UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-07155
DEX ONE CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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13-2740040 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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1001 Winstead Drive, Cary, N.C.
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27513 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code (919) 297-1600
Securities registered pursuant to Section 12(b) of the Act:
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Title of class
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Name of exchange on which registered |
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Common Stock, par value $.001 per share
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes o No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Securities Act.
Yes o No þ
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes 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 (Section 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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. :
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes o No þ
On June 30, 2010, the last day of the most recently completed second quarter, the aggregate market
value of Dex One Corporations common stock (based upon the closing price per share of $19.00 of
such stock traded on The New York Stock Exchange on such date) held by non-affiliates of the
Registrant was approximately $670,316,789. At June 30, 2010, there were 50,015,691 outstanding
shares of the Registrants common stock. For purposes of this calculation, those shares held by
directors and executive officers of the Registrant and shares held by Franklin Resources Inc., who
held approximately 29% of our outstanding shares of common stock at June 30, 2010, have been
excluded as held by affiliates. Such exclusion should not be deemed a determination or an
admission by the Registrant or any such person that such individuals or entities are or were, in
fact, affiliates of the Registrant. At February 1, 2011, there were 50,031,441 outstanding shares
of the Registrants common stock.
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
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for the 2011 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission on or prior to May 2, 2011, are incorporated by
reference in this Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.
PART I
ITEM 1. BUSINESS.
General
Dex One Corporation became the successor registrant to R.H. Donnelley Corporation upon emergence
from Chapter 11 proceedings under Title 11 of the United States Code (Chapter 11) on January 29,
2010 (the Effective Date) and pursuant to Rule 12g-3 under the Securities Exchange Act of 1934.
See Item 8, Financial Statements and Supplementary Data Note 1, Business and Basis of
Presentation for detailed information on matters associated with the Chapter 11 proceedings.
Except where otherwise indicated or as the context may otherwise indicate, the terms Dex One,
Successor Company, Company, Parent Company, we, us and our refer to Dex One Corporation
and its direct and indirect wholly-owned subsidiaries subsequent to the Effective Date. As of
December 31, 2010, R.H. Donnelley Corporation, R.H. Donnelley Inc. (RHDI or RHD Inc.), Dex
Media, Inc. (Dex Media), Business.com, Inc. (Business.com) and Dex One Service, Inc. (Dex One
Service) were our only direct wholly-owned subsidiaries. The financial information set forth in
this Annual Report, unless otherwise indicated or as the context may otherwise indicate, reflects
the consolidated results of operations and financial position of Dex One as of and for the eleven
months ended December 31, 2010. Our executive offices are located at 1001 Winstead Drive, Cary,
North Carolina 27513 and our telephone number is (919) 297-1600. Our corporate Internet website
address is www.DexOne.com. For more information on the products and services that Dex One offers,
please visit our website at www.DexKnows.com®. We make available free of charge on our
website our annual, quarterly and current reports, including amendments to such reports, as soon as
practicable after we electronically file such material with, or furnish such material to, the
United States Securities and Exchange Commission (SEC). Our filings can also be obtained from
the SEC website at www.sec.gov. However, the information found on our website and the SEC website
is not part of this Annual Report.
Except where otherwise indicated or as the context may otherwise indicate, the terms Predecessor
Company, RHD, we, us and our refer to R.H. Donnelley Corporation and its direct and
indirect wholly-owned subsidiaries prior to the Effective Date. The financial information set
forth in this Annual Report, unless otherwise indicated or as the context may otherwise indicate,
reflects the consolidated results of operations and financial position of RHD as of and for the one
month ended January 31, 2010 and for each of the years in the two year period ended December 31,
2009.
On the Effective Date and in connection with our emergence from Chapter 11, RHD was renamed Dex One
Corporation. The Company was formed on February 6, 1973 as a Delaware corporation. In November
1996, the Company, then known as The Dun & Bradstreet Corporation separated through a spin-off into
three separate public companies: The Dun and Bradstreet Corporation, ACNielsen Corporation, and
Cognizant Corporation. In June 1998, The Dun & Bradstreet Corporation separated through a spin-off
into two separate public companies: R.H. Donnelley Corporation (formerly The Dun & Bradstreet
Corporation) and a new company that changed its name to The Dun & Bradstreet Corporation (D&B).
Corporate Overview
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 highly
effective marketing solutions combine multiple media platforms that drive large volumes of leads to
our clients. Our highly skilled, 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 include local business and market
analysis, message and image creation, target
market identification, advertising and digital profile creation, keyword and search engine
optimization strategies and programs, distribution strategies, social strategies, and tracking and
reporting. 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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We believe our ability to effectively compete in our industry is supported by a number of
advantages:
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A deep domain expertise in the realm of local businesses; |
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A vast database of local business information within our markets and the ability to
collect and continuously update its content; and |
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Strong, direct and long-standing relationships with local businesses maintained by
our locally based marketing consultants who work closely with clients to first discover
their business goals and marketing needs, assess their unique situations, and then
recommend a customized, cost-effective set of marketing solutions to help generate
leads. |
Segment Reporting
Management reviews and analyzes its business of providing marketing solutions as one operating
segment.
Financial and Other Business Information
See Item 8, Financial Statements and Supplementary Data for financial information, including
revenues and earnings from operations, for our operating segment.
Business Overview
Our business model of helping local businesses generate leads and manage their presence among
consumers in the ever changing, complex and fragmented markets we serve is fulfilled by providing
proprietary and affiliate provided marketing solutions that combine multiple media platforms. Local
businesses face an overwhelming array of marketing options and are looking for simple, complete and
effective marketing solutions that do not require their day-to-day involvement. We believe our
marketing solutions fulfill these local business needs by providing targeted solution bundles that
combine offline and online media platforms to drive large volumes of leads to our clients. We also
provide high levels of support and service through our locally based marketing consultants who
strive to understand clients businesses and then present customized solutions from our leading
offerings to create high impact, multi-platform marketing campaigns.
The Company is in the process of transitioning to a compete-and-collaborate business model, as we
anticipate that affiliate provided solutions will grow at a faster rate than our proprietary
solutions. This compete-and-collaborate business model entails our collaboration with certain of
our competitors. In light of increasing fragmentation within the markets we serve, this model will
allow us to aggregate more leads for our clients in our markets. As such, we anticipate expanding
the breadth of our affiliate provided solutions to areas such as website creation, web hosting and
reputation management.
Our marketing solutions help businesses get found well over a billion times each year by actively
shopping consumers. These references result in a conversion of advertising impressions to actual
transactions for our clients, which help generate returns on investment that are inclined to be
higher than those for other forms of local media, such as magazines, newspapers, radio and
television. Unlike many other forms of local media that focus on creative advertising, one of the
primary drivers of higher relative return on investment for our clients is our focus on targeting
consumers that are closer to making a purchase decision and thus are able to offer our clients a
more effective return on investment.
Marketing Solutions
We offer the following marketing solutions, which are complemented by our partnerships with some of
the best known search engine companies, such as Google and Yahoo!, to promote businesses on the
Internet via our proprietary search network, DexNet.
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Assessment of marketing programs and advertisements; |
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Message and image creation; |
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Recommendations for advertising placement; |
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Industry-specific research and information; |
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Market-specific research and information; |
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In-depth understanding of how consumers search for businesses and what influences them
to buy from one business versus another; |
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Dex published yellow pages; |
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Dex published white pages; |
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DexKnows.com; |
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Search engine optimization strategies; |
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Keyword implementation; |
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Social strategies; and |
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Tracking and reporting. |
Print Products and Services
We offer three primary types of printed yellow pages directories: core directories, community
directories and Plus companion directories. Core directories generally cover large population or
regional areas, whereas community directories typically focus on a sub-section of the areas
addressed by corresponding core directories. The Plus companion directory is a small format
directory used in addition to the core and community directories. It is complementary to the core
directory with replicated advertising from the core directory. Our print directory advertising
products can be broken down into three basic categories: Yellow Pages, White Pages and
Specialty/Awareness Products.
Whenever practicable, we combine the white pages section and the yellow pages section of our print
directory products into a single directory. In large markets where it is impractical to combine
the two sections into one volume, separate stand-alone white and yellow pages print directories are
normally published at about the same time. We are committed to environmental stewardship and offer
a variety of recycling programs in many of the markets we serve. In many of the markets we serve,
consumers also have the ability to choose the print directories that they wish to receive or may
elect to receive none at all via the Select Your Dex program.
Our directories are designed to meet the advertising needs of local and national businesses and the
informational needs of local consumers. The diversity of advertising options available enables us
to create customized marketing programs that are responsive to specific client needs and financial
resources. The yellow pages and white pages print directories are also efficient sources of
information for consumers, featuring a comprehensive list of businesses in the local market that
are conveniently organized under thousands of directory headings.
Online Products and Services
DexKnows.com
Our listing and clients content is also placed on the DexKnows.com platform through basic text
listings and searchable business profiles and through Internet products including DexKnows Enhanced
Packs and DexKnows Starter Packs. In many cases, print clients content is largely replicated to
DexKnows.com, which provides consumers a content rich online search experience.
We purchase information from other national databases to enhance in-region listings and supply
out-of-region listings, although these out-of-region listings are not as comprehensive as our
in-region information. DexKnows.com includes approximately 13.7 million business listings and more
than 190 million residential listings from across the United States.
Consumers can access information on DexKnows.com from their computer or mobile phone. DexKnows.com
allows the user to search based on a category, business name or set of keyword terms within a
geographic region. In addition, DexKnows.com provides users with the ability to refine their
searches using a navigable, flexible digital category structure that includes such things as
specific product and brand names, hours of operation, payment options and locations.
We have content agreements and distribution agreements with various search engines, portals and
local community destination websites. These agreements provide us with access to important channels
to enhance our distribution network on behalf of our clients. This enhanced distribution typically
leads to increased usage among consumers and greater value and return on investment for our
clients.
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One such distribution agreement is with Yahoo!. Qwest region clients benefit from inclusion within
the following Yahoo! Local and Yahoo! Yellow Pages advertising products:
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Yahoo! Local Featured Listingssponsored listings with guaranteed placement on the
first or second results pages for broader exposure in a specific geography or category. |
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Yahoo! Local Enhanced Listingssponsored listings that offer the ability to add a
detailed description of their business, photos, a tagline and coupons to create greater
online visibility for businesses and enhance their appearance within organic results. |
We have a YellowPages.com (YPC) Reseller Agreement with AT&T, which allows us to be the exclusive
provider of YPC Internet yellow pages advertising in our Illinois and Northwest Indiana markets.
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Basic Listings We have the rights to distribute an unlimited number of clients to
the YPC Internet yellow pages website. |
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Premium Listings We have the rights to sell enhanced YPC advertising products, for
example, guaranteed placement and/or inclusion on the YPC Internet yellow pages website,
to our Illinois and Northwest Indiana clients. |
DexNet
DexNet drives leads to our clients through placement of their business listings in prime locations
on DexKnows.com and distributes it to other major search engines. Products and services offered by
DexNet provide new, innovative solutions to enhance our local directional marketing capabilities.
DexNet provides a comprehensive approach to serving the Internet marketing needs of local
businesses through four major product and service elements:
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Client Profileconstructs a simple but content rich presence on the web for the client
and is designed to maximize the opportunity to appear on major search engines. |
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Distributionprovides the clients information and business information to multiple
local search platforms including YellowPages.com, Google Maps and Local.com. |
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Paid Searchdevelops, deploys and manages effective search marketing campaigns across
major search platforms, such as Google and Yahoo!, on behalf of the client. |
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Reportingprovides transparent, real-time results, such as phone calls, e-mails,
listing views, website visits, driving directions, and the total number of times the
profile is sent to mobile. Reporting is accessible 24 hours a day, 7 days a week and
combines results received from DexKnows.com and leading local search sites. |
Business Cycle Overview
Our sales, marketing, operations and production teams work together to foster the efficiency and
effectiveness of our end-to-end process from advertising purchase to product distribution or
service fulfillment and billing. We work with vendor partners to print and distribute our
proprietary print and online products, including DexKnows.com and Dex published yellow pages print
directories, while facilitating the fulfillment of DexNet purchases on the sites of our online
distribution partners.
Our print directories usually have a 12-month directory cycle period. A publication process
generally takes 15 to 20 months from the beginning of the sales cycle to the end of a directorys
life and the sales stage closes approximately 70 days prior to publication. Consistent with our
print directories, our online products and services usually have a 12-month billing cycle, although
our DexKnows.com platform provides an opportunity for clients to update aspects of their
advertising content online at any time before the next sales cycle.
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Sales
Our local marketing consultant team is comprised of approximately 1,500 employees.
We assign our clients among local marketing consultants and telephone local marketing consultants
based on a careful assessment of a clients expected advertising expenditures. This practice
allows us to deploy our local marketing consultants in an effective manner. Our local marketing
consultants are assigned to local service areas. Management believes that our local marketing
consultants facilitate the establishment of personal, long-term relationships with local print and
online clients that are necessary to maintain a higher rate of client renewal.
Our local sales channel is divided into three sales sub-channels: premise sales, telephone sales
and locally centralized sales.
Premise local marketing consultants conduct sales meetings face to face at clients business
locations and typically handle higher dollar and more complex accounts.
Telephone local marketing consultants handle lower dollar value accounts and conduct sales over
the phone.
Locally centralized sales includes multiple types of sales efforts, including centralized local
marketing consultants, prospector local marketing consultants and a letter renewal effort. These
sales mechanisms are used to contact non-advertisers or very low dollar value clients that in many
cases have renewed their account for the same product for several years. Some of these centralized
efforts are also focused on initiatives to recover former clients.
Management believes that formal training is important to maintaining a highly productive sales
force. Our local marketing consultants are formally trained on relationship selling skills. This
process is a highly client-centric consultative selling model that emphasizes diagnosis of needs
before developing customized solutions. We believe this process increases effectiveness for
retaining and growing existing clients along with the ability to acquire new clients and
successfully sell multiple products. New marketing consultants receive extensive initial training
including relationship selling skills, product portfolio, client care and administration, standards
and ethics. All sales managers have been trained also on new active management processes to
provide daily management and coaching to the local marketing consultants on relationship selling
skills, maximizing productivity, and managing leading indicators of the business. This
relationship sales process, combined with the daily management activities, provides clients a level
of high-quality service centered on their individual needs.
National Sales
In addition to our locally based marketing consultants, we utilize a separate sales channel to
serve our national clients. In 2010, national clients accounted for about 15% of our revenue.
National clients are typically national or large regional chains such as rental car companies,
insurance companies and pizza businesses that purchase advertisements in many yellow pages
directories in multiple geographic regions. In order to sell to national clients, we employ
associates to manage our selling efforts. In addition we contract with third party Certified
Marketing Representatives (CMR) who design and create advertisements for national companies and
place those advertisements in relevant yellow pages directories nationwide and in online products
and services. Some CMRs are departments of general advertising agencies, while others are
specialized agencies that focus solely on directory advertising. The national client pays the CMR,
which then pays us after deducting its commission. We accept orders from approximately 160 CMRs
and our associates also manage our CMR relationships.
Printing and Distribution
Our directories are printed through our long-standing relationship with printing vendor R.R.
Donnelley & Sons Company (R.R. Donnelley), as well as with World Color (USA) Corp. (Worldcolor)
now owned by Quad/Graphics, Inc. In general, R.R. Donnelley prints all AT&T and CenturyLink
directories and larger, higher-circulation Qwest directories, whereas Worldcolor prints Qwest
directories that are smaller and have a more limited circulation. Our agreements with R.R.
Donnelley and Worldcolor for the printing of all of our directories extend through 2014 and 2015,
respectively.
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The physical delivery of directories is facilitated through several outsourcing relationships.
Delivery methods utilized to distribute directories to consumers are selected based on factors such
as cost, quality, geography and market need. Primary delivery methods include U.S. Postal Service
and hand delivery. We have contracts with two companies for the distribution of our directories.
These contracts are scheduled to expire at various times from May 2012 through May 2013.
