially all net assets of Business.com in February 2011. These declines are partially offset
by increased purchased traffic costs that direct traffic to our online properties driven by higher
cost per click rates.
GAAP print, paper and distribution expenses for the three months ended March 31, 2011 declined $2.8
million, compared to non-GAAP combined adjusted print, paper and distribution expenses for the
three months ended March 31, 2010, primarily due to lower page volumes associated with declines in
print advertisements.
Selling and Support Expenses
GAAP selling and support expenses for the three months ended March 31, 2011 were $104.1 million,
compared to non-GAAP combined adjusted selling and support expenses of $128.1 million for three
months ended March 31, 2010. The primary components of the $24.0 million, or 18.7%, decrease in
GAAP selling and support expenses for the three months ended March 31, 2011 were as follows:
Three | ||||
Months Ended | ||||
(amounts in millions) | March 31, 2011 | |||
Lower bad debt expense |
$ | (12.9 | ) | |
Lower commissions and salesperson expenses |
(7.3 | ) | ||
Lower advertising expenses |
(2.1 | ) | ||
All other, net |
(1.7 | ) | ||
Total decrease in GAAP selling
and support expenses for the
three months ended March 31,
2011 |
$ | (24.0 | ) | |
GAAP bad debt expense for the three months ended March 31, 2011 declined $12.9 million, compared to
non-GAAP combined adjusted bad debt expense for the three months ended March 31, 2010, primarily
due to effective credit and collections practices, which have driven improvement in our accounts
receivable portfolio, as well as lower billing volumes associated with declines in advertisers and
advertising sales. GAAP bad debt expense for the three months ended March 31, 2011 represented
2.2% of our net revenue, compared to 4.6% for the non-GAAP combined adjusted three months ended
March 31, 2010.
GAAP commissions and salesperson expenses for the three months ended March 31, 2011 decreased $7.3
million, compared to non-GAAP combined adjusted commissions and salesperson expenses for the three
months ended March 31, 2010, primarily due to lower advertising sales and its effect on
variable-based commissions, lower headcount and declines in commissions associated with a
delinquent CMR.
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GAAP advertising expenses for the three months ended March 31, 2011 decreased $2.1 million,
compared to non-GAAP combined adjusted advertising expenses for the three months ended March 31,
2010, primarily due to the timing of media spend between periods.
General and Administrative Expenses
GAAP general and administrative (G&A) expenses for the three months ended March 31, 2011 were
$38.1 million, compared to non-GAAP combined adjusted G&A expenses of $30.5 million for the three
months ended March 31, 2010. The primary components of the $7.6 million, or 24.9%, increase in GAAP
G&A expenses for the three months ended March 31, 2011 were as follows:
Three | ||||
Months Ended | ||||
(amounts in millions) | March 31, 2011 | |||
Higher restructuring expenses |
$ | 6.0 | ||
All other, net |
1.6 | |||
Total increase in GAAP G&A expenses for the three months ended March 31, 2011 |
$ | 7.6 | ||
During the fourth quarter of 2010, we commenced a restructuring plan that includes headcount
reductions and consolidation of responsibilities, which continued into 2011. As a result of this
restructuring plan, the Company recognized a restructuring charge of $6.0 million during the three
months ended March 31, 2011. There were no restructuring charges recognized during the non-GAAP
combined adjusted three months ended March 31, 2010.
Depreciation and Amortization Expenses
GAAP depreciation and amortization expenses for the three months ended March 31, 2011 were $54.1
million, compared to combined depreciation and amortization expenses of $59.6 million for the three
months ended March 31, 2010. GAAP amortization of intangible assets was $38.2 million for the three
months ended March 31, 2011, compared to $46.4 million for the combined three months ended March
31, 2010. The decrease in GAAP intangible asset amortization expense for the three months ended
March 31, 2011 is primarily a result of not recognizing any amortization expense for Business.com
intangible assets, as these intangible assets were fully impaired during 2010. The decrease in GAAP
intangible asset amortization expense is also due to the income forecast amortization methodology,
which assumes the value derived from our intangible assets and associated amortization expense is
greater in the earlier years and steadily declines over time.