Occasionally, we use United Parcel Service or other types of expedited delivery methods.
Frequently, a combination of these methods is required to meet the needs of the marketplace.
Printing, paper and distribution costs represented approximately 11% of net revenue for the eleven
months ended December 31, 2010.
Online Production and Distribution
Online products are provisioned on our proprietary Internet directory site, DexKnows.com, as well
as distributed to third party Internet search engines and directories such as Google, Yahoo! and
YellowPages.com. Delivery to end users is determined based on factors such as demographics, cost,
quality, geography and marketing intent.
The provisioning of online directories and search engine marketing products is facilitated through
a combination of internal technology as well as several outsourcing relationships. In 2010, the
production of our consumer-oriented Internet advertising site, DexKnows.com, was facilitated
through various technology outsourcing relationships while the fulfillment of search engine
marketing products utilize our proprietary technology.
Credit, Collections and Bad Debt Expense
Since most of our products and services have 12-month cycles and most clients are billed over the
course of that 12-month period, we extend credit to our clients in the form of a trade receivable.
A majority of these clients are local businesses with default rates that usually exceed those of
larger companies. Our policies toward the extension of credit and collection activities associated
with trade receivables are designed to manage bad debt at certain targeted levels while intending
to promote reasonable sales growth.
Local advertising clients spending above identified levels may be subject to a credit review that
includes, among other criteria, evaluation of credit or payment history with us, third party credit
scoring, credit checks with other vendors along with consideration of credit risks associated with
particular headings. Where appropriate, advance payments (in whole or in part) and/or personal
guarantees from business owners may be required prior to the extension of credit to select
advertisers. In addition to efforts to assess credit risk prior to extending credit to clients, we
employ well-developed collection strategies utilizing an integrated system of internal and
automated means to engage clients concerning payment obligations. The Company may choose to renew
contracts with clients who have accounts receivable balances with us in arrears if the client
agrees to prepay in full for new advertising.
Fees for national clients are generally billed upon publication of each issue of the directory in
which the advertising is placed by CMRs. Because we do not usually enter into contracts with
national clients directly, we are subject to the credit risk of CMRs on sales to those clients, to
the extent we do not receive fees in advance.
Competition
The local search industry in which we operate is highly competitive and fragmented. We compete
with other print and online yellow pages directory publishers, as well as other types of media
including direct mail, search engines, local search sites, advertising networks, and emerging
technologies. Among our highest spending category of customers, we also compete with television,
newspaper and radio, which tend to charge more for similar coverage. Looking ahead, new content
delivery technologies and consumer focus continue to
evolve in the media environment such as with social media, ratings and reviews, mobile
applications, etc. This represents potential competition as well as opportunities for partnership
and incremental sales. We regularly monitor developing trends and technologies to assess
opportunities for enhancing our own capabilities through new product development, partnerships or
acquisitions, and identify competitive threats where a specific response may be warranted. In
addition, we expect to operate on a compete and collaborate model in which we are both partners
and competitors with the same firm in different aspects of operations.
In nearly all of our markets, we compete with one or more traditional print yellow pages directory
publishers, including independent publishers such as Yellowbook, White Directory Publishing, Inc.
and Phone Directories Company. In some markets, we compete with other incumbent publishers such as
SuperMedia and AT&T. We compete with these publishers based on price, quality, features, usage
leadership and distribution.
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Most of the major yellow pages directory publishers offer print and online directories as well as
online search products. Virtually all independent publishers, including Yellowbook, a competitor in
the majority of our markets, compete aggressively and use pricing and discounting as a primary
competitive tool to try to increase their market share. Due to the recent economic environment and
trends in our industry and an increase in competition and more fragmentation in the local business
search space, we have experienced a significant decline in advertising sales during 2010 and we
currently expect this trend to continue in 2011. We believe these same trends are also impacting
our competitors.
Online competition has intensified as technologies have improved and broadband penetration has
increased, offering a diverse set of advertising alternatives for small businesses. We consider
our primary online competition to be the major search engines, such as Google, Yahoo!, BING and
others, in addition to the online directory properties of the largest yellow pages directory
publishers, such as Superpages.com, provided by SuperMedia, and YellowPages.com, provided by AT&T.
Additionally, we compete with a growing number of local shopping-related competitors including
industry specific online verticals, such as FindLaw.com and ServiceMagic.com, user-generated
content sites such as Yelp and Kudzu, and search engine intermediaries such as ReachLocal and
Yodle. We also compete with a number of well known online map websites such as
MapQuest®, Rand McNally® and Google Maps. Most of these companies operate on
a national scale, competing for consumer and business users across our entire regions and actively
soliciting clients in many of our markets. We may not be able to compete effectively with these
other companies, some of which may have greater resources than we do, for advertising sales or
acquisitions in the future. Our Internet strategy and our business may be adversely affected if
major search engines build local sales forces or otherwise begin to more effectively reach small
local businesses for local commercial search services.
Our enhanced distribution arrangements have involved, and will likely continue to involve,
cooperating with other local media companies with whom we also compete, particularly with respect
to online local search. As a result, particularly as usage continues to migrate from print to
online, we bear some risk that such cooperation arrangements may presently, or come to constitute,
a significant component of the aggregate distribution of the advertising message that we offer to
certain of our clients. Some of these local media companies with whom we cooperate and compete
have greater financial resources than we do. Should our relationships with such companies be
discontinued for any reason, it may be detrimental to our clients and thereby may result in lower
rates of renewal of our contractual relationships with our clients. Our reliance on these
cooperation arrangements may also provide an unintended competitive advantage to some of our
competitors by (a) promoting the products and services of those competitors and (b) establishing,
building and reinforcing an indirect relationship between our clients and those competitors, which
could facilitate those competitors entering into direct relationships with our clients without our
involvement. Over the last few years, we have experienced a loss in our client base due to
competition in the markets we serve. We believe that our transition to a compete-and-collaborate
business model will allow us to aggregate more leads for our clients in our markets and potentially
grow our client base. If we are not able to execute on this business model, we could experience a
continued loss of clients, which would have a material adverse effect on our business, financial
condition and results of operations.
Raw Materials
Our principal raw material is paper and we use recycled material. It is one of our largest cost
items, representing approximately 4.0% of net revenue for the eleven months ended December 31,
2010. Paper used is supplied by two paper companies, CellMark Paper, Inc. (CellMark) and Nippon
Paper Industries USA, Co., Ltd. (Nippon), with whom we have three year agreements that commenced
in January 2010. Paper used for the covers and tabs of our directories is supplied by Unisource
Worldwide, Inc. (Unisource). Both agreements with Unisource expire on December 31, 2012.
Intellectual Property
We own and control confidential information as well as a number of trade secrets, trademarks,
service marks, trade names, copyrights, patents and other intellectual property rights that, in the
aggregate, are of material importance to our business. We believe that Dex One®,
Dex®, Qwest®, CenturyLinkTM, AT&T Real Yellow Pages,
DexKnows.com®, DexKnows® and DexNet® and related names,
marks and logos are, in the aggregate, material to our business. We are licensed to use certain
technology and other intellectual property rights owned and controlled by others, and, similarly,
other companies are licensed to use certain technology and other intellectual property rights owned
and controlled by us.
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DexNet is our distribution platform that delivers the local web to local businesses in a
predictable and budgeted manner. In connection with DexNet, we recently filed a U.S. Patent
Application directed to providing business owners with predictable client lead volume and price
transparency of the effective cost-per-lead and managing the consistent delivery of leads
throughout the duration of an advertising campaign.
We are the exclusive official directory publisher of listings and classified advertisements for
Qwest (and its successors) telephone customers in the states DME Inc. and DMW Inc. operate our
directory business (Qwest States) and in which Qwest provided local telephone service as of
November 8, 2002 (subject to limited extensions). We also have the exclusive right to use certain
Qwest branding on directories in these markets. In addition, Qwest assigned and/or licensed to us
certain intellectual property used in the Qwest directory business prior to November 8, 2002.
These rights generally expire in 2052.
We have an exclusive license to produce, publish and distribute directories for CenturyLink (and
its successors) in the markets where Sprint provided local telephone service as of September 21,
2002 (subject to limited extensions), as well as the exclusive license to use CenturyLinks name
and logo on directories in those markets. These rights generally expire in 2052.
We have an exclusive license to provide yellow pages directory services for AT&T (and its
successors) and to produce, publish and distribute white pages directories on behalf of AT&T in
Illinois and Northwest Indiana, as well as the exclusive right to use the AT&T brand and logo on
print directories in those markets. These rights generally expire in 2054.
Under license agreements for subscriber listings and directory delivery lists, each of Qwest,
CenturyLink and AT&T have granted to us a non-exclusive, non-transferable restricted license of
listing and delivery information for persons and businesses that order and/or receive local
exchange telephone services in the relevant service areas at the prices set forth in the respective
agreements. Generally, we may use the listing information solely for publishing directories (in
any format) and the delivery information solely for delivering directories, although in the case of
Qwest, we may also resell the information to third parties solely for direct marketing activities,
database marketing, telemarketing, market analysis purposes and internal marketing purposes, and
use it ourselves in direct marketing activities undertaken on behalf of third parties. The term of
these license agreements is generally consistent with the term of the respective publishing
agreements described above.
Although we do not consider any individual trademark or other intellectual property to be material
to our operations, we believe that, taken as a whole, the licenses, marks and other intellectual
property rights that we acquired in conjunction with prior acquisitions are material to our
business. We consider our trademarks, service marks, databases, software and other intellectual
property to be proprietary, and we rely on a combination of copyright, trademark, trade secret,
non-disclosure and contract safeguards for protection. We also benefit from the use of the phrase
yellow pages and the walking fingers logo, both of which we believe to be in the public domain in
the United States.
Employees
As of February 1, 2011, Dex One has approximately 3,200 employees of which approximately 1,000 are
represented by labor unions covered by two collective bargaining agreements with Dex Media in the
Qwest States. The unionized employees are represented by either the International Brotherhood of
Electrical Workers of America (IBEW), which represents approximately 400 of the unionized
workforce, or the Communication Workers of America (CWA), which represents approximately 600 of
the unionized workforce. Dex Medias collective bargaining agreement with the IBEW expires in May
2012 and Dex Medias collective bargaining agreement with the CWA expires in September 2012. Dex
One considers our relationships with our employees and both unions to be good.
10
Executive Officers of the Registrant
The following table sets forth information concerning the individuals who serve as executive
officers of the Company as of February 1, 2011.
|
|
|
|
|
Name |
|
Age |
|
Position(s) |
Alfred T. Mockett |
|
62 |
|
Chief Executive Officer and President |
George F. Bednarz |
|
57 |
|
Executive Vice President, Sales and Marketing |
|
|
|
|
(acting) |
Steven M. Blondy |
|
51 |
|
Executive Vice President and Chief Financial |
|
|
|
|
Officer |
Atish Banerjea |
|
45 |
|
Senior Vice President and Chief Technology Officer |
Sean W. Greene |
|
40 |
|
Senior Vice President, Interactive (acting) |
Tyler D. Gronbach |
|
42 |
|
Senior Vice President, Communications |
Mark W. Hianik |
|
50 |
|
Senior Vice President, General Counsel and |
|
|
|
|
Corporate Secretary |
Donna Towles |
|
58 |
|
Senior Vice President, Operations |
Gretchen Zech |
|
41 |
|
Senior Vice President, Human Resources |
Sylvester J. Johnson |
|
50 |
|
Vice President, Controller and Chief Accounting |
|
|
|
|
Officer |
The executive officers serve at the pleasure of the Board of Directors. The following descriptions
of the business experience of our executive officers include the principal positions held by them
since February 2006.
Alfred T. Mockett has served as Chief Executive Officer and President since September 2010.
Prior to joining the Company, Mr. Mockett served as Chairman and CEO of Motive, Inc., a provider of
software management services to communications providers until the company was sold in 2008. Mr.
Mockett has more than 30 years experience in executive management and strategic decision-making at
a number of leading technology, telecommunications and professional services companies including
American Management Systems, a global business and information technology consulting firm for the
U.S. and state governments, financial services and communications industries, BT Group (formerly
British Telecom), a global provider of communications solutions and services, and Memorex Telex, a
global provider of information technology solutions.
George F. Bednarz has served as Executive Vice President, Sales and Marketing (acting) since
January 2011. Prior to that, Mr. Bednarz served as Executive Vice President, Enterprise Sales and
Operations since June 2008. Prior to that, Mr. Bednarz served as Senior Vice President, Operations
since January 2008. Prior to that, Mr. Bednarz served as Senior Vice President, RHD Interactive
since January 2007. Prior to that, Mr. Bednarz served as Senior Vice President, Integration,
Corporate Planning, Administration and Communications since January 2006. Prior to that, Mr.
Bednarz served as Vice President, Corporate Planning and Information Technology.
Steven M. Blondy has served as Executive Vice President and Chief Financial Officer since
January 2006. Prior to that, Mr. Blondy served as Senior Vice President and Chief Financial
Officer.
Atish Banerjea has served as Senior Vice President and Chief Technology Officer since January
2011. Prior to joining the Company, Mr. Banerjea served as Executive Vice President of Pearson,
PLC, a $9 billion international media group. Prior to his promotion to Executive Vice President of
Pearson in 2005, Mr. Banerjea served as Senior Vice President, Technology Strategy and Architecture
and Chief Technology Officer for Pearson Education.
Sean W. Greene has served as Senior Vice President, Interactive (acting) since July 2009.
Prior to that, Mr. Greene served as Corporate Strategy and Business Development since October 2008.
Prior to that, Mr. Greene served as Vice President & General Manager of Dex Search Marketing since
December 2007. Prior to that, Mr. Greene served as Vice President of Interactive Strategy, Product
Management and Business Development from September 2006 to December 2007. Prior to that, Mr. Greene
served as Assistant Vice President of Competitive Strategy and Business Development.
Tyler D. Gronbach has served as Senior Vice President, Communications since January 2011.
Prior to that, Mr. Gronbach served as Senior Vice President of Corporate Communications and
Administration since January 2007. Prior to that, Mr. Gronbach served as Vice President of
Corporate Communications.
11
Mark W. Hianik has served as Senior Vice President, General Counsel and Corporate Secretary since
April 2008. Prior to joining the Company, Mr. Hianik served as Vice President and Assistant General
Counsel for Tribune Company, a diversified media company. While at Tribune, Mr. Hianik was lead
in-house counsel for numerous M&A and corporate financing transactions. Mr. Hianik was also
responsible for overseeing the corporate secretarial function and managing a wide variety of
operational matters as well as complex litigation.
Donna Towles has served as Senior Vice President, Operations since January 2011. Prior to
that, Ms. Towles served as Vice President, Publishing Operations since November 2006. Prior to
that, Ms. Towles served as Assistant Vice President of Publishing.
Gretchen Zech has served as Senior Vice President, Human Resources since June 2006. Prior to
joining the Company, Ms. Zech served as Group Vice President, Human Resources at Gartner, Inc., a
technology research and consulting firm.
Sylvester J. Johnson has served as Vice President, Controller and Chief Accounting Officer
since April 2009. Prior to joining the Company, Mr. Johnson served as Vice President and Controller
of 7-Eleven, Inc., a convenience retailing company, from January 2002 to November 2007.
We have been advised that there are no family relationships among any of our executive officers or
directors and that there is no arrangement or understanding among any of our executive officers and
any other persons pursuant to which they were appointed, respectively, as an executive officer.
Each of Ms. Zech and Messrs. Bednarz, Blondy, Greene, Gronbach, Hianik and Johnson were serving as
executive officers of the Company when it filed for voluntary reorganization under Chapter 11 on
May 28, 2009.