GAAP depreciation of fixed assets and amortization of computer software was $15.9 million for the
three months ended March 31, 2011, compared to $13.2 million for the combined three months ended
March 31, 2010. The increase in GAAP depreciation expense for the three months ended March 31, 2011
is primarily due to software development capital projects placed into service during the later part
of 2010 and first quarter of 2011.
Operating Income (Loss)
GAAP operating income for the three months ended March 31, 2011 and non-GAAP combined adjusted
operating income (loss) for the three months ended March 31, 2010 was as follows:
Non-GAAP | |||||||||||||||||||||||||||||
Successor | Successor | Predecessor | Combined | ||||||||||||||||||||||||||
Company | Company | Company | Adjusted | ||||||||||||||||||||||||||
Three Months Ended | Two Months Ended | One Month Ended | Three Months Ended | ||||||||||||||||||||||||||
March 31, | March 31, | January 31, | Fresh Start | March 31, | |||||||||||||||||||||||||
(amounts in millions) | 2011 | 2010 | 2010 | Adjustments | 2010 | $ Change | % Change | ||||||||||||||||||||||
Total |
$ | 119.9 | $ | (95.4 | ) | $ | 64.1 | $ | 200.1 | (1) | $ | 168.8 | $ | (48.9 | ) | (29.0 | )% | ||||||||||||
(1) | Represents the net effect of (a) eliminating gross advertising revenues, sales claims and allowances, other revenues and certain deferred expenses for advertising sales fulfilled prior to the Fresh Start Reporting Date, which would have been recognized during the two months ended March 31, 2010 absent our adoption of fresh start accounting required under GAAP and (b) the exclusion of cost-uplift recorded under fresh start accounting. |
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GAAP operating income for the three months ended March 31, 2011 of $119.9 million compares to
non-GAAP combined adjusted operating income of $168.8 million for the three months ended March 31,
2010. The decrease in GAAP operating income for the three months ended March 31, 2011 is due to the
revenue and expense trends described above.
GAAP
Results for the Three Months Ended March 31, 2011, Two Months Ended March 31, 2010
(Successor Company) and One Month Ended January 31, 2010 (Predecessor Company)
Gain on Sale of Assets
On February 14, 2011, we completed the sale of substantially all net assets of Business.com,
including long-lived assets, domain names, trademarks, brands, intellectual property, related
content and technology platform. As a result, we recognized a gain on the sale of these assets of
$13.4 million during the three months ended March 31, 2011.
Interest Expense, Net
Successor Company
Net interest expense of the Company was $57.7 million and $48.9 million for the three months ended
March 31, 2011 and two months ended March 31, 2010, respectively.
In conjunction with our adoption of fresh start accounting and reporting on the Fresh Start
Reporting Date, an adjustment was established to record our outstanding debt at fair value on the
Fresh Start Reporting Date. This fair value adjustment will be amortized as an increase to interest
expense over the remaining term of the respective debt agreements using the effective interest
method and does not impact future scheduled interest or principal payments. Amortization of the
fair value adjustment included as an increase to interest expense was $7.3 million and $5.5 million
for the three months ended March 31, 2011 and two months ended March 31, 2010, respectively.
During the first quarter of 2010, we entered into interest rate swap and interest rate cap
agreements, which have not been designated as cash flow hedges. The Companys interest expense for
the three months ended March 31, 2011 and two months ended March 31, 2010 includes income of $0.7
million and expense of $1.1 million, respectively, resulting from the change in fair value of these
interest rate swaps and interest rate caps.
Predecessor Company
Net interest expense of the Predecessor Company was $19.7 million for the one month ended January
31, 2010. Contractual interest expense that would have appeared on the Predecessor Companys unaudited
condensed consolidated statement of operations if not for the filing of the Chapter 11 petitions
was $65.9 million for the one month ended January 31, 2010.
Reorganization Items, Net
Predecessor Company
Reorganization items directly associated with the process of reorganizing the business under
Chapter 11 have been recorded on a separate line item on the consolidated statement of operations.