Forward-Looking Information
Certain statements contained in this Annual Report on Form 10-K regarding Dex Ones 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 only our current beliefs and assumptions with respect to our future results, business plans
and prospects, based on information currently available to us and consequently are subject to
significant risks and uncertainties. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results, levels of activity
or performance. In evaluating forward-looking statements included in this annual report, you
should specifically consider various factors, including the risks and uncertainties discussed
below. These factors may cause our actual results to differ materially from those expressed in, or
implied by, our forward-looking statements. All forward-looking statements attributable to us or a
person speaking on our behalf are expressly qualified in their entirety by these cautionary
statements. These forward-looking statements are made as of the date of this annual report and,
except as required under the federal securities laws and the rules and regulations of the SEC, we
assume no obligation to update or revise them or to provide reasons why actual results may differ.
12
Risks, trends, uncertainties and contingencies that could negatively impact our future operating
results, performance, business plans or prospects include:
Risks Related to Our Financial Condition and Capital Structure
1) Our substantial debt poses various risks
We have a substantial amount of debt and significant debt service obligations. As of December 31,
2010, we had total outstanding debt of $2.7 billion. See Item 8, Financial Statements and
Supplementary Data Note 6, Long-Term Debt, Credit Facilities and Notes for detailed
information on our outstanding debt. See Item 8, Financial Statements and Supplementary Data -
Note 3, Fresh Start Accounting for information on debt repayments made in conjunction with our
emergence from the Chapter 11 proceedings.
As a result of our debt and debt service obligations, we face various risks regarding, among other
things, the following:
|
|
|
we may not be able to obtain additional financing or refinance our existing indebtedness
on satisfactory terms or at all; |
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|
|
our indebtedness limits our financial flexibility in planning for, or reacting to,
changes in our business and the industry in which we operate; |
|
|
|
|
rising interest rates could increase the costs of servicing our debt because a majority
of our debt is at variable interest rates; |
|
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|
|
interest and principal payments on our indebtedness reduces the cash flow available to
us to fund working capital requirements, capital expenditures, acquisitions or other
strategic initiatives, investments and other general corporate requirements because a
substantial portion of our cash flow is needed to service our debt obligations; and |
|
|
|
|
speculation as to our financial condition and the effect of our debt level and debt
service obligations could disrupt our relationships with clients, suppliers, employees,
creditors and other third parties. |
Based on current financial projections, but in any event for the next 12-15 months, we expect to be
able to continue to generate cash flows from operations in amounts sufficient to satisfy our
interest and principal payment obligations. However, we can make no assurances that our business
will generate sufficient cash flows from operations over longer periods to enable us to satisfy our
interest and principal payment obligations.
2) The restrictive covenants under our debt agreements limit our operational flexibility
The agreements governing our credit facilities, including an indenture governing the Dex One Senior
Subordinated Notes, contain affirmative and negative covenants. These covenants could adversely
affect us by, among other things, limiting our ability to obtain funds from our subsidiaries, or to
otherwise meet our capital needs. These covenants generally limit or restrict our ability, and our
subsidiaries ability, to:
|
|
|
incur additional indebtedness or liens; |
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|
|
make capital expenditures and investments (including acquisitions); |
|
|
|
pay dividends or otherwise make distributions; |
|
|
|
make payments of certain indebtedness; |
|
|
|
engage in sale and leaseback transactions, swap transactions and transactions with
affiliates; and |
|
|
|
modify the Dex One Senior Subordinated Notes. |
The affirmative covenants require, among other things, that we meet various financial covenants,
including leverage ratios and interest coverage ratios.
13
Our ability to comply with these covenants depends on various factors, certain of which are outside
of our control. Such factors include our ability to generate sufficient revenues and cash flows
from operations, our ability to reduce over time our outstanding indebtedness, and changes in
interest rates. Our failure to comply with those
covenants could result in our triggering a default under our credit agreements which could have an
adverse effect on our business, financial condition and results of operations.
3) Our variable rate indebtedness subjects us to interest rate risk
At December 31, 2010, $2.4 billion, or approximately 89%, of our outstanding indebtedness bore
interest at variable rates. An increase in interest rates could cause our debt service obligations
to increase significantly. The Company has entered into fixed interest rate swap agreements and
interest rate cap agreements to manage fluctuations in cash flows resulting from changes in
interest rates on variable rate debt. However, we cannot provide assurances that such agreements
will be effective in managing our exposure to rising interest rates. See Item 8, Financial
Statements and Supplementary Data Note 6, Long-Term Debt, Credit Facilities and Notes for a
detailed discussion of the interest rates applicable to borrowings under our credit facilities and
Item 8, Financial Statements and Supplementary Data Note 7, Derivative Financial Instruments
for information on our interest rate swap agreements and interest rate cap agreements.
Risks Related to Our Business
1) The ongoing weak economic conditions could adversely affect our business
As a result of the ongoing weak economic conditions, we have continued to experience lower
advertising sales during 2010 primarily as a result of declines in new and recurring business,
including both renewal and incremental sales to existing clients, 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. We currently expect these
weak economic conditions to continue throughout 2011. Consequently, prolonged weak economic
conditions could have an adverse effect on our business, financial condition and results of
operations.
2) Some of our competitors are larger than we are and have greater financial and other resources
The local search industry in which we operate is highly competitive and fragmented. We compete
with other print and online yellow pages directory publishers, as well as other types of media
including direct mail, search engines, local search sites, advertising networks, and emerging
technologies. In nearly all of our markets, we compete with one or more traditional print yellow
pages directory publishers, including independent publishers such as Yellowbook, White Directory
Publishing, Inc., and Phone Directories Company, and in some markets, we compete with other
incumbent publishers such as SuperMedia and AT&T. Most major yellow pages directory publishers
offer print and online directories as well as online search products. We compete with these
publishers based on price, discounting, quality, features, usage leadership and distribution. Our
competitors approaches to pricing and discounting may affect our pricing strategies and our future
revenues. Among our highest spending category of customers, we also compete with television,
newspaper and radio, which tend to charge more for similar coverage. Some of our competitors are
larger than we are and have greater financial and technological resources than we have and may be
able to commit more resources or otherwise devote more capital to their business, thus limiting our
ability to compete effectively with these entities.
3) Competition from emerging online technologies could adversely affect our business
We also face increased competition from online technologies as such technologies have improved,
offering a diverse set of advertising alternatives for small businesses. We consider our primary
online competition to be the major search engines, such as Google, Yahoo!, BING and others.
Additionally, we compete with a growing number of online local shopping-related competitors
including industry specific online verticals, such as FindLaw.com and ServiceMagic.com,
user-generated content sites such as Yelp and Kudzu, and search engine intermediaries such as
ReachLocal and Yodle. We also compete with a number of well known online map websites such as
MapQuest®, Rand McNally® and Google Maps. Most of these companies operate on
a national scale, competing for consumer and business users across our entire region and actively
solicit clients in many of our markets. We may not be able to compete effectively with these online
competitors, some of which may have greater resources than we do. Our Internet strategy and our
business may be adversely affected if major search engines build local sales forces or otherwise
begin to more effectively reach small local businesses for local commercial search services.
14
Our enhanced distribution arrangements have involved, and will likely continue to involve,
cooperating with other local media companies with whom we also compete, particularly with respect
to online local search. Our reliance on these cooperation arrangements may also provide an
unintended competitive advantage to some of our competitors by (a) promoting the products and
services of those competitors and (b) establishing, building and reinforcing an indirect
relationship between our clients and those competitors, which could facilitate those
competitors entering into direct relationships with our clients without our involvement. Material
loss of clients would have a material adverse effect on our business, financial condition and
results of operations.
4) The changing market position of telephone utilities could adversely affect our business
The market position of telephone utilities, including Qwest, CenturyLink and AT&T, may erode over
time. As a result, it is possible that Qwest, CenturyLink and AT&T, or their successors, may not
remain the primary local telephone service provider in their local service areas. If Qwest,
CenturyLink or AT&T, or their successors, were no longer the primary local telephone service
provider in any particular local service area, our license to be the exclusive publisher in that
market may decline in value and adversely affect our business, financial condition and results of
operations.
5) The termination or modification of one or more material Internet search engine, local search or
portal agreements could adversely affect our business
Our ability to provide enhanced distribution arrangements, including Internet marketing solutions
to our clients is dependent upon relationships with major Internet search companies and local media
companies. If we are unable to maintain these relationships or are unable to renew material portal
agreements or if the level of service provided by these search companies changes, it could
adversely impact the performance of our business.
6) The continuing decline in the use of print yellow pages could adversely affect our business
Over the past several years, overall references to print yellow pages directories in the United
States have continued to decline while the usage of Internet-based directory products has increased
rapidly. We believe this decline has been influenced by increasing consumer usage of a variety of
digital information services, including search engines, online directories, social networks,
industry-specific websites, and mobile applications. We believe that over the next several years,
references to print yellow pages directories will continue to decline as users increasingly turn to
digital and other interactive media delivery devices for local commercial search information. These
trends have, in part, resulted in advertising sales declining in 2010, and we expect these trends
to continue in 2011.
Any decline in usage could:
|
|
|
impair our ability to maintain or increase our advertising prices; |
|
|
|
cause businesses that purchase advertising in our yellow pages directories to reduce or
discontinue those purchases; and |
|
|
|
discourage businesses that do not presently purchase advertising in our yellow pages
directories from doing so in the future. |
Although we believe that any decline in the usage of our printed directories will be offset in part
by an increase in usage of our Internet-based directories and distribution partnerships, we cannot
provide any assurances that such usage will result in additional revenue or profits. Any of the
factors that may contribute to a decline in usage of our print directories, or a combination of
them, could adversely affect our business, financial condition or results of operations.
15
7) New technologies could adversely affect our business
The directory advertising industry is subject to changes arising from developments in technology,
including information distribution methods and users technological preferences. The use of the
Internet and wireless devices by consumers as a means to transact commerce may result in new
technologies being developed and services being provided that could compete with our products and
services. National search companies such as Google and Yahoo! are focusing and placing a high
priority on local commercial search initiatives. As a result of these factors, our growth and
future financial performance may depend on our ability to develop and market new products and
services, to negotiate satisfactory strategic arrangements with national search companies and
utilize new distribution channels, while enhancing existing products, services and distribution
channels, to incorporate the latest technological advances and accommodate changing user
preferences, including the use of the Internet and wireless devices. We may not be able to develop
and market new products. In addition, if we fail to anticipate or respond adequately to changes in
technology and user preferences or are unable to finance the capital expenditures necessary to
respond to such changes, it could adversely affect our business, financial condition or results of
operations.
8) We could recognize impairment charges for our intangible assets or goodwill
At December 31, 2010, the net carrying value of our goodwill and intangible assets totaled $801.1
million and $2,369.2 million, respectively. In the recent past, we have recognized significant
goodwill and intangible asset impairment charges. We recognized a total impairment charge of
$1,159.3 million during the eleven months ended December 31, 2010. The Predecessor Company
recognized impairment charges of $7,337.8 million and $3,870.4 million during the years ended
December 31, 2009 and 2008, respectively. These impairment charges had no impact on current or
future operating cash flow, compliance with debt covenants or tax attributes. See Item 8,
Financial Statements and Supplementary Data Note 2, Summary of Significant Accounting Policies
Identifiable Intangible Assets and Goodwill for additional information on these impairment
charges.
If industry and local business conditions in our markets deteriorate in excess of current
estimates, potentially resulting in further declines in advertising sales and operating results,
and if the trading value of our debt and equity securities decline significantly, we will be
required to once again assess the recoverability of goodwill in addition to our annual evaluation
and recoverability and useful lives of our intangible assets and other long-lived assets. 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.
9) Our business could be adversely affected by interruptions to our computer and IT systems
Most of our business activities rely to a significant degree on the efficient and uninterrupted
operation of our computer and IT systems and those of third parties with which we have contracted.
Our computer and IT systems are vulnerable to damage or interruption from a variety of sources and
our disaster recovery systems may be deemed ineffective. Any failure of these systems could impair
our business. This could have a material adverse effect on our business, financial condition and
results of operations.
10) The bankruptcy of any of our telecommunication partners could adversely affect us
In the event that any of our telecommunications partners sought protection under U.S. bankruptcy
laws, our agreements with such partners, including our rights to provide search services under
those agreements, could be materially adversely impacted. In addition, our telecommunication
partners may be unable in such circumstance to provide services to us under our contracts with
them. Consequently, the bankruptcy of any of our telecommunication partners could have an adverse
effect on our business, financial condition or results of operations.
16
11) Early termination of our contracts with our telecommunication partners could have an adverse
effect on our business
Our commercial arrangements with Qwest, CenturyLink and AT&T have an initial term of 50 years,
subject to specified automatic renewal and early termination provisions. These commercial
arrangements may be terminated by our counterparty prior to their stated term under certain
specified circumstances, some of which at times may be beyond our reasonable control and/or which
may require extraordinary efforts or the incurrence of material excess costs on our part in order
to avoid breach of the applicable agreement. It is possible that these arrangements will not remain
in place for their full stated term or that we may be unable to avoid all potential breaches of or
defaults under these commercial arrangements. Further, any remedy exercised by Qwest, CenturyLink
or AT&T, as the case may be, under any of these arrangements could have a material adverse effect
on our financial condition or results of operations. At this time, we are not aware of any
information or circumstances that might give rise to a termination right by Qwest, CenturyLink and
AT&T.
12) Future regulatory changes in directory publishing obligations in the Qwest and AT&T markets
could have an adverse effect on our business
Pursuant to our agreements with Qwest and AT&T, we are required to discharge Qwests and AT&Ts
regulatory obligations to publish White Pages directories in various territories. If the staff of a
state public utility commission were to impose additional or changed legal requirements in any of
the service territories with respect to these obligations, we would be obligated to comply with
these requirements on behalf of Qwest or AT&T, even if such compliance were to increase our
publishing costs. Pursuant to our publishing agreements with Qwest and AT&T, Qwest and AT&T are not
obligated to reimburse us for all of our increased costs of publishing directories that satisfy
Qwests or AT&Ts publishing obligations resulting from new governmental legal requirements.
Consequently, our costs could increase which could have an adverse effect on our business,
financial condition or results of operations.
13) Internet-related regulation may adversely affect our business
As the local search directories industry develops, specific laws relating to the provision of
Internet services and the use of Internet and Internet-related applications may become relevant.
Regulation of the Internet and Internet-related services is itself still developing both formally
by, for instance, statutory regulation, and also less formally by, for instance, industry self
regulation. If our regulatory environment becomes more restrictive, including by increased Internet
regulation, it could adversely affect our business, financial condition or results of operations.
14) Environmental regulations could adversely affect our business
Our operations, as well as the properties owned and leased for our business, are subject to
stringent laws and regulations relating to environmental protection. The failure to comply with
applicable environmental laws, regulations or permit requirements, or the imposition of liability
related to waste disposal or other matters arising under these laws, could result in civil or
criminal fines, penalties or enforcement actions, third-party claims for property damage and
personal injury or requirements to clean up property or other remedial actions. Some of these laws
provide for strict liability, which can render a party liable for environmental or natural
resource damage without regard to negligence or fault on the part of the party.
15) Other governmental regulation could adversely affect our business
In addition, new laws and regulations (including, for example, limiting distribution of print
directories), new interpretations of existing laws and regulations, increased governmental
enforcement or other developments could require us to make additional unforeseen expenditures or
could lead to us suffering declines in revenues. For example, opt out and opt in legislation
has been proposed in certain states where we operate that would either (i) allow consumers to opt
out of the delivery of print yellow pages or (ii) prevent us from delivery until consumers who
preferred delivery of print yellow pages affirmatively elected to receive the print directory.
Although to date, this proposed legislation has not been signed into law in any of the states where
we operate, we cannot assure you that similar legislation will not be passed in the future. If such
legislation were to become effective, it could have a material adverse effect on the use of our
products and, ultimately, our revenues. If different forms of this type of legislation are adopted
in multiple jurisdictions, it could also materially increase our operating costs in order to
comply. We are adopting voluntary measures to permit consumers to share with us their preferences
with respect to the delivery of our various print and digital products.
17
If a large number of consumers advise us that they do not desire delivery of our products, the
usage of our products and, ultimately our revenues, could materially decline, which may have an
adverse effect on our business, financial condition and results of operations.