The Predecessor Company has recorded $7.8 billion of reorganization items during the one month
ended January 31, 2010 comprised of a $4.5 billion gain on reorganization / settlement of
liabilities subject to compromise and fresh start accounting adjustments of $3.3 billion. The
following table displays the details of reorganization items for the one month ended January 31,
2010:
Predecessor Company | ||||
One Month Ended | ||||
(amounts in thousands) | January 31, 2010 | |||
Liabilities subject to compromise |
$ | 6,352,813 | ||
Issuance of new Dex One common stock (par value) |
(50 | ) | ||
Dex One additional paid-in capital |
(1,450,734 | ) | ||
Dex One Senior Subordinated Notes |
(300,000 | ) | ||
Reclassified into other balance sheet liability accounts |
(39,471 | ) | ||
Professional fees and other |
(38,403 | ) | ||
Gain on reorganization / settlement of liabilities subject to compromise |
4,524,155 | |||
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Predecessor Company | ||||
One Month Ended | ||||
(amounts in thousands) | January 31, 2010 | |||
Fresh start accounting adjustments: |
||||
Goodwill |
2,097,124 | |||
Write off of deferred revenue and deferred directory costs |
655,555 | |||
Fair value adjustment to intangible assets |
415,132 | |||
Fair value adjustment to the amended and restated credit facilities |
120,245 | |||
Fair value adjustment to fixed assets and computer software |
49,814 | |||
Write-off of deferred financing costs |
(48,443 | ) | ||
Other fresh start accounting adjustments |
(20,450 | ) | ||
Total fresh start accounting adjustments |
3,268,977 | |||
Total reorganization items, net |
$ | 7,793,132 | ||
Income Taxes
Successor Company
Our
quarterly income tax (provision) benefit for income taxes is measured using an estimated annual
effective tax rate for the period, adjusted for discrete items that occurred within the periods
presented. For the three months ended March 31, 2011, we recorded an income tax provision of
$(20.2) million, which represents an effective tax rate of 26.8%. The effective tax rate for the
three months ended March 31, 2011 differs from the federal statutory rate of 35.0% primarily due to
changes in deferred tax liabilities related to the stock basis of
subsidiaries (discussed below), the impact of state
income taxes, and a
valuation allowance that has been recorded.
Upon
emergence from bankruptcy, where required pursuant to FASB
ASC 740-30-25-7, Income Taxes, the Company recorded deferred tax liabilities
related to the excess of the financial statement carrying amount over
the tax basis of investments in certain subsidiaries. The estimated
annual effective tax rate for the current year includes an estimate
of the change in these deferred tax liabilities for the year. The
resulting reduction in income tax expense allocated to the three months ended March 31, 2011
relating to the change in these deferred tax liabilities is
$6.4 million, which reduces the effective tax rate for the three
months ended March 31, 2011 by approximately 8.4%.
For the two months ended March 31, 2010, we recorded an income tax benefit of $401.5 million, which
represents an effective tax rate of 278.2%. Internal Revenue Code Section 382 (Section 382)
imposes limitations on the availability of net operating losses and other corporate tax attributes
as ownership changes occur. Under Section 382, potential limitations are triggered when there has
been an ownership change, which is generally defined as a greater than 50% change in stock
ownership (by value) over a three-year prescribed testing period. Such change in ownership will restrict the Companys
ability to use certain net operating losses and other corporate tax attributes in the future.
However, the ownership change does not constitute a change in control under any of the Companys
debt agreements or other contracts. The Company experienced an
ownership change in March 2009.
Based upon the closing of the SEC filing period for Schedules 13-G and review of these schedules
filed through February 15, 2010, the Company determined that, more likely than not, a certain
check-the-box election was effective prior to the date of the 2009 ownership change under Section
382. As a result, the Company recorded a tax benefit for the reversal of a liability for
unrecognized tax benefit of $351.9 million in the condensed consolidated statement of operations
for the two months ended March 31, 2010, which was the primary driver of our effective tax rate for
the period.
Predecessor Company
For the one month ended January 31, 2010, the Predecessor Company recorded an income tax provision
of $(917.5) million which represents an effective tax rate of 11.7%.
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Net Income and Earnings Per Share
Successor Company
Net income of $55.4 million for the three months ended March 31, 2011 was a direct result of the
revenue and expense trends described above. Net income of $257.2 million for the two months ended
March 31, 2010 was a direct result of the income tax benefit described above, offset by the
significant impact of the effects of fresh start accounting and the revenue and expense trends
described above.
Basic and diluted earnings per share (EPS) was $1.11 for the three months ended March 31, 2011.
For the two months ended March 31, 2010, basic and diluted EPS was $5.14. See Item 1, Financial
Statements (Unaudited) Note 2, Summary of Significant Accounting Policies Earnings Per
Share for further details and computations of basic and diluted EPS.
Predecessor Company
Net income of $6,920.0 million for the one month ended January 31, 2010 is primarily due to the
gain on reorganization and fresh start accounting adjustments that comprise reorganization items,
net. In addition, net income for the one month ended January 31, 2010 was determined based on the
revenue and expense trends and income taxes described above. For the one month ended January 31,
2010, basic EPS was $100.3 and diluted EPS was $100.2.
Non-GAAP Statistical Measures
Advertising sales is a non-GAAP statistical measure and consists of sales of advertising in print
directories distributed during the period and Internet-based products and services with respect to
which such advertising first appeared publicly during the period. It is important to distinguish
advertising sales from net revenues, which under GAAP are recognized under the deferral and
amortization method. Advertising sales in current periods will be recognized as gross advertising
revenues in future periods as a result of the deferral and amortization method of revenue
recognition. Advertising sales for the three months ended March 31, 2011 were $364.5 million,
representing a decline of $72.5 million, or 16.6%, from combined advertising sales of $437.0
million for the three months ended March 31, 2010.
In order to provide more visibility into what the Company will book as revenue in the future, we
are presenting an additional non-GAAP statistical measure called bookings, which represent sales
activity associated with our print directories and Internet-based marketing solutions during the
period. Bookings associated with our local customers represent signed contracts during the period.
Bookings associated with our national customers represent what has been published or fulfilled
during the period. Bookings for the three months ended March 31, 2011 were $351.0 million,
representing a decline of $66.6 million, or 15.9%, from combined bookings of $417.5 million for the
three months ended March 31, 2010.
The decrease in advertising sales and bookings for the three months ended March 31, 2011 is a
result of declines in new and recurring business, mainly driven by (1) customer attrition, (2)
declines in overall advertising spending by our clients, (3) the significant impact of the weak
local business conditions on consumer spending in our clients markets and (4) an increase in
competition and more fragmentation in local business search.
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LIQUIDITY AND CAPITAL RESOURCES
The following table presents the fair market value of our long-term debt at March 31, 2011 based on
quoted market prices on that date, as well as the carrying value of our long-term debt at March 31,
2011, which includes $83.7 million of unamortized fair value adjustments required by GAAP in
connection with the Companys adoption of fresh start accounting on the Fresh Start Reporting Date.
Fair Market Value | Carrying Value | |||||||
March 31, 2011 | March 31, 2011 | |||||||
RHDI Amended and Restated Credit Facility |
$ | 767,204 | $ | 986,073 | ||||
Dex Media East Amended and Restated Credit Facility |
558,879 | 717,081 | ||||||
Dex Media West Amended and Restated Credit Facility |
571,218 | 646,511 | ||||||
Dex One 12%/14% Senior Subordinated Notes due 2017 |
190,500 | 300,000 | ||||||
Total Dex One consolidated |
2,087,801 | 2,649,665 | ||||||
Less current portion |
181,961 | 224,555 | ||||||
Long-term debt |
$ | 1,905,840 | $ | 2,425,110 | ||||
RHDI Amended and Restated Credit Facility
As of March 31, 2011, the outstanding carrying value under the amended and restated RHDI credit
facility (RHDI Amended and Restated Credit Facility) totaled $986.1 million. The RHDI Amended and
Restated Credit Facility requires quarterly principal and interest payments and matures on October
24, 2014. The weighted average interest rate of outstanding debt under the RHDI Amended and
Restated Credit Facility was 9.0% at March 31, 2011.
Dex Media East Amended and Restated Credit Facility
As of March 31, 2011, the outstanding carrying value under the amended and restated Dex Media East
credit facility (Dex Media East Amended and Restated Credit Facility) totaled $717.1 million. The
Dex Media East Amended and Restated Credit Facility requires quarterly principal and interest
payments and matures on October 24, 2014. The weighted average interest rate of outstanding debt
under the Dex Media East Amended and Restated Credit Facility was 2.8% at March 31, 2011.