Many of these laws and regulations are becoming increasingly stringent, and the cost of compliance
with these requirements can be expected to increase over time. To the extent that the costs
associated with meeting any of these requirements are substantial and not adequately provided for,
there could be a material adverse effect on our business, financial condition and results of
operations.
16) Our reliance on, and extension of credit to, local businesses could adversely affect our
business
Approximately 85% of our advertising revenues are derived from the sale of our marketing solutions
to local businesses. In the ordinary course of our yellow pages publishing business, we extend
credit to these clients in the form of a trade receivable for advertising purchases. Local
businesses, however, tend to have fewer financial resources and higher failure rates than large
businesses, especially during a downturn in the general economy. The proliferation of very large
retail stores may continue to adversely affect local businesses. We believe these limitations are significant
contributing factors to having clients in any given year not renew their advertising in the
following year. If clients fail to pay within specified credit terms, we may cancel their
advertising in future directories, which could further impact our ability to collect past due
amounts as well as adversely impact our advertising sales and revenue trends. In addition, full or
partial collection of delinquent accounts can take an extended period of time. Consequently, we
could be adversely affected by our dependence on and our extension of credit to local businesses in
the form of a trade receivable.
17) Our dependence on third-party providers of printing, distribution, delivery and IT services
could adversely affect our business, financial condition or results of operations
We depend on third parties for the printing and distribution of our respective directories. We also
rely on the services of an information technology (IT) outsource service provider for IT
development and support services related to our directory publishing business. We must rely on the
systems of our third-party service providers, their ability to perform key operations on our behalf
in a timely manner and in accordance with agreed levels of service and their ability to attract and
retain sufficient qualified personnel to perform our work. A failure in the systems of one of our
third-party service providers, or their inability to perform in accordance with the terms of our
contracts or to retain sufficient qualified personnel, could have a material adverse effect on our
business, results of operations and financial condition.
Because of the large print volume and specialized binding of directories, only a limited number of
companies are capable of servicing our printing needs. Accordingly, the inability or unwillingness
of our third party service providers, as the case may be, to provide printing services on
acceptable terms or at all or any deterioration in our relationships with them could have a
material adverse effect on our business.
The physical delivery of directories is facilitated through several outsourcing relationships.
Delivery methods utilized to distribute directories to consumers are selected based on factors such
as cost, quality, geography and market need. Primary delivery methods include U.S. Postal Service
and hand delivery. We have contracts with two companies for the distribution of our directories.
Although these contracts are scheduled to expire at various times from May 2012 through May 2013,
any of these vendors may terminate its contract with us upon 120 days written notice. Only a
limited number of companies are capable of servicing our delivery needs. Accordingly, the inability
or unwillingness of our current vendors to provide delivery services on acceptable terms, or at
all, could have a material adverse effect on our business.
If we were to lose the services of the IT outsource service provider, we would be required either
to hire sufficient staff to perform these IT development and support services in-house or to find
an alternative service provider. In the event we were required to perform any of the services that
we currently outsource, it is possible that we would not be able to perform them on a
cost-effective basis. There are a limited number of alternative third-party service providers, if
any.
18
18) The sale of advertising to national accounts is coordinated by third parties that we do not
control, the performance and financial stability of which could adversely affect our business
Approximately 15% of our revenue is derived from the sale of advertising to national or large
regional companies, such as rental car companies, automobile repair shops and pizza delivery
businesses, that purchase advertising in several of our directories. Substantially all of the
revenue derived from national accounts is serviced through CMRs from which we accept orders. CMRs
are independent third parties that act as agents for national companies and design their
advertisements, arrange for the placement of those advertisements in directories and provide
billing services. As a result, our relationship with these national clients depends significantly
on the performance and financial stability of these third party CMRs that we do not control.
Although we believe that our respective relationships with these CMRs have been mutually
beneficial, if some or all of the CMRs with which we have established relationships were unable or
unwilling to do business with us on acceptable terms or at all, such inability or unwillingness
could have a material adverse effect on our business. In addition, any decline in the performance
of CMRs with which we do business could harm our ability to generate revenue from our national
accounts and could materially adversely affect our business. We also act as a CMR directly placing
certain national advertising in competition with these CMRs. It is possible that our status as a
competitor of CMRs could adversely impact our relationships with CMRs or expose us to possible
legal claims from CMRs. In light of the overall downturn in the economy, we may be adversely
impacted by credit risk with CMRs from which we accept orders and credit risk that CMRs face with
their clients. We cannot assure you that this credit risk will not have a significant impact on our
financial condition or results of operations in the future. During the fourth quarter of 2010, our
bad debt provision was negatively impacted by delinquent balances associated with a CMR.
19) Work stoppages or increased unionization among our work force could adversely affect our
business, financial condition or results of operations
Approximately 1,000 of our Dex Media employees are represented by labor unions covered by two
collective bargaining agreements with Dex Media. In addition, some of our key suppliers employees
are represented by unions. The unionized employees are represented by either the International
Brotherhood of Electrical Workers of America (IBEW), which represents approximately 400 of the
unionized workforce, or the Communication Workers of America (CWA), which represents
approximately 600 of the unionized workforce. Dex Medias collective bargaining agreement with the
IBEW expires in May 2012 and Dex Medias collective bargaining agreement with the CWA expires in
September 2012. If our unionized workers, or those of our key suppliers, were to engage in a
strike, work stoppage or other slowdown in the future, our business could experience a significant
disruption of operations and an increase in operating costs, which could have a material adverse
effect on our business.
20) Turnover among our sales force or key management could adversely affect our business
The success of our business is dependent on the leadership of our key personnel. The loss of a
significant number of experienced key personnel could adversely affect our results of operations,
financial condition and liquidity. Our success also depends on our ability to identify, hire, train
and retain qualified sales personnel in each of the regions in which we operate. We currently
expend significant resources and management time in identifying and training our local marketing
consultants and sales managers. Our ability to attract and retain qualified sales personnel will
depend, however, on numerous factors, including factors outside our control, such as conditions in
the local employment markets in which we operate.
Furthermore, our success depends on the continued services of key personnel, including our
experienced senior management team as well as our regional sales management personnel. If we fail
to retain the necessary key personnel, our results of operations, financial conditions and
liquidity, could be adversely affected.
19
21) The loss of important intellectual property rights could adversely affect our business,
financial condition or results of operations
Some trademarks and related names, marks and logos such as Dex One®,
Dex®, Qwest®, CenturyLinkTM, AT&T Real Yellow Pages,
DexKnows.com®. DexKnows® and DexNet® and other intellectual
property rights are important to our business. We rely upon a combination of patent, copyright and
trademark laws as well as contractual arrangements, including licensing agreements, particularly
with respect to Qwest, CenturyLink and AT&T markets, to establish and protect our intellectual
property rights. We are required from time to time to bring lawsuits against third parties to
protect our intellectual property rights. Similarly, from time to time, we are party to proceedings
whereby third parties challenge our rights. We cannot be sure that any lawsuits or other actions
brought by us will be successful or that we will not be found to infringe the intellectual property
rights of third parties. As the Internet grows, it may prove more onerous to protect our trademarks
and domain names, including DexKnows.com, from domain name infringement or to prevent others from
using Internet domain names that associate their business with ours. Although we are not aware of
any material infringements of any trademark rights that are significant to our business, any
lawsuits, regardless of their outcome, could result in substantial costs and diversion of resources
and could have a material adverse effect on our business, financial condition or results of
operations. Furthermore, the loss of important intellectual property rights could have a material
adverse effect upon our business, financial condition and results of operations.
22) Legal proceedings could adversely affect our business, financial condition or results of
operation
From time
to time, we are parties to civil litigation including regulatory and other proceedings with
governmental authorities and administrative agencies. Adverse outcomes in lawsuits or
investigations could result in significant monetary damages or injunctive relief that could
adversely affect our operating results or financial condition as well as our ability to conduct our
businesses as they are presently being conducted. See Item 3,
Legal Proceedings.
23) Fluctuations in the price and availability of paper could adversely affect our business,
financial condition or results of operation
Our principal raw material is paper and we use recycled material. It is one of our largest cost
items, representing approximately 4.0% of net revenue for the eleven months ended December 31,
2010.
We cannot assure you that we will be able to renegotiate our paper contracts in the future or renegotiate without an increase to the fixed pricing currently agreed
upon in the contracts. Changes in the supply of, or demand for, paper could affect market prices or
delivery times. We do not engage in hedging activities to limit our exposure to increases in paper
prices. In the future, the price of paper may fluctuate significantly due to changes in supply and
demand. We cannot assure you that we will have access to paper in the necessary amounts or at
reasonable prices or that any increases in paper costs would not have a material adverse effect on
our business, results of operations or financial condition especially in light of our projected
continuing decline in advertising sales.
|
|
|
ITEM 1B. |
|
UNRESOLVED STAFF COMMENTS |
None.
20
The following table details the location and general character of the material properties used by
the Company to conduct its business as of February 1, 2011:
|
|
|
|
|
|
|
|
|
Approximate Square |
|
|
|
|
Property Location |
|
Footage |
|
Purpose |
|
Lease Expiration |
Lone Tree, CO (1) |
|
143,000 |
|
Sales and Administration |
|
2012 |
Cary, NC |
|
105,000 |
|
Corporate Headquarters |
|
2015 |
Englewood, CO (1) |
|
66,000 |
|
Sales and Operations |
|
2011 |
Morrisville, NC (1)(2) |
|
56,000 |
|
Operations and Information Technology |
|
2015 |
Maple Grove, MN (1) |
|
42,000 |
|
Sales and Operations |
|
2014 |
Bellevue, WA (1) |
|
38,000 |
|
Sales and Operations |
|
2012 |
Overland Park, KS (1)(2) |
|
35,000 |
|
Sales and Operations |
|
2012 |
Chicago, IL (2) |
|
34,000 |
|
Sales and Operations |
|
2013 |
Santa Monica, CA (3) |
|
29,000 |
|
Digital Sales and Operations |
|
2011 |
Beaverton, OR (1) |
|
27,000 |
|
Sales and Operations |
|
2013 |
Phoenix, AZ (1) |
|
26,000 |
|
Sales and Operations |
|
2013 |
Bristol, TN (2) |
|
25,000 |
|
Sales and Operations |
|
Owned |
Murray, UT (1) |
|
25,000 |
|
Sales and Operations |
|
2011 |
Tinley Park, IL (2) |
|
21,000 |
|
Sales and Operations |
|
2014 |
Dunmore, PA (2) |
|
20,000 |
|
Graphics Operations |
|
2011 |
Lombard, IL (2) |
|
20,000 |
|
Sales and Operations |
|
2012 |
|
|
|
(1) |
|
Represents facilities utilized by Dex Media, Inc., our direct wholly-owned subsidiary, and its direct and
indirect subsidiaries, to conduct their operations. Employees currently residing at the Englewood, CO location will relocate
to the Lone Tree, CO location upon lease expiration in 2011. We intend to negotiate a new lease at the Murray, UT location
during 2011. |
|
(2) |
|
Represents facilities utilized by R.H. Donnelley Inc., our direct wholly-owned subsidiary, and its direct
subsidiaries, to conduct their operations. We will not renew our lease at the Dunmore, PA location once it expires in 2011. |
|
(3) |
|
Represents facilities previously utilized by Business.com, Inc., the assets of which were sold in February
2011, and other employees involved in our interactive business. We intend to negotiate a new lease at the Santa Monica, CA
location during 2011. |
We also lease space for additional operations, administrative and sales offices.
We believe that these facilities are adequate for current and future operations.
21
|
|
|
ITEM 3. |
|
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, including the two cases described below, will not have a
material adverse effect on our results of operations, cash flows or financial position.
Beginning on October 23, 2009, a series of putative securities class action lawsuits were commenced
in the United States District Court for the District of Delaware on behalf of all persons who
purchased or otherwise acquired our publicly traded securities between July 26, 2007 and the time
we filed for bankruptcy on May 28, 2009, alleging that certain of our officers issued false and
misleading statements regarding our business and financial condition and seeking damages and
equitable relief. On August 19, 2010, an amended consolidated class action complaint was filed as
the operative securities class action complaint (the Securities Class Action Complaint). The
Securities Class Action Complaint extends the class to include all persons who purchased or
otherwise acquired our publicly traded securities between October 26, 2006 and May 28, 2009. On
December 7, 2009, a putative ERISA class action lawsuit was commenced in the United States District
Court for the Northern District of Illinois on behalf of certain participants in, or beneficiaries
of, the R.H. Donnelley 401(k) Savings Plan at any time between July 26, 2007 and the time the
lawsuit was filed and whose plan accounts included investments in R.H. Donnelley common stock. The
putative ERISA class action complaint contains allegations against certain current and former
directors, officers and employees similar to those set forth in the Securities Class Action
Complaint as well as allegations of breaches of fiduciary duties under ERISA and seeks damages and
equitable relief. We believe the allegations set forth in both of these lawsuits are without merit
and we are vigorously defending the suits.
|
|
|
ITEM 4. |
|
(REMOVED AND RESERVED) |
22
PART II
|
|
|
ITEM 5. |
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market for Registrants Common Equity and Related Stockholder Matters
Dex Ones common stock is traded on the New York Stock Exchange (NYSE) under the symbol DEXO.
RHDs common stock was traded over-the-counter on the Pink Sheets under the symbol RHDC from
January 2, 2009 through October 21, 2009. From October 22, 2009 through the Effective Date, RHDs
common stock was traded over-the-counter on the Pink Sheets under the symbol RHDCQ. Prior to
January 2, 2009, RHDs common stock traded on the NYSE under the symbol RHD. The tables below
indicate the high and low sales price by quarter of Dex Ones common stock from February 1, 2010,
the date of initial trading on the NYSE, through December 31, 2010 and RHDs common stock from
January 1, 2010 through the Effective Date and for 2009.
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
High |
|
|
Low |
|
1st Quarter |
|
|
|
|
|
|
|
|
RHD: January 1, 2010 January 29, 2010 |
|
$ |
0.01 |
|
|
$ |
0.01 |
|
Dex One: February 1, 2010 March 31, 2010 |
|
$ |
35.00 |
|
|
$ |
25.71 |
|
2nd Quarter |
|
$ |
30.89 |
|
|
$ |
17.60 |
|
3rd Quarter |
|
$ |
19.72 |
|
|
$ |
8.35 |
|
4th Quarter |
|
$ |
12.42 |
|
|
$ |
4.46 |
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
High |
|
|
Low |
|
1st Quarter |
|
$ |
0.37 |
|
|
$ |
0.07 |
|
2nd Quarter |
|
$ |
0.31 |
|
|
$ |
0.04 |
|
3rd Quarter |
|
$ |
0.09 |
|
|
$ |
0.04 |
|
4th Quarter |
|
$ |
0.05 |
|
|
$ |
0.01 |
|
Upon emergence from Chapter 11 and pursuant to the Plan, all of the issued and outstanding shares
of RHD common stock and any other outstanding equity securities of RHD including all stock options,
stock appreciation rights and restricted stock, were cancelled. On the Effective Date, Dex One
issued an aggregate amount of 50,000,001 shares of new common stock, par value $.001 per share.
On February 1, 2011, there was one registered holder of record of Dex Ones common stock. On
February 1, 2011, the closing bid or ask market price of Dex Ones common stock was $5.79.
No shares of Dex One common stock were repurchased and Dex One did not pay any common stock
dividends from February 1, 2010 through December 31, 2010. No shares of RHD common stock were
repurchased and RHD did not pay any common stock dividends from January 1, 2010 through the
Effective Date or during the year ended December 31, 2009.
Our various debt instruments contain financial restrictions that place limitations on our ability
to pay dividends in the future. See Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Capital Resources for additional information
regarding these instruments and agreements and relevant limitations thereunder.