Dex Media West Amended and Restated Credit Facility
As of March 31, 2011, the outstanding carrying value under the amended and restated Dex Media West
credit facility (Dex Media West Amended and Restated Credit Facility) totaled $646.5 million. The
Dex Media West Amended and Restated Credit Facility requires quarterly principal and interest
payments and matures on October 24, 2014. The weighted average interest rate of outstanding debt
under the Dex Media West Amended and Restated Credit Facility was 7.0% at March 31, 2011.
Impact of Fresh Start Accounting
In conjunction with our adoption of fresh start accounting, an adjustment was established to record
our outstanding debt at fair value on the Fresh Start Reporting Date. The Company was required to
record our amended and restated credit facilities at a discount as a result of their fair value on
the Fresh Start Reporting Date. Therefore, the carrying amount of these debt obligations is lower
than the principal amount due at maturity. A total discount of $120.2 million was recorded upon
adoption of fresh start accounting associated with our amended and restated credit facilities, of
which $83.7 million remains unamortized at March 31, 2011, as shown in the following table.
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Outstanding Debt at | ||||||||||||
March 31, 2011 | ||||||||||||
Unamortized Fair | Excluding the | |||||||||||
Value Adjustments | Impact of | |||||||||||
Carrying Value at | at March 31, | Unamortized Fair | ||||||||||
March 31, 2011 | 2011 | Value Adjustments | ||||||||||
RHDI Amended and Restated Credit Facility |
$ | 986,073 | $ | 13,514 | $ | 999,587 | ||||||
Dex Media East Amended and Restated Credit Facility |
717,081 | 59,320 | 776,401 | |||||||||
Dex Media West Amended and Restated Credit Facility |
646,511 | 10,844 | 657,355 | |||||||||
Dex One 12%/14% Senior Subordinated Notes due 2017 |
300,000 | | 300,000 | |||||||||
Total |
$ | 2,649,665 | $ | 83,678 | $ | 2,733,343 | ||||||
Liquidity and Cash Flows
The Companys primary sources of liquidity are existing cash on hand and cash flows generated from
operations. The Companys primary liquidity requirements will be to fund operations and service its
indebtedness.
The Companys ability to meet its debt service requirements will be dependent on its ability to
generate sufficient cash flows from operations. The primary sources of cash flows will consist
mainly of cash receipts from the sale of our marketing solutions and can be impacted by, among
other factors, general local business conditions, an increase in competition and more fragmentation
in the local business search market, consumer confidence and the level of demand for our
advertising products and services.
Based on current financial projections, but in any event for at least the next 12-15 months, the
Company expects to be able to continue to generate cash flows from operations in amounts sufficient
to fund operations and capital expenditures, as well as meet debt service requirements. The
Companys financial projections also include excess cash flow that will be used to fund additional
debt repayments resulting from cash flow sweep requirements under our amended and restated credit
facilities. However, no assurances can be made that our business will generate sufficient cash
flows from operations to enable us to fund these prospective cash requirements since the current
information used in our financial projections could change in the future as a result of changes in
estimates and assumptions as well as risks noted in Part I Item 1A, Risk Factors of our Annual
Report on Form 10-K for the year ended December 31, 2010.
As provided for in our amended and restated credit facilities, each of the Companys operating
subsidiaries are permitted to fund a share of the Parent Companys interest obligations on the
$300.0 million aggregate principal amount of 12%/14% Senior Subordinated Notes due 2017 (Dex One
Senior Subordinated Notes). In addition, each of our operating subsidiaries is permitted to send
up to $5 million annually to the Parent Company for its use on an unrestricted basis. Other funds,
based on a percentage of each operating subsidiaries excess cash flow, as defined in each credit
agreement, may be provided to the Parent Company to fund specific activities, such as acquisitions.
Lastly, our operating subsidiaries fund on a proportionate basis those expenses paid by the Parent
Company to fund the daily operations of our operating subsidiaries. Excluding the very limited
exceptions noted above, all of the net assets of the Company and its subsidiaries are restricted
from being paid as dividends to any third party, and our subsidiaries are restricted from paying
dividends, loans or advances to us under the terms of our amended and restated credit facilities.
The Company currently believes that the limitations and restrictions imposed by our amended and
restated credit facilities noted above will not impact our ability to fund operations and capital
expenditures as well as meet debt service requirements, specifically at the Parent Company level.
However, no assurances can be made that these limitations and restrictions will not have an impact
on our ability to fund operations and capital expenditures as well as meet debt service
requirements specifically at the Parent Company level in the future.
See Part I Item 2, Managements Discussion and Analysis of Financial Condition and Results of
Operations Recent Trends and Developments Related to Our Business for additional information
related to trends and uncertainties with respect to our business, which could have a significant
impact on our future liquidity and cash flows.
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Successor Company
Three Months Ended March 31, 2011
Aggregate outstanding debt at March 31, 2011 was $2,649.7 million, which includes fair value
adjustments of $83.7 million required by GAAP in connection with the Companys adoption of fresh
start accounting. During the three months ended March 31, 2011, we made scheduled and accelerated
principal payments of $40.9 million and $53.9 million, respectively, for total principal payments
of $94.8 million under our amended and restated credit facilities. For the three months ended March
31, 2011, we made aggregate net cash interest payments of $63.7 million. At March 31, 2011, we had
$136.6 million of cash and cash equivalents before checks not yet presented for payment of $0.5
million.
Cash provided by operating activities was $109.5 million for the three months ended March
31, 2011 and included net income adjusted for non-cash items such as depreciation and amortization,
partially offset by changes in assets and liabilities primarily driven by changes in deferred
directory revenues.
Cash provided by investing activities for the three months ended March 31, 2011 was $10.5
million and relates to the sale of substantially all net assets of Business.com, partially
offset by the purchase of fixed assets, primarily computer equipment, software and leasehold
improvements.
Cash used in financing activities for the three months ended March 31, 2011 was $111.3
million and includes the following:
| $94.8 million in principal payments on our amended and restated credit facilities; | ||
| $0.3 million provided by other financing items; and | ||
| $16.7 million in the decreased balance of checks not yet presented for payment. |
Two Months Ended March 31, 2010
Cash provided by operating activities was $105.3 million for the two months ended March
31, 2010 and included net income, non-cash items, net primarily related to a deferred income tax
benefit, offset by depreciation and amortization, and changes in assets and liabilities primarily
driven by changes in deferred income taxes.
Cash used in investing activities for the two months ended March 31, 2010 was $6.4
million and relates to the purchase of fixed assets, primarily computer equipment, software
and leasehold improvements.
Cash used in financing activities for the two months ended March 31, 2010 was $150.8
million and includes the following:
| $153.2 million in principal payments on our amended and restated credit facilities; | ||
| $0.9 million in other financing costs; and | ||
| $3.3 million in the increased balance of checks not yet presented for payment. |
Predecessor Company
One Month Ended January 31, 2010
Cash provided by operating activities was $71.7 million for the one month ended January
31, 2010 and included net income, non-cash items, net primarily related to non-cash reorganization
items, net, offset by a deferred income tax provision and depreciation and amortization, and
changes in assets and liabilities primarily driven by changes in deferred income taxes and pension
and postretirement long-term liabilities.
Cash used in investing activities for the one month ended January 31, 2010 was $1.8
million and relates to the purchase of fixed assets, primarily computer equipment, software
and leasehold improvements.
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Cash used in financing activities for the one month ended January 31, 2010 was $536.5
million and includes the following:
| $511.3 million in principal payments on term loans under the Predecessor Companys credit facilities in accordance with the Plan and in conjunction with our emergence from Chapter 11; | ||
| $22.1 million in costs associated with the issuance of the Dex One Senior Subordinated Notes and other financing related costs; and | ||
| $3.1 million in the decreased balance of checks not yet presented for payment. |
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk and Risk Management
The Companys amended and restated credit facilities each bear interest at variable rates and,
accordingly, our earnings and cash flow are affected by changes in interest rates. Management
believes that it is prudent to mitigate the interest rate risk on a portion of its variable rate
borrowings. To satisfy our objectives and requirements, the Company has entered into interest rate
swap and interest rate cap agreements, which have not been designated as cash flow hedges, to
manage our exposure to interest rate fluctuations on our variable rate debt.