23
Equity Compensation Plan Information
On the Effective Date, the Companys Board of Directors ratified the Dex One Equity Incentive Plan
(EIP), which was previously approved as part of the Confirmation Order. Under the EIP, certain
employees and non-employee directors of the Company are eligible to receive stock options, stock
appreciation rights (SARs), limited stock appreciation rights in tandem with stock options,
restricted stock and restricted stock units. Under the EIP, 5.6 million shares of our common stock
were authorized for grant. To the extent that shares of our common stock are not issued or
delivered by reason of (i) the expiration, termination, cancellation or forfeiture of such award,
with certain exceptions, or (ii) the settlement of such award in cash, then such shares of our
common stock shall again be available under the EIP. Stock awards will typically be granted at the
market value of our common stock at the date of the grant, become exercisable in ratable
installments or otherwise, over a period of one to four years from the date of grant, and may be
exercised up to a maximum of ten years from the date of grant. The Companys Compensation &
Benefits Committee determines termination, vesting and other relevant provisions at the date of the
grant.
As previously noted, upon emergence from Chapter 11 and pursuant to the Plan, all outstanding
equity securities of RHD including all stock options, SARs and restricted stock, were cancelled.
The following table sets forth securities outstanding under existing equity compensation plans, as
well as securities remaining available for future issuance under those plans, in each case as of
December 31, 2010.
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
(a) |
|
|
|
|
|
|
Remaining Available |
|
|
|
Number of |
|
|
|
|
|
|
for Future Issuance |
|
|
|
Securities to Be |
|
|
(b) |
|
|
Under Equity |
|
|
|
Issued Upon |
|
|
Weighted-average |
|
|
Compensation Plans |
|
|
|
Exercise of |
|
|
Exercise Price of |
|
|
(excluding |
|
|
|
Outstanding |
|
|
Outstanding |
|
|
securities |
|
|
|
Options, Warrants |
|
|
Options, Warrants |
|
|
reflected in column |
|
Plan category |
|
and Rights |
|
|
and Rights |
|
|
(a)) |
|
Equity compensation plans not
approved by security holders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EIP |
|
|
865,681 |
|
|
$ |
28.68 |
|
|
|
3,889,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEO Stock-Based Awards (1) |
|
|
800,000 |
|
|
|
19.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,665,681 |
|
|
$ |
24.48 |
|
|
|
3,889,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In accordance with Mr. Mocketts employment agreement, on September
13, 2010, he was awarded 200,000 shares of the Companys common stock in the form of a
restricted stock award with a grant price of $9.62 per share, which was the closing price of the
Companys common stock on September 13, 2010, that will vest ratably over three years. On
September 13, 2010, he was also granted a fair market value option to purchase 200,000 shares of
the Companys common stock at an exercise price of $9.75 per share, which was the closing price
of the Companys common stock on September 3, 2010, that will vest ratably over four years, and
fully vested premium priced options to purchase 600,000 shares of the Companys common stock, a
third of which shares have an exercise price of $15 per share, a third of which shares have an
exercise price of $23 per share, and a third of which shares have an exercise price of $32 per
share (collectively, the CEO Stock-Based Awards). |
24
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from the Companys and the Predecessor Companys
audited consolidated financial statements. The information set forth below should be read in
conjunction with the audited consolidated financial statements and related notes in Item
8,Financial Statements and Supplementary Data, with Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations and Item 1A, Risk Factors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
Eleven Months |
|
|
One Month Ended |
|
|
|
|
(in thousands, except share and per |
|
Ended December 31, |
|
|
January 31, |
|
|
Years Ended December 31, |
|
share data) |
|
2010(1) |
|
|
2010 (1) |
|
|
2009 |
|
|
2008 |
|
|
2007(6) |
|
|
2006(7) |
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
830,887 |
|
|
$ |
160,372 |
|
|
$ |
2,202,447 |
|
|
$ |
2,616,811 |
|
|
$ |
2,680,299 |
|
|
$ |
1,899,297 |
|
Impairment charges (2) |
|
|
(1,159,266 |
) |
|
|
|
|
|
|
(7,337,775 |
) |
|
|
(3,870,409 |
) |
|
|
(20,000 |
) |
|
|
|
|
Operating income (loss) |
|
|
(1,294,256 |
) |
|
|
64,074 |
|
|
|
(6,797,503 |
) |
|
|
(3,005,717 |
) |
|
|
904,966 |
|
|
|
442,826 |
|
Gain (loss) on debt transactions, net
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
265,166 |
|
|
|
(26,321 |
) |
|
|
|
|
Reorganization items, net (4) |
|
|
|
|
|
|
7,793,132 |
|
|
|
(94,768 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(923,592 |
) |
|
|
6,920,009 |
|
|
|
(6,453,293 |
) |
|
|
(2,298,327 |
) |
|
|
46,859 |
|
|
|
(237,704 |
) |
Preferred dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,974 |
|
Gain on repurchase of preferred
stock(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,195 |
) |
|
|
|
Income (loss) available to common
shareholders |
|
$ |
(923,592 |
) |
|
$ |
6,920,009 |
|
|
$ |
(6,453,293 |
) |
|
$ |
(2,298,327 |
) |
|
$ |
46,859 |
|
|
$ |
(208,483 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(18.46 |
) |
|
$ |
100.3 |
|
|
$ |
(93.67 |
) |
|
$ |
(33.41 |
) |
|
$ |
0.66 |
|
|
$ |
(3.14 |
) |
Diluted |
|
$ |
(18.46 |
) |
|
$ |
100.2 |
|
|
$ |
(93.67 |
) |
|
$ |
(33.41 |
) |
|
$ |
0.65 |
|
|
$ |
(3.14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Used in Computing Earnings
(Loss) Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
50,020 |
|
|
|
69,013 |
|
|
|
68,896 |
|
|
|
68,793 |
|
|
|
70,932 |
|
|
|
66,448 |
|
Diluted |
|
|
50,020 |
|
|
|
69,052 |
|
|
|
68,896 |
|
|
|
68,793 |
|
|
|
71,963 |
|
|
|
66,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (8) |
|
$ |
4,488,848 |
|
|
$ |
5,913,482 |
|
|
$ |
4,498,794 |
|
|
$ |
11,880,709 |
|
|
$ |
16,089,093 |
|
|
$ |
16,147,468 |
|
Long-term debt, including current
maturities (8) |
|
|
2,737,221 |
|
|
|
3,264,578 |
|
|
|
3,554,776 |
|
|
|
9,622,256 |
|
|
|
10,175,649 |
|
|
|
10,403,152 |
|
Liabilities subject to compromise
(8) |
|
|
|
|
|
|
|
|
|
|
6,352,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity (deficit)
(8) |
|
|
525,916 |
|
|
|
1,450,784 |
|
|
|
(6,919,048 |
) |
|
|
(493,375 |
) |
|
|
1,822,736 |
|
|
|
1,820,756 |
|
|
|
|
(1) |
|
As a result of our emergence from Chapter 11 on the Effective Date, financial
information for Dex One is presented as of and for the eleven months ended December 31, 2010.
Financial information for the Predecessor Company is presented as of and for the one month ended
January 31, 2010. See Item 8, Financial Statements and Supplementary Data Note 3, Fresh
Start Accounting for information on how the Company determined a fresh start reporting date of
February 1, 2010 and for a presentation of the impact of emergence from reorganization and fresh
start accounting on our financial position, results of operations and cash flows. |
|
(2) |
|
We recognized a non-goodwill intangible asset impairment charge associated with
trade names and trademarks, technology, local customer relationships and other from our former
Business.com reporting unit of $21.6 million and a goodwill impairment charge of $1,137.6
million, for a total impairment charge of $1,159.3 million during the eleven months ended
December 31, 2010. |
25
|
|
|
|
|
The Predecessor Company recognized a non-goodwill intangible asset impairment charge of $7,337.8
million during the year ended December 31, 2009 associated with directory services agreements,
advertiser relationships, third party contracts and network platforms acquired in prior
acquisitions. |
|
|
|
The Predecessor Company recognized a goodwill impairment charge of $3,123.8 million and
non-goodwill intangible asset and other long-lived asset impairment charges totaling $746.6
million associated with local
and national customer relationships and tradenames and technology acquired in prior
acquisitions, for a total impairment charge of $3,870.4 million during the year ended December
31, 2008. |
|
|
|
During the year ended December 31, 2007, the Predecessor Company recorded a non-goodwill
intangible asset impairment charge of $20.0 million associated with the tradenames acquired in a
prior acquisition. |
|
|
|
See Item 8, Financial Statements and Supplementary Data Note 2, Summary of Significant
Accounting Policies Identifiable Intangible Assets and Goodwill for additional information
on these impairment charges. |
|
(3) |
|
As a result of financing activities conducted during 2008, the Predecessor
Company reduced its outstanding debt by $410.0 million and recorded a gain of $265.2 million
during the year ended December 31, 2008. See Item 8, Financial Statements and Supplementary
Data Note 2, Summary of Significant Accounting Policies Gain on Debt Transactions, Net
for further discussion. |
|
|
|
During the year ended December 31, 2007, the Predecessor Company recorded a loss on debt
transactions of $26.3 million resulting from tender and redemption premium payments of $71.7
million and the write-off of unamortized deferred financing costs of $16.8 million associated
with refinancing transactions conducted during the fourth quarter of 2007, offset by the
accelerated amortization of the fair value adjustment directly attributable to the redemption of
Dex Media East LLCs outstanding 9.875% senior notes and 12.125% senior subordinated notes on
November 26, 2007 of $62.2 million, which was accounted for as an extinguishment of debt. |
|
(4) |
|
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 recorded $7.8 billion of net 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. For the year ended December 31, 2009, the Predecessor Company
recorded $94.8 million of net reorganization items. See Item 8, Financial Statements and
Supplementary Data Note 4, Reorganization Items, Net and Liabilities Subject to Compromise
for further discussion. |
|
(5) |
|
In conjunction with the Predecessor Companys repurchase of its preferred stock
during 2006, the Predecessor Company reversed the previously recorded beneficial conversion
feature related to these shares and recorded a decrease to loss available to common shareholders
on the consolidated statement of operations of $31.2 million for the year ended December 31,
2006. |
|
(6) |
|
Financial data for the year ended December 31, 2007 includes the results of
Business.com commencing August 23, 2007. |
|
(7) |
|
Financial data for the year ended December 31, 2006 includes the results of Dex
Media commencing February 1, 2006. Net revenue, operating income, net loss and loss available to
common shareholders reflect purchase accounting adjustments that precluded the recognition of
revenue and certain expenses associated with directories published by Dex Media prior to and in
the month of the Dex Media merger. |
|
(8) |
|
The significant decline in total assets and shareholders deficit as of December
31, 2009 and 2008 is a direct result of the impairment charges noted above. The significant
decline in long-term debt, including current maturities, at December 31, 2009 is a direct result
of the Notes in Default, which were reclassed to liabilities subject to compromise on the
consolidated balance sheet at December 31, 2009. See Item 8, Financial Statements and
Supplementary Data Note 3, Fresh Start Accounting and Note 4, Reorganization Items, Net
and Liabilities Subject to Compromise for additional information as well as items included in
liabilities subject to compromise on the consolidated balance sheet at December 31, 2009. |
26
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Item should be read in conjunction with the audited consolidated financial statements and
notes thereto that are included in Item 8, Financial Statements and Supplementary Data. Unless
otherwise indicated or as the context may otherwise indicate, the terms Dex One, Successor
Company, Company, Parent Company, we, us and our refer to Dex One Corporation and its
direct and indirect wholly-owned subsidiaries subsequent to the Effective Date, which is defined
below. The financial information set forth in this Annual Report, unless otherwise indicated or as
the context may otherwise indicate, reflects the consolidated results of operations and financial
position of Dex One as of and for the eleven months ended December 31, 2010.
Dex One became the successor registrant to R.H. Donnelley Corporation (RHD Predecessor Company,
we, us and our for operations prior to January 29, 2010, the Effective Date) upon emergence
from Chapter 11 proceedings under Title 11 of the United States Code (Chapter 11) on the
Effective Date. The financial information set forth in this Annual Report, unless otherwise
indicated or as the context may otherwise indicate, reflects the consolidated results of operations
and financial position of RHD as of and for the one month ended January 31, 2010 and for each of
the years in the two year period ended December 31, 2009.
See Item 8, Financial Statements and Supplementary Data Note 1, Business and Basis of
Presentation for detailed information on the following matters associated with the Chapter 11
proceedings:
|
|
|
The Predecessor Companys filing of voluntary positions in Chapter 11; |
|
|
|
|
The confirmed Joint Plan of Reorganization (the Plan) and our emergence from the
Chapter 11 proceedings; |
|
|
|
|
Restructuring conducted in connection with our emergence from the Chapter 11
proceedings; |
|
|
|
|
Consummation of the Plan; |
|
|
|
|
Impact on long-term debt upon emergence from the Chapter 11 proceedings; and |
|
|
|
|
Accounting matters resulting from the Chapter 11 proceedings. |
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 year ended December 31, 2010 as compared to the prior year, apart
from the impact on net revenues as a result of fresh start accounting which is discussed below.
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.
27
Our Plan
As more fully described in Item 1, Business, 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 include local business and market analysis,
message and image creation, target market identification, advertising and digital profile creation,
keyword and search engine optimization strategies and programs, distribution strategies, social
strategies, voice search platforms and tracking and reporting. We continue to invest in our future
through initiatives such as sales force automation and a client self-service system and portal. We
are also training and directing our locally based marketing consultants to focus on selling the
value provided to local businesses through these expanded platforms.
The Company is in the process of transitioning to a compete-and-collaborate business model, as we
anticipate that affiliate provided solutions will grow at a faster rate than our proprietary
solutions. In light of increasing fragmentation within the markets we serve, this model will allow
us to aggregate more leads for our clients in our markets. As such, we anticipate expanding the
breadth of our affiliate provided solutions to areas such as website creation, web hosting and
reputation management.
As local business conditions recover in our markets, we believe these investments will help us
drive future revenue.
In response to these challenges, 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 will continue into 2011, includes headcount
reductions, consolidation of responsibilities and vacating leased facilities. As a result of this
restructuring plan, approximately 600 employees were notified of their termination and the Company
recorded a restructuring charge of $18.6 million during the fourth quarter of 2010 related to
severance. Most of the cash payments associated with this restructuring charge will be made in
2011. The Company anticipates additional charges to earnings related to severance and charges to
earnings associated with vacating leased facilities in conjunction with this restructuring plan
during 2011. These amounts have not been determined at this time. See Item 8, Financial Statements
and Supplementary Data Note 5, Restructuring Charges for additional information.
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 and
improvements in local business conditions that are anticipated in our long-term financial forecast
noted above 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 used in our going concern analysis as of December 31, 2010, 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 the next 12-15 months.
See Item 8, Financial Statements and Supplementary Data Note 3, Fresh Start Accounting for
information and analysis on our emergence from the Chapter 11 proceedings and the impact on our
financial position. The Companys goodwill and non-goodwill intangible asset impairment charges
during the eleven months ended December 31, 2010 noted below do not affect our ability to continue
as a going concern, as we are permitted to exclude such charges from debt covenant evaluations.
28
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 have been and will continue to be
significantly impacted by our adoption of fresh start accounting on the Fresh Start Reporting Date
over the twelve month period ending January 31, 2011. See Results of Operations Factors
Affecting Comparability below for additional information on the impact of fresh start accounting
and the Companys presentation of Combined Adjusted results.
Impairment Charges
During the second and third quarters of 2010, the Company concluded that there were indicators of
impairment based upon (1) the decline in the trading value of our debt and equity securities, (2)
the departure of our Chairman and Chief Executive Officer on May 28, 2010 and (3) the adverse
impact local business conditions had on our current and future advertising sales, operating results
and cash flows as discussed above. Therefore, in addition to our annual impairment test of
goodwill, we were required to perform impairment tests of our goodwill, definite-lived intangible
assets and other long-lived assets as of September 30, 2010 and June 30, 2010, which resulted in a
total impairment charge of $1,159.3 million for the eleven months ended December 31, 2010. See Item
8, Financial Statements and Supplementary Data Note 2, Summary of Significant Accounting
Policies Identifiable Intangible Assets and Goodwill for additional information.
New Chief Executive Officer and President and Departure of Former Chairman and Chief Executive
Officer
On September 6, 2010, the Companys Board of Directors (the Board) appointed Alfred T. Mockett as
Chief Executive Officer and President of Dex One, as well as a member of the Board, effective
September 13, 2010. Effective May 28, 2010, our former Chairman and Chief Executive Officer, David
C. Swanson, left the Company. See Item 8, Financial Statements and Supplementary Data Note 1,
Business and Basis of Presentation New Chief Executive Officer and President and Business and
Basis of Presentation Departure of Former Chairman and Chief Executive Officer for additional
information.
Labor Unions
Our unionized employees are represented by either the International Brotherhood of Electrical
Workers of America (IBEW) or the Communication Workers of America (CWA). Dex Medias
collective bargaining agreement with the IBEW expires in May 2012 and Dex Medias collective
bargaining agreement with the CWA expires in September 2012.
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 in 2010
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.
29
New Accounting Pronouncements
In July 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance
for Credit Losses (ASU 2010-20). ASU 2010-20 improves the disclosures that an entity provides
about the credit quality of its financing receivables and the related allowance for credit losses.
The objective of enhancing these disclosures is to improve financial statement users understanding
of the nature of an entitys credit risk associated with its financing receivables and the entitys
assessment of that risk in estimating its allowance for credit losses as well as changes in the
allowance and the reasons for those changes. The enhanced disclosure requirements provided by ASU
2010-20 are not required for short-term receivables that have maturity dates of less than one year,
other than credit card receivables. For public entities, the disclosures as of the end of a
reporting period are effective for interim and annual reporting periods ending on or after December
15, 2010. The disclosures about activity that occurs during a reporting period are effective for
interim and annual reporting periods beginning on or after December 15, 2010. The Company has
adopted the disclosure provisions of ASU 2010-20 that are effective for interim and annual
reporting periods ending on or after December 15, 2010. Excluding credit card receivables, which
are immaterial to our operations, all of our financing receivables have maturity dates of less than
one year. Therefore certain of the enhanced disclosure requirements of ASU 2010-20 are not
applicable to the Company and have not been provided.
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements
(ASU 2010-06). ASU 2010-06 amends FASB Accounting Standards Codification (ASC) 820 to clarify
existing disclosure requirements and require additional disclosure about fair value measurements.
ASU 2010-06 clarifies existing fair value disclosures about the level of disaggregation presented
and about inputs and valuation techniques used to measure fair value for measurements that fall in
either Level 2 or Level 3 of the fair value hierarchy. The additional disclosure requirements
include disclosure regarding the amounts and reasons for significant transfers in and out of Level
1 and Level 2 of the fair value hierarchy and separate presentation of purchases, sales, issuances
and settlements of items within Level 3 of the fair value hierarchy. ASU 2010-06 is effective for
interim and annual reporting periods beginning after December 15, 2009 except for the disclosures
about Level 3 activity of purchases, sales, issuances and settlements, which is effective for
interim and annual reporting periods beginning after December 15, 2010. Effective January 1, 2010,
we adopted the disclosure provisions of ASU 2010-06 that are effective for interim and annual
reporting periods beginning after December 15, 2009. These disclosures are required to be provided
only on a prospective basis.
In September 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force (ASU
2009-13), which updates the current guidance pertaining to multiple-element revenue arrangements
included in FASB ASC 605-25, Revenue Recognition Multiple Element Arrangements. ASU 2009-13
addresses how to determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting and how the arrangement consideration should be allocated among the
separate units of accounting. ASU 2009-13 will be effective for the Company in the annual reporting
period beginning January 1, 2011. ASU 2009-13 may be applied retrospectively or prospectively and
early adoption is permitted. The Company does not expect the adoption of ASU 2009-13 to have an
impact on its financial position, results of operations or cash flows.
We have reviewed other accounting pronouncements that were issued as of December 31, 2010, which
the Company has not yet adopted, and do not believe that these pronouncements will have a material
impact on our financial position or operating results.
30
Critical Accounting Estimates
The preparation of financial statements in accordance with generally accepted accounting principles
(GAAP) requires management to estimate the effect of various matters that are inherently
uncertain as of the date of the financial statements. Each of these estimates varies in regard to
the level of judgment involved and its potential impact on the Companys and the Predecessor
Companys reported financial results. Estimates are deemed critical when a different estimate
could have reasonably been used or when changes in the estimate are reasonably likely to occur from
period to period, and could materially impact the Companys and the Predecessor Companys financial
condition, changes in financial condition or results of operations. The Companys significant
accounting policies as of December 31, 2010 are discussed in Note 2, Summary of Significant
Accounting Policies, of the notes to our consolidated financial statements included in Item 8 of
this Annual Report. The critical estimates inherent in these accounting policies as of December
31, 2010 are discussed below. Management believes the current assumptions and other considerations
used to estimate these amounts in the Companys consolidated financial statements are appropriate.
Intangible Assets and Goodwill Valuation and Amortization
Goodwill of $2.1 billion was recorded in connection with the Companys adoption of fresh start
accounting as discussed in Item 8, Financial Statements and Supplementary Data Note 3, Fresh
Start Accounting and represented the excess of the reorganization value of Dex One over the fair
value of identified tangible and intangible assets. Goodwill is not amortized but is subject to
impairment testing on an annual basis as of October 31st or more frequently if
indicators of potential impairment exist. Goodwill is tested for impairment at the reporting unit
level, which represents one level below an operating segment. As of December 31, 2010, the
Companys reporting units are R.H. Donnelley Inc. (RHDI), Dex Media East, Inc. (DME Inc.), and
Dex Media West, Inc. (DMW Inc.).
Our intangible assets consist of (a) directory services agreements between the Company and Qwest,
AT&T and CenturyLink, respectively, (b) established customer relationships resulting from prior
acquisitions, (c) a non-competition agreement between the Company and Sprint and (d) trademarks and
trade names and an advertising commitment resulting from a prior acquisition. The intangible assets
are being amortized over their estimated useful lives in a manner that best reflects the economic
benefit derived from such assets.
The Company and the Predecessor Company review the carrying value of goodwill, definite-lived
intangible assets and other long-lived assets whenever events or circumstances indicate that their
carrying amount may not be recoverable. The following information, estimates and assumptions are
analyzed to determine if any indicators of impairment exist:
|
|
|
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 and other long-lived asset carrying values and any changes in current
and future use; |
|
|
|
|
Trading values of our debt and equity securities; |
|
|
|
|
Industry and economic trends; and |
|
|
|
|
Other Company-specific and Predecessor Company-specific information. |
Based upon the decline in the trading value of our debt and equity securities and the departure of
our Chairman and Chief Executive Officer on May 28, 2010, among other indicators, the Company
performed impairment tests of its goodwill, definite-lived intangible assets and other long-lived
assets as of September 30, 2010 and June 30, 2010. As a result of these impairment tests, we
recognized a non-goodwill intangible asset impairment charge associated with trade names and
trademarks, technology, local customer relationships and other from our former Business.com
reporting unit of $21.6 million and a goodwill impairment charge of $1,137.6 million, for a total
impairment charge of $1,159.3 million during the eleven months ended December 31, 2010.
31
The change in the carrying amount of goodwill for the eleven months ended December 31, 2010 is as
follows:
|
|
|
|
|
Balance at February 1, 2010. |
|
$ |
2,097,124 |
|
Goodwill impairment charge during the three months ended June
30, 2010 |
|
|
(752,340 |
) |
Goodwill impairment charge during the three months ended
September 30, 2010 |
|
|
(385,283 |
) |
Reduction in goodwill during the three months ended December
31, 2010 |
|
|
(158,427 |
) |
|
|
|
|
Balance at December 31, 2010 |
|
$ |
801,074 |
|
|
|
|
|
During the three months ended December 31, 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.
At December 31, 2010, the net carrying value of our goodwill totaled $801.1 million and is
allocated among our reporting units as follows:
|
|
|
|
|
|
|
Allocation of Goodwill at |
|
Reporting Unit |
|
December 31, 2010 |
|
|
RHDI |
|
$ |
250,518 |
|
DME Inc. |
|
|
236,159 |
|
DMW Inc. |
|
|
314,397 |
|
|
|
|
|
Total |
|
$ |
801,074 |
|
|
|
|
|
As a result of our annual impairment test of goodwill, we determined that each of our reporting
units fair value exceeded the carrying amount of its assets and liabilities. Therefore the second
step of the goodwill impairment test was not required to be performed. The following table presents
the dollar amount and percentage by which each of our reporting units fair value exceeded the
carrying amount of its assets and liabilities as of October 31, 2010:
|
|
|
|
|
|
|
|
|
Reporting Unit |
|
$ |
|
|
% |
|
|
RHDI |
|
$ |
134,848 |
|
|
|
10.8 |
% |
DME Inc. |
|
|
18,479 |
|
|
|
1.9 |
|
DMW Inc. |
|
|
13,202 |
|
|
|
1.2 |
|
Had our discounted cash flows used to determine the fair value of the RHDI, DME Inc. and DMW Inc.
reporting units as of October 31, 2010 been lower by 12.5%, 2.5% and 1.5%, respectively, step one
of the annual impairment test of goodwill would have failed at each reporting unit, requiring us to
proceed with the second step of the goodwill impairment test.
As a result of filing the Chapter 11 petitions and finalizing an extensive analysis associated with
our emergence from Chapter 11, the Predecessor Company performed impairment tests of its
definite-lived intangible assets and other long-lived assets during 2009. As a result of these
impairment tests, the Predecessor Company recognized a non-goodwill intangible asset impairment
charge of $7,337.8 million during the year ended December 31, 2009 associated with directory
services agreements, advertiser relationships, third party contracts and network platforms acquired
in prior acquisitions.
As a result of the decline in the trading value of the Predecessor Companys debt and equity
securities and the decline in operating results, the Predecessor Company performed impairment tests
of its goodwill, definite-lived intangible assets and other long-lived assets during 2008. As a
result of these impairment tests, the Predecessor Company recognized a goodwill impairment charge
of $3,123.8 million for the year ended December 31, 2008. The Predecessor Company recognized a
non-goodwill intangible asset impairment charge of $744.0 million during the year ended December
31, 2008 associated with the local and national customer relationships acquired in prior
acquisitions. In addition, as a result of the Predecessor Companys decision to discontinue the use
of tradenames and technology acquired in a prior acquisition, the Predecessor Company recognized a
non-goodwill intangible asset impairment charge of $2.2 million during the year ended December 31,
2008. Total impairment charges related to the Predecessor Companys intangible assets, goodwill and
other long-lived assets were $3,870.4 million during the year ended December 31, 2008.
32
See Item 8, Financial Statements and Supplementary Data Note 2, Summary of Significant
Accounting Policies Identifiable Intangible Assets and Goodwill for information on the
Companys and the Predecessor Companys impairment testing of goodwill, definite-lived intangible
assets and other long-lived assets, critical estimates, assumptions and methodologies used for the
impairment testing and the impairment charges recognized
during the eleven months ended December 31, 2010 and years ended December 31, 2009 and 2008. These
impairment charges had no impact on current or future operating cash flow, compliance with debt
covenants or tax attributes.
At December 31, 2010, the net carrying value of our intangible assets totaled $2,369.2 million.
Amortization expense related to our intangible assets for the eleven months ended December 31, 2010
was $167.0 million. Amortization expense of the Predecessor Company for the one month ended January
31, 2010 and years ended December 31, 2009 and 2008 was $15.6 million, $514.6 million and $415.9
million, respectively. Had the aggregate net book value of our intangible assets at December 31,
2010 been impaired by an incremental 1%, net loss for the eleven months ended December 31, 2010
would have been adversely impacted by approximately $14.2 million.
The Company and the Predecessor Company evaluate the remaining useful lives of identifiable
intangible assets and other long-lived assets whenever events or circumstances indicate that a
revision to the remaining period of amortization is warranted. If the estimated remaining useful
lives change, the remaining carrying amount of the intangible assets and other long-lived assets
would be amortized prospectively over that revised remaining useful life. In conjunction with our
impairment testing during the eleven months ended December 31, 2010, the Company evaluated the
remaining useful lives of identifiable intangible assets and other long-lived assets by
considering, among other things, the effects of obsolescence, demand, competition, which takes into
consideration the price premium benefit we have over competing independent publishers in our
markets as a result of directory services agreements acquired in prior acquisitions, and other
economic factors, including the stability of the industry in which we operate, known technological
advances, legislative actions that result in an uncertain or changing regulatory environment, and
expected changes in distribution channels. In addition, in conjunction with our adoption of fresh
start accounting and the determination of the fair value of our assets and liabilities in the first
quarter of 2010, we evaluated the remaining useful lives of identifiable intangible assets and
other long-lived assets by considering the factors noted above. The Company has determined that the
combined weighted average useful life of our identifiable intangible assets at December 31, 2010 is
21 years. The weighted average useful lives and amortization methodology for each of our
identifiable intangible assets at December 31, 2010 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
Intangible Asset |
|
Useful Lives |
|
|
Amortization 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 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. |
Had the remaining useful lives of the intangible assets been shortened by 10%, net loss for the
eleven months ended December 31, 2010 would have been adversely impacted by approximately $17.7
million.
If industry and local business conditions in our markets deteriorate in excess of current
estimates, potentially resulting in further declines in advertising sales and operating results,
and if the trading value of our debt and equity securities decline significantly, we will be
required to once again assess the recoverability of goodwill in addition to our annual evaluation
and recoverability and useful lives of our intangible assets and other long-lived assets. 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.
33
Fresh Start Accounting
The Company adopted fresh start accounting and reporting on the Fresh Start Reporting Date in
accordance with FASB ASC 852, Reorganizations (FASB ASC 852), as the holders of existing voting
shares immediately before confirmation of the Plan received less than 50% of the voting shares of
the emerging entity and the reorganization value of the Companys assets immediately before the
date of confirmation was less than the post-petition liabilities and allowed claims. Under FASB ASC
852, the reorganization value represents the fair value of the entity before considering
liabilities and approximates the amount a willing buyer would pay for the assets of the Company
immediately after restructuring. The reorganization value is allocated to the respective fair value
of assets. The excess reorganization value over the fair value of identified tangible and
intangible assets is recorded as goodwill. Liabilities, other than deferred taxes, are stated at
present values of amounts expected to be paid.
Fair values of our assets and liabilities represented our best estimates based on independent
appraisals and valuations. Where the foregoing were not available, industry data and trends or
references to relevant market rates and transactions were used. These estimates and assumptions
were subject to significant uncertainties beyond our reasonable control.
See Item 8, Financial Statements and Supplementary Data Note 3, Fresh Start Accounting for a
presentation of the critical estimates, assumptions and methodologies used in determining the fair
values of our assets and liabilities in fresh start accounting and the impact of emergence from
reorganization and fresh start accounting on our financial position, results of operations and cash
flows.
Liabilities Subject to Compromise
Liabilities subject to compromise generally refer to pre-petition obligations, secured or
unsecured, that may be impaired by a plan of reorganization. FASB ASC 852 requires such
liabilities, including those that became known after filing the Chapter 11 petitions, be reported
at the amounts expected to be allowed, even if they may be settled for lesser amounts. These
liabilities represent the estimated amount expected to be resolved on known or potential claims
through the Chapter 11 process, and remain subject to future adjustments from negotiated
settlements, actions of the Bankruptcy Court and non-acceptance of certain executory contracts and
unexpired leases. Liabilities subject to compromise also includes items that may be assumed under
the plan of reorganization, and may be subsequently reclassified to liabilities not subject to
compromise. The Predecessor Company classified $6.1 billion of its senior notes, senior discount
notes and senior subordinated notes (collectively the Notes in Default) as liabilities subject to
compromise at December 31, 2009. Liabilities subject to compromise also included certain
pre-petition liabilities including accrued interest, accounts payable and accrued liabilities, tax
related liabilities and lease related liabilities. During the bankruptcy process, the likelihood of
settlement and potential settlement outcomes was considered in evaluating whether potential
obligations were probable and estimable as of the end of each reporting period.
Pre-petition obligations were evaluated to determine whether a potential liability was probable. If
probable, an assessment, based on all information then available, was made of whether the potential
liability was estimable. A liability was recorded when it was both probable and estimable. The
estimates used to determine amounts reported as liabilities subject to compromise reflected our
best estimates, but they involved uncertainties based on certain conditions generally outside the
control of the Predecessor Company, and in most instances, in the control of the Bankruptcy Court.
As a result, if other estimates had been used, material amounts presented as liabilities subject to
compromise on the Predecessor Companys consolidated balance sheet at December 31, 2009 may have
been presented as liabilities not subject to compromise. The reclass of these amounts could also
have impacted amounts reported as reorganization items, net on the consolidated statement of
operations for the year ended December 31, 2009 and one month ended January 31, 2010.
See Item 8, Financial Statements and Supplementary Data Note 3, Fresh Start Accounting and
Note 4, Reorganization Items, Net and Liabilities Subject to Compromise for additional
information on amounts presented as liabilities subject to compromise.
34
Income Taxes
The Company and the Predecessor Company account for income taxes under the asset and liability
method in accordance with FASB ASC 740, Income Taxes (FASB ASC 740). Deferred income tax
liabilities and assets reflect temporary differences between amounts of assets and liabilities for
financial and tax reporting. Such amounts are adjusted, as appropriate, to reflect changes in tax
rates expected to be in effect when the temporary differences reverse. A valuation allowance is
established to offset any deferred income tax assets if, based upon the available evidence, it is
more likely than not that some or all of the deferred income tax assets will not be realized.
FASB ASC 740 also prescribes a recognition threshold and measurement principles for the financial
statement recognition and measurement of tax positions taken or expected to be taken on a tax
return. Under FASB ASC 740, the impact of an uncertain income tax position on an income tax return
must be recognized at the largest amount that is more likely than not to be sustained upon audit by
the relevant taxing authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, FASB ASC 740 provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosures
and transition requirements.
See Item 8, Financial Statements and Supplementary Data Note 8, Income Taxes, for more
information regarding the Companys and the Predecessor Companys (provision) benefit for income
taxes.
In the ordinary course of business, there may be many transactions and calculations where the
ultimate tax outcome is uncertain. The calculation of tax liabilities involves dealing with
uncertainties in the application of complex tax laws. The Company and the Predecessor Company
recognize potential liabilities for anticipated tax audit issues based on an estimate of the
ultimate resolution of whether, and the extent to which, additional taxes will be due. Although the
Company and the Predecessor Company believe the estimates are reasonable, no assurance can be given
that the final outcome of these matters will not be different than what is reflected in the
historical income tax provisions and accruals.
As part of the Companys and the Predecessor Companys financial reporting process, we must assess
the likelihood that our deferred income tax assets can be recovered. Unless recovery is more likely
than not, the provision for taxes must be increased by recording a reserve in the form of a
valuation allowance for the deferred income tax assets that are estimated not to be ultimately
recoverable. In this process, certain relevant criteria are evaluated including the existence of
deferred income tax liabilities that can be used to absorb deferred income tax assets and taxable
income in future years. The Companys and the Predecessor Companys judgment regarding future
taxable income may change due to future market conditions, changes in U.S. tax laws and other
factors. These changes, if any, may require material adjustments to these deferred income tax
assets and an accompanying reduction or increase in net income (loss) in the period when such
determinations are made.
In addition, the Company and the Predecessor Company operate within multiple taxing jurisdictions
and we are subject to audit in these jurisdictions. These audits can involve complex issues, which
may require an extended period of time to resolve. The Company and the Predecessor Company maintain
a liability for the estimate of potential income tax exposure and in our opinion adequate provision
for income taxes has been made for all years.
Allowance for Doubtful Accounts and Sales Claims
The Company and the Predecessor Company record revenue net of an allowance for sales claims. In
addition, the Company and the Predecessor Company record a provision for bad debts. The provision
for bad debts and allowance for sales claims are estimated based on historical experience. The
Company and the Predecessor Company also evaluate the current condition of client balances,
bankruptcy filings, any change in credit policy, historical charge-off patterns, recovery rates and
other data when determining an allowance for doubtful accounts reserve. The Company and the
Predecessor Company review these estimates periodically to assess whether additional adjustment is
needed based on economic events or other circumstances, including actual experience at the end of
the billing and collection cycle. The Company and the Predecessor Company believe that the
allowance for doubtful accounts and sales claims is adequate to cover anticipated losses under
current conditions; however, significant deterioration in any of the factors noted above or in the
overall economy could materially change these expectations. The provisions for sales claims and
doubtful accounts are estimated based on a percentage of revenue. Accordingly, an additional 1%
change in either of these allowance percentages would have impacted net loss for the eleven months
ended December 31, 2010 by approximately $5.0 million.
35
Pension Benefits
The Companys and the Predecessor Companys pension plan obligations and related assets of the
defined benefit pension plans are presented in Item 8, Financial Statements and Supplementary
Data Note 10, Benefit Plans. Plan assets consist primarily of marketable equity and debt
instruments and are valued using market quotations. The determination of plan obligations and
annual pension expense requires management to make a number of assumptions. Key assumptions in
measuring the plan obligations include the discount rate and the long-term expected return on plan
assets. For the eleven months ended December 31, 2010, the Company utilized an outsource providers
yield curve to determine the appropriate discount rate for each of the defined benefit pension
plans based on the individual plans expected future cash flows. During January 2010 and the year
ended December 31, 2009, the Predecessor Company utilized an outsource providers yield curve to
determine the appropriate discount rate for the defined benefit pension plans. During the year
ended December 31, 2008, the Predecessor Company utilized the Citigroup Pension Liability Index as
the appropriate discount rate for its defined benefit pension plans. The Predecessor Company
changed to an outsource providers yield curve during 2009 to better reflect the specific cash
flows of these plans in determining the discount rate. Asset returns are based upon the long-term
anticipated average rate of earnings expected on invested funds of the plan. Salary increase
assumptions were based upon historical experience and anticipated future management actions.
At December 31, 2010, the weighted-average actuarial assumptions used in determining the Companys
net periodic benefit expense were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Rate of |
|
|
|
Discount Rate |
|
|
Return on Plan Assets |
|
Dex One Retirement Plan |
|
|
5.70 |
% |
|
|
8.00 |
% |
Dex Media Pension Plan |
|
|
5.70 |
% |
|
|
8.00 |
% |
At January 31, 2010, the weighted-average actuarial assumptions used in determining the Predecessor
Companys net periodic benefit expense were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Rate of |
|
|
|
Discount Rate |
|
|
Return on Plan Assets |
|
Dex One Retirement Plan |
|
|
5.70 |
% |
|
|
8.00 |
% |
Dex Media Pension Plan |
|
|
5.70 |
% |
|
|
8.00 |
% |
At December 31, 2009, the weighted-average actuarial assumptions used in determining the
Predecessor Companys net periodic benefit expense were:
|
|
|
|
|
|
|
|
|
|
|
Discount Rate |
|
|
|
January 1, 2009- |
|
|
June 1, 2009- |
|
|
|
May 31, 2009 |
|
|
December 31, 2009 |
|
Dex One Retirement Plan |
|
|
5.87 |
% |
|
|
5.87 |
% |
Dex Media Pension Plan |
|
|
5.87 |
% |
|
|
6.87 |
% |
|
|
|
|
|
|
|
|
|
|
|
Long-Term Rate of |
|
|
Rate of Increase in |
|
|
|
Return on Plan Assets |
|
|
Future Compensation |
|
Dex One Retirement Plan |
|
|
8.00 |
% |
|
|
|
|
Dex Media Pension Plan |
|
|
8.00 |
% |
|
|
3.66 |
% |
Net periodic pension income recognized by the Company and the Predecessor Company during the eleven
months ended December 31, 2010 and one month ended January 31, 2010 were $3.5 million and $0.1
million, respectively. A 1% increase (decrease) in the discount rate would affect net income
(loss) for the eleven months ended December 31, 2010 and one month ended January 31, 2010 by
approximately $0.7 million and $0.1 million, respectively, and a 1% increase (decrease) in the
long-term rate of return on plan assets would affect net income (loss) for the eleven months ended
December 31, 2010 and one month ended January 31, 2010 by approximately $1.5 million and $0.2
million, respectively.
During the second quarter of 2010, we recognized a one-time curtailment gain of $3.8 million
associated with the departure of the Companys former Chief Executive Officer.
36
During 2009, the Predecessor Company froze all current defined benefit plans covering CWA and IBEW
represented employees and curtailed the retiree health care and life insurance benefits covering
CWA and IBEW represented employees. As a result of implementing the freeze on the defined benefit
plans covering CWA and IBEW represented employees, the Predecessor Company recognized a one-time
net curtailment gain of $4.2
million during the year ended December 31, 2009, which was entirely offset by losses incurred on
plan assets and previously unrecognized prior service costs that had been charged to accumulated
other comprehensive loss. As a result of eliminating retiree health care and life insurance
benefits for CWA and IBEW represented employees, the Predecessor Company recognized a one-time
curtailment gain of $52.0 million for the year ended December 31, 2009.
During 2008, the Predecessor Company froze all current defined benefit plans covering all non-union
employees and curtailed the non-union retiree health care and life insurance benefits. As a result
of implementing the freeze on the defined benefit plans covering non-union employees, the
Predecessor Company recognized a one-time net curtailment loss of $1.6 million during the year
ended December 31, 2008, consisting of a curtailment gain of $13.6 million, entirely offset by
losses incurred on plan assets and recognition of previously unrecognized prior service costs that
had been charged to accumulated other comprehensive loss. As a result of eliminating retiree health
care and life insurance benefits for non-union employees, the Predecessor Company recognized a
one-time, curtailment gain of $39.6 million for the year ended December 31, 2008.
Stock-Based Compensation
The fair value of the Companys and the Predecessor Companys stock options and stock appreciation
rights (SARs) that do not have a market condition is calculated using the Black-Scholes model at
the time the stock-based awards are granted. The fair value of the Companys stock options and SARs
that have a market condition is calculated using the Monte Carlo model at the time the stock-based
awards are granted. The use of the Black-Scholes and Monte Carlo models require significant
judgment and the use of estimates, particularly for assumptions such as expected volatility,
risk-free interest rates and expected lives to value stock-based awards as well as forfeiture rates
to recognize stock-based compensation expense and derived service periods for allocation of
stock-based compensation expense associated with stock-based awards that have a market condition.
The Company granted 2.1 million stock options and SARs and 0.2 million shares of restricted stock
during the eleven months ended December 31, 2010. The Predecessor Company did not grant any stock
options, SARs or restricted stock during the one month ended January 31, 2010 or year ended
December 31, 2009. The Company used an estimated weighted average forfeiture rate in determining
stock-based compensation expense of 8.9% during the eleven months ended December 31, 2010. The
Predecessor Company used an estimated forfeiture rate in determining stock-based compensation
expense of 8.0% during the first quarter of 2009 and 10.2% for the remainder of 2009 and January
2010. For the year ended December 31, 2008, the Predecessor Company utilized an estimated
forfeiture rate of 8% in determining stock-based compensation expense.
The following assumptions were used in valuing stock-based awards and for recognition and
allocation of stock-based compensation expense for the eleven months ended December 31, 2010 and
year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
Eleven Months Ended |
|
|
Year Ended |
|
|
|
December 31, 2010 |
|
|
December 31, 2008 |
|
Expected volatility |
|
|
37.3 |
% |
|
|
58.8 |
% |
Risk-free interest rate |
|
|
2.6 |
% |
|
|
2.8 |
% |
Expected life |
|
7.1 Years |
|
5 Years |
Derived service period (grants using Monte Carlo model) |
|
3.6 Years |
|
|
|
|
Forfeiture rate |
|
|
8.9 |
% |
|
|
8.0 |
% |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Since the Company recently emerged from bankruptcy, we do not have sufficient Company-specific
historical data in order to determine certain assumptions used for valuing stock-based awards. As
such, the Company utilized data from industry sources and peer and competitive company data in
order to estimate the expected volatility assumption used for valuing stock-based awards during the
eleven months ended December 31, 2010. The Predecessor Company estimated expected volatility based
on the historical volatility of the price of its common stock over the expected life of its
stock-based awards. The expected life represents the period of time that stock-based awards granted
are expected to be outstanding. The Company and the Predecessor Company estimated the expected life
by
37
using the simplified method permitted by Staff Accounting Bulletin No. 110, Use of a Simplified
Method in Developing Expected Term of Share Options, as these stock-based awards satisfied the
plain vanilla criteria. The simplified method calculates the expected life as the average of the
vesting and contractual terms of the award. The risk-free interest rate for both the Company and
the Predecessor Company is based on applicable U.S. Treasury yields that approximate the expected
life of stock-based awards granted by the Company and the Predecessor Company. During the eleven
months ended December 31, 2010, the Company used actual voluntary turnover data during the first
quarter of 2010 to estimate a weighted average forfeiture rate. The Predecessor Company used
historical data to
estimate a forfeiture rate for the one month ended January 31, 2010 and years ended December 31,
2009 and 2008. Estimated forfeitures are adjusted to the extent actual forfeitures differ, or are
expected to materially differ, from such estimates. Derived service periods associated with
stock-based awards that have a market condition were calculated by determining the average time
until the Companys stock price reached the given exercise price across the Monte Carlo
simulations. For simulations where the stock price did not reach the exercise price, the Company
has excluded such paths.
These assumptions reflect the Companys and the Predecessor Companys best estimates, but they
involve inherent uncertainties based on certain conditions generally outside the control of the
Company and the Predecessor Company. As a result, if other assumptions had been used, total
stock-based compensation expense could have been materially impacted. Furthermore, if we use
different assumptions for future grants, stock-based compensation expense could be materially
impacted in future periods.
Upon emergence from Chapter 11 and pursuant to the Plan, all outstanding equity securities of the
Predecessor Company including all stock options, SARs and restricted stock, were cancelled. See
Item 8, Financial Statements and Supplementary Data Note 2, Summary of Significant Accounting
Policies Stock-Based Awards for information regarding Dex Ones new Equity Incentive Plan
(EIP).
Fair Value of Financial Instruments
At December 31, 2010 and 2009, the fair value of cash and cash equivalents, accounts receivable,
and accounts payable and accrued liabilities approximated their carrying value based on the net
short-term nature of these instruments. As discussed in Item 8, Financial Statements and
Supplementary Data Note 3, Fresh Start Accounting, all of the Companys assets and liabilities
were fair valued as of the Fresh Start Reporting Date in connection with our adoption of fresh
start accounting. The Company has utilized quoted market prices, where available, to compute the
fair market value of our long-term debt at December 31, 2010 as disclosed in Item 8, Financial
Statements and Supplementary Data Note 6, Long-Term Debt, Credit Facilities and Notes. These
estimates of fair value may be affected by assumptions made and, accordingly, are not necessarily
indicative of the amounts the Company could realize in a current market exchange. As a result of
filing the Chapter 11 petitions and the Plan, the Predecessor Company does not believe that it is
meaningful to present the fair market value of its long-term debt at December 31, 2009.
FASB ASC 820, Fair Value Measurements and Disclosures (FASB ASC 820) defines fair value,
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value and expands disclosures about fair value measurements. FASB ASC 820 defines fair
value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. The fair value hierarchy,
which gives the highest priority to quoted prices in active markets, is comprised of the following
three levels:
|
|
|
Level 1 Unadjusted quoted market prices in active markets for identical assets and
liabilities. |
|
|
|
|
Level 2 Observable inputs other than Level 1 inputs such as quoted prices for similar
assets or liabilities, quoted prices in markets with insufficient volume or infrequent
transactions, or model-derived valuations in which all significant inputs are observable or
can be derived principally from or corroborated by observable market data for substantially
the full term of the assets or liabilities. |
|
|
|
|
Level 3 Prices or valuations that require inputs that are both significant to the
measurement and unobservable. |
38
As required by FASB ASC 820, assets and liabilities are classified based on the lowest level of
input that is significant to the fair value measurement. The Companys and the Predecessor
Companys assessment of the significance of a particular input to the fair value measurement
requires judgment, and may affect the valuation of the fair value of assets and liabilities and
their placement within the fair value hierarchy levels. The Company and the Predecessor Company had
interest rate swaps with a notional amount of $500.0 million and $200.0 million at December 31,
2010 and 2009, respectively, that are and were measured at fair value on a recurring basis. At
December 31, 2010, the Company had interest rate caps with a notional amount of $400.0 million that
are measured at fair value on a recurring basis. The following table presents the Companys and the
Predecessor Companys assets and liabilities that were measured at fair value on a recurring basis
at December 31, 2010 and 2009, respectively, and the level within the fair value hierarchy in which
the fair value measurements were included.
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
Using Significant Other Observable Inputs (Level 2) |
|
|
|
Successor Company |
|
|
Predecessor Company |
|
Derivatives: |
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
Interest Rate Swap
Liabilities |
|
$ |
(6,365 |
) |
|
$ |
(6,695 |
) |
Interest Rate Cap Assets |
|
$ |
308 |
|
|
$ |
|
|
There were no transfers of assets or liabilities into or out of Level 2 during the eleven months
ended December 31, 2010, one month ended January 31, 2010 or year ended December 31, 2009. The
Company has established a policy of recognizing transfers between levels in the fair value
hierarchy as of the end of a reporting period. In conjunction with the classification of the
Predecessor Companys credit facilities at December 31, 2009, interest rate swap liabilities were
excluded from liabilities subject to compromise on the consolidated balance sheet at December 31,
2009, as both the Predecessor Companys credit facilities and interest rate swaps were fully
collateralized and the fair value of such collateral exceeded the carrying value of the credit
facilities and interest rate swaps.
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 and the Predecessor 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 and the Predecessor Company use 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 Item 8, Financial Statements and
Supplementary Data Note 7, 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 December 31,
2010, the impact of applying counterparty credit risk in determining the fair value of our
derivative instruments was an increase to our derivative instruments liability of less than $0.1
million. At December 31, 2010, the impact of applying the Companys credit risk in determining the
fair value of our derivative instruments was a decrease to our derivative instruments liability of
$1.2 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 and the
Predecessor 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.
39
Fair Value Control Processes Interest Rate Swaps and Interest Rate Caps
The Company and the Predecessor Company employ 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.
Benefit Plan Assets
The fair value of the assets held in the Dex One Retirement Account Master Trust (Master Trust)
at December 31, 2010 and 2009, by asset category, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2010 |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Using |
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
Cash |
|
$ |
460 |
|
|
$ |
460 |
|
|
$ |
|
|
U.S. Government securities (a) |
|
|
23,210 |
|
|
|
|
|
|
|
23,210 |
|
Common/collective trusts (b) |
|
|
67,375 |
|
|
|
|
|
|
|
67,375 |
|
Corporate debt (c) |
|
|
19,736 |
|
|
|
|
|
|
|
19,736 |
|
Corporate stock (d) |
|
|
19,720 |
|
|
|
19,720 |
|
|
|
|
|
Registered investment companies (e) |
|
|
29,860 |
|
|
|
29,860 |
|
|
|
|
|
Real estate investment trust (f) |
|
|
338 |
|
|
|
338 |
|
|
|
|
|
Credit default swaps and futures (g) |
|
|
1,149 |
|
|
|
|
|
|
|
1,149 |
|
Collective Fund Group Trust (h) |
|
|
25,479 |
|
|
|
|
|
|
|
25,479 |
|
|
|
|
Total |
|
$ |
187,327 |
|
|
$ |
50,378 |
|
|
$ |
136,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2009 |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Using |
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
Cash |
|
$ |
1,860 |
|
|
$ |
1,860 |
|
|
$ |
|
|
U.S. Government securities (a) |
|
|
14,755 |
|
|
|
|
|
|
|
14,755 |
|
Common/collective trusts (b) |
|
|
80,062 |
|
|
|
|
|
|
|
80,062 |
|
Corporate debt (c) |
|
|
20,879 |
|
|
|
|
|
|
|
20,879 |
|
Corporate stock (d) |
|
|
22,051 |
|
|
|
22,051 |
|
|
|
|
|
Registered investment companies (e) |
|
|
34,036 |
|
|
|
34,036 |
|
|
|
|
|
Real estate investment trust (f) |
|
|
198 |
|
|
|
198 |
|
|
|
|
|
Credit default swaps and futures (g) |
|
|
394 |
|
|
|
|
|
|
|
394 |
|
|
|
|
Total |
|
$ |
174,235 |
|
|
$ |
58,145 |
|
|
$ |
116,090 |
|
|
|
|
|
|
|
(a) |
|
This category includes investments in U.S. Government bonds, government mortgage-backed
securities, index-linked government bonds, guaranteed commercial paper, short-term treasury
bills and notes. Fair value for these assets is determined using a bid evaluation process
of observable, market based inputs effective as of the last business day of the plan year. |
|
(b) |
|
This category includes investments in two common/collective funds of which 89% is
invested in stocks comprising the Russell 1000 equity index and the remaining 11% is
comprised of short-term investments at December 31, 2010. Fair value for these assets is
determined based on the contract value, which is based on the provisions of the underlying
guaranteed investment contracts. |
|
(c) |
|
This category includes investments in corporate bonds, commercial mortgage-backed and
asset-backed securities, collateralized mortgage obligations and commercial paper. Fair
value for these assets is determined using a bid evaluation process of observable, market
based inputs effective as of the last business day of the plan year. |
40
|
|
|
(d) |
|
This category includes investments in small cap stocks of U. S. issuers across diverse
industries. Fair value for these assets is determined using quoted market prices on a
recognized securities exchange at the last reported trading price on the last business day
of the plan year. |
|
(e) |
|
This category is comprised of two mutual funds, one fund that invests in
value-oriented international stocks across diverse industries and one that invests in
intermediate term fixed income instruments such as treasuries and high grade corporate
bonds. Fair value for these assets is determined using quoted market prices on a recognized
securities exchange at the last reported trading price on the last business day of the plan
year. |
|
(f) |
|
This category is comprised of a healthcare real estate investment trust. Fair value for
these assets is determined based on traded market prices. |
|
(g) |
|
This category includes investments in a combination of 5, 10 and 30 year U.S. Treasury
notes and bond futures and credit default swaps. Fair value for these assets is determined
based on either settlement prices, prices on a recognized securities exchange or a mid/bid
evaluation process using observable, market based inputs. |
|
(h) |
|
This category includes investments in passively managed funds composed of
international stocks across diverse industries. Fair value for these assets is calculated
based upon a compilation of observable market information. |
The Asset Management Committee (AMC) as appointed by the Compensation and Benefits Committee of
the Companys Board of Directors is a named fiduciary of the plan in matters relating to plan
investments and asset management. The AMC has the authority to appoint, retain, monitor and remove
any custodian or investment manager and is responsible for establishing and maintaining a funding
and investment policy for the Master Trust.
See Item 8, Financial Statements and Supplementary Data Note 10, Benefit Plans, for further
information regarding our benefit plans.
RESULTS OF OPERATIONS
Factors Affecting Comparability
Fresh Start Accounting Adjustments
The Company adopted fresh start accounting and reporting effective February 1, 2010, the Fresh
Start Reporting Date. The financial statements as of the Fresh Start Reporting Date will report the
results of Dex One with no beginning retained earnings or accumulated deficit. Any presentation of
Dex One represents the financial position and results of operations of a new reporting entity and
is not comparable to prior periods presented by the Predecessor Company. The financial statements
for periods ended prior to the Fresh Start Reporting Date do not include the effect of any changes
in the Predecessor Companys capital structure or changes in the fair value of assets and
liabilities as a result of fresh start accounting.
We have provided a U.S. GAAP analysis of the Companys results of operations for the eleven months
ended December 31, 2010 and the Predecessor Companys results of operations for the one month ended
January 31, 2010 below. This GAAP analysis includes a discussion of results for the individual
reporting periods, however does not provide a comparison of the individual reporting periods to the
respective prior year reporting periods due to the reasons discussed above.
As a result of the deferral and amortization method of revenue recognition, recognized gross
advertising revenues reflect the amortization of advertising sales consummated in prior periods as
well as in the current period. The adoption of fresh start accounting has a significant impact on
the financial position and results of operations of the Company commencing on the Fresh Start
Reporting Date. Consistent with the Predecessor Companys historical application of the purchase
method of accounting for business combinations included in FASB ASC 805, Business Combinations,
fresh start accounting precludes us from recognizing advertising revenue and certain expenses
associated with advertising sales fulfilled prior to the Fresh Start Reporting Date. Thus, our
reported results for the eleven months ended December 31, 2010 are not indicative of our underlying
operating and financial performance and are not comparable to any prior period presentation. The
adoption of fresh start accounting did not have any impact on cash flows from operations.
41
Accordingly, in addition to providing a GAAP analysis below, management has also provided a
non-GAAP analysis entitled Non-GAAP Financial Information Combined Adjusted Results. Non-GAAP
Financial Information Combined Adjusted Results (1) combines GAAP results of the Company for the
eleven months ended December 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 (as defined below)
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 will
be amortized over the terms of the applicable directories, not to exceed twelve months, and has
been allocated between production and distribution expenses and selling and support expenses based
upon the category of the deferred directory costs that were fair valued. Managements non-GAAP
analysis compares the Non-GAAP Financial Information Combined Adjusted Results to the
Predecessor Companys GAAP results for the year ended December 31, 2009 through operating income.
Management believes that the presentation of Non-GAAP Financial Information Combined Adjusted
Results will help financial statement users better understand the material impact fresh start
accounting has on the Companys results of operations for the eleven months ended December 31, 2010
and also offers a non-GAAP normalized comparison to GAAP results of the Predecessor Company for the
year ended December 31, 2009. The Non-GAAP Financial Information Combined Adjusted Results
presented below are reconciled to the most comparable GAAP measures. While the Non-GAAP Financial
Information Combined Adjusted Results exclude the effects of fresh start accounting and certain
other items, it must be noted that the Non-GAAP Financial Information Combined Adjusted Results
are not comparable to the Predecessor Companys GAAP results for the year ended December 31, 2009
and should not be treated as such.
Impairment Charges
The Company has excluded the goodwill and non-goodwill intangible asset impairment charges totaling
$1,159.3 million for the eleven months ended December 31, 2010 from Combined Adjusted Results. The
Predecessor Company has excluded the non-goodwill intangible asset impairment charges totaling
$7,337.8 million from Adjusted Results for the year ended December 31, 2009.
Reclassifications
Certain prior period amounts included in the consolidated statements of operations have been
reclassified to conform to the current periods presentation. Purchased traffic costs incurred to
direct traffic to our online properties have been reclassified from advertising expense, a
component of selling and support expenses, to production and distribution expenses in the
consolidated statements of operations. In addition, information technology expenses have been
reclassified from production and distribution expenses to general and administrative expenses in
the consolidated statements of operations. These reclassifications had no impact on operating loss
or net loss for the years ended December 31, 2009 and 2008. The tables below summarize these
reclassifications.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
|
|
|
As Previously |
|
|
|
|
|
|
|
(amounts in millions) |
|
Reported |
|
|
Reclass |
|
|
As Reclassified |
|
Production and
distribution expenses |
|
$ |
350.7 |
|
|
$ |
24.6 |
|
|
$ |
375.3 |
|
Selling and support
expenses |
|
|
663.6 |
|
|
|
(53.3 |
) |
|
|
610.3 |
|
General and
administrative
expenses |
|
|
69.0 |
|
|
|
28.7 |
|
|
|
97.7 |
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
|
|
As Previously |
|
|
|
|
|
|
|
(amounts in millions) |
|
Reported |
|
|
Reclass |
|
|
As Reclassified |
|
Production and
distribution expenses |
|
$ |
418.3 |
|
|
$ |
3.6 |
|
|
$ |
421.9 |
|
Selling and support
expenses |
|
|
729.7 |
|
|
|
(42.2 |
) |
|
|
687.5 |
|
General and
administrative
expenses |
|
|
120.9 |
|
|
|
38.6 |
|
|
|
159.5 |
|
GAAP Reported Results
Successor Company Eleven Months Ended December 31, 2010
Net Revenues
The components of our net revenues for the eleven months ended December 31, 2010 were as follows:
|
|
|
|
|
|
|
Successor Company |
|
(amounts in millions) |
|
Eleven Months Ended
December 31, 2010 |
|
|
Gross advertising revenues |
|
$ |
824.4 |
|
Sales claims and allowances |
|
|
(9.9 |
) |
|
|
|
|
Net advertising revenues |
|
|
814.5 |
|
Other revenues |
|
|
16.4 |
|
|
|
|
|
Total |
|
$ |
830.9 |
|
|
|
|
|
Our advertising revenues are earned primarily from the sale of advertising in yellow pages
directories we publish. Advertising revenues also include revenues for Internet-based advertising
products including online directories, such as DexKnows.com and DexNet. Advertising revenues are
affected by several factors, including changes in the quantity and size of advertisements,
acquisition of new clients, renewal rates of existing clients, premium advertisements sold, changes
in advertisement pricing, the introduction of new products, an increase in competition and more
fragmentation in the local business search market and general economic factors. Revenues with
respect to print advertising and Internet-based advertising products that are sold with print
advertising are recognized under the deferral and amortization method. Revenues related to our
print advertising and Internet-based advertising products that are sold with print advertising 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 services that are sold standalone, such as DexNet, are recognized as delivered or
fulfilled. Revenues with respect to our advertising products 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 advertising products that are performance-based are
recognized as the service is delivered or fulfilled.
The adoption of fresh start accounting has had a significant impact on the results of operations of
the Company commencing on the Fresh Start Reporting Date. As a result of the deferral and
amortization method of revenue recognition, recognized gross advertising revenues reflect the
amortization of advertising sales consummated in prior periods as well as in the current period.
Fresh start accounting precludes us from recognizing advertising revenue and certain expenses
associated with advertising sales fulfilled prior to the Fresh Start Reporting Date. Thus, our
reported results for the eleven months ended December 31, 2010 are not indicative of our underlying
operating and financial performance and are not comparable to any prior period presentation.
Gross advertising revenues were $824.4 million for the eleven months ended December 31, 2010 and
exclude $799.3 million of gross advertising revenues resulting from our adoption of fresh start
accounting. Gross advertising revenues continue to be impacted by declines in advertising sales
primarily as a result of declines in new and recurring business, mainly driven by (1) 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.
43
Sales claims and allowances were $9.9 million for the eleven months ended December 31, 2010 and
exclude $14.0 million of sales claims and allowances resulting from our adoption of fresh start
accounting. Sales claims and allowances were affected by lower claims experience due to process
improvements and operating efficiencies, which improved print copy quality in certain of our
markets, as well as lower advertising sales volume.
Other revenues were $16.4 million for the eleven months ended December 31, 2010 and exclude $5.6
million of other revenues resulting from our adoption of fresh start accounting. Other revenues
include late fees received on outstanding customer balances, barter revenues, commissions earned on
sales contracts with respect to advertising placed into other publishers directories, and sales of
directories and certain other advertising-related products.
Expenses
The components of our total expenses for the eleven months ended December 31, 2010 were as follows:
|
|
|
|
|
|
|
Successor Company |
|
|
|
Eleven Months Ended |
|
(amounts in millions) |
|
December 31, 2010 |
|
|
Production and distribution expenses |
|
$ |
223.0 |
|
Selling and support expenses |
|
|
378.8 |
|
General and administrative expenses |
|
|
146.4 |
|
Depreciation and amortization |
|
|
217.7 |
|
Impairment charges |
|
|
1,159.3 |
|
|
|
|
|
Total |
|
$ |
2,125.2 |
|
|
|
|
|
Certain costs directly related to the selling and production of directories are initially deferred
and then amortized ratably over the life of the directories under the deferral and amortization
method of accounting to match revenue recognized relating