The Company has entered into the following interest rate swaps that effectively convert $500.0
million, or approximately 21%, of the Companys variable rate debt to fixed rate debt as of March
31, 2011. Since the RHDI Amended and Restated Credit Facility and the Dex Media West Amended and
Restated Credit Facility are subject to a LIBOR floor of 3.00% and the LIBOR rate is below that
floor at March 31, 2011, both credit facilities are effectively fixed rate debt until such time
LIBOR exceeds the stated floor. At March 31, 2011, approximately 89% of our total debt outstanding
consisted of variable rate debt, excluding the effect of our interest rate swaps. Including the
effect of our interest rate swaps, total fixed rate debt comprised approximately 30% of our total
debt portfolio as of March 31, 2011. The interest rate swaps mature at varying dates from February
2012 through February 2013.
Interest Rate Swaps Dex Media East
Effective Dates | Notional Amount | Pay Rates | Maturity Dates | |||||||
(amounts in millions) | ||||||||||
February 26, 2010 |
$ | 300 | (2) | 1.20% - 1.796 | % | February 29, 2012 February 28, 2013 | ||||
March 5, 2010 |
100 | (1) | 1.688 | % | January 31, 2013 | |||||
March 10, 2010 |
100 | (1) | 1.75 | % | January 31, 2013 | |||||
Total |
$ | 500 | ||||||||
Under the terms of the interest rate swap agreements, we receive variable interest based on the
three-month LIBOR and pay a weighted average fixed rate of 1.5%. The weighted average rate received
on our interest rate swaps was 0.3% for the three months ended March 31, 2011. These periodic
payments and receipts are recorded as interest expense.
Under the terms of the interest rate cap agreements, the Company will receive payments based on the
spread in rates if the three-month LIBOR rate increases above the cap rates noted in the table
below. The Company paid $2.1 million for the interest rate cap agreements entered into during the
first quarter of 2010. We are not required to make any future payments related to these interest
rate cap agreements.
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Interest Rate Caps RHDI
Effective Dates | Notional Amount | Cap Rates | Maturity Dates | |||||||
(amounts in millions) | ||||||||||
February 26, 2010 |
$ | 200 | (3) | 3.0% - 3.5 | % | February 29, 2012 February 28, 2013 | ||||
March 8, 2010 |
100 | (4) | 3.5 | % | January 31, 2013 | |||||
March 10, 2010 |
100 | (4) | 3.0 | % | April 30, 2012 | |||||
Total |
$ | 400 | ||||||||
(1) | Consists of one swap | |
(2) | Consists of three swaps | |
(3) | Consists of two caps | |
(4) | Consists of one cap |
We use derivative financial instruments for hedging purposes only and not for trading or
speculative purposes. By using derivative financial instruments to hedge exposures to changes in
interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the
possible failure of the counterparty to perform under the terms of the derivative contract. When
the fair value of a derivative contract is positive, the counterparty owes the Company, which
creates credit risk for the Company. When the fair value of a derivative contract is negative, the
Company owes the counterparty and, therefore, it is not subject to credit risk. The Company
minimizes the credit risk in derivative financial instruments by entering into transactions with
major financial institutions with credit ratings of AA- or higher, or the equivalent dependent upon
the credit rating agency.
Market risk is the adverse effect on the value of a financial instrument that results from a change
in interest rates. The market risk associated with interest-rate contracts is managed by
establishing and monitoring parameters that limit the types and degree of market risk that may be
undertaken.
Market Risk Sensitive Instruments
All derivative financial instruments are recognized as either assets or liabilities on the
condensed consolidated balance sheets with measurement at fair value. On a quarterly basis, the
fair values of our interest rate swaps and interest rate caps are determined based on quoted market
prices. These derivative instruments have not been designated as cash flow hedges and as such, the
initial fair value and any subsequent gains or losses on the change in the fair value of the
interest rate swaps and interest rate caps are reported in earnings as a component of interest
expense. Any gains or losses related to the quarterly fair value adjustments are presented as an
operating activity on the condensed consolidated statements of cash flows.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Management conducted an evaluation, under the supervision and with the participation of the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of
the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended) as of March 31, 2011. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that such disclosure controls and
procedures are effective and sufficient to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Securities Act of 1934 is recorded,
processed, summarized and reported within the time periods specific in the SECs rules and forms.
In addition, based on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that such disclosure controls and procedures are effective and sufficient to ensure that
information required to be disclosed by the Company in reports that it files or submits under the
Securities Act of 1934 is accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
There have not been any changes in the Companys internal controls over financial reporting during
the Companys most recent fiscal quarter that materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to various lawsuits, claims, and regulatory and administrative proceedings arising
out of our business covering matters such as general commercial, governmental regulations,
intellectual property, employment, tax and other actions. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse effect on our results of
operations, cash flows or financial position.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I Item 1A to
our Annual Report on Form 10-K for the year ended December 31, 2010. The risk factors disclosed in
our Annual Report on Form 10-K, in addition to the other information set forth in this Quarterly
Report on Form 10-Q could materially affect our business, financial condition or results.
Additional risks and uncertainties not currently known to us or that we currently deem immaterial
also may materially adversely affect our business, financial condition or results.
Item 6. Exhibits
Exhibit No. | Document | |
10.1*
|
Form of Restricted Stock Award Agreement for Executive Officers. | |
10.2*
|
Form of Non-Qualified Stock Option Agreement (Time-Vested Award) for Executive Officers. | |
10.3*
|
Form of Non-Qualified Stock Option Agreement (Price-Vested Award) for Executive Officers. | |
31.1*
|
Certification of Quarterly Report on Form 10-Q for the period ended March 31, 2011 by Alfred T. Mockett, Chief Executive Officer and President of Dex One Corporation under Section 302 of the Sarbanes-Oxley Act | |
31.2*
|
Certification of Quarterly Report on Form 10-Q for the period ended March 31, 2011 by Steven M. Blondy, Executive Vice President and Chief Financial Officer of Dex One Corporation under Section 302 of the Sarbanes-Oxley Act | |
32.1*
|
Certification of Quarterly Report on Form 10-Q for the period ended March 31, 2011, under Section 906 of the Sarbanes-Oxley Act by Alfred T. Mockett, Chief Executive Officer and President, and Steven M. Blondy, Executive Vice President and Chief Financial Officer, for Dex One Corporation |
* | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
DEX ONE CORPORATION | ||||||
Date: May 2, 2011
|
By: | /s/ Steven M. Blondy | ||||
Steven M. Blondy | ||||||
Executive Vice President and Chief Financial Officer | ||||||
(Principal Financial Officer) | ||||||
/s/ Sylvester J. Johnson | ||||||
Sylvester J. Johnson | ||||||
Vice President, Corporate Controller and Chief Accounting Officer | ||||||
(Principal Accounting Officer) |
37
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Exhibit Index
Exhibit No. | Document | |
10.1*
|
Form of Restricted Stock Award Agreement for Executive Officers. | |
10.2*
|
Form of Non-Qualified Stock Option Agreement (Time-Vested Award) for Executive Officers. | |
10.3*
|
Form of Non-Qualified Stock Option Agreement (Price-Vested Award) for Executive Officers. | |
31.1*
|
Certification of Quarterly Report on Form 10-Q for the period ended March 31, 2011 by Alfred T. Mockett, Chief Executive Officer and President of Dex One Corporation under Section 302 of the Sarbanes-Oxley Act | |
31.2*
|
Certification of Quarterly Report on Form 10-Q for the period ended March 31, 2011 by Steven M. Blondy, Executive Vice President and Chief Financial Officer of Dex One Corporation under Section 302 of the Sarbanes-Oxley Act | |
32.1*
|
Certification of Quarterly Report on Form 10-Q for the period ended March 31, 2011, under Section 906 of the Sarbanes-Oxley Act by Alfred T. Mockett, Chief Executive Officer and President, and Steven M. Blondy, Executive Vice President and Chief Financial Officer, for Dex One Corporation |
* | Filed herewith. |
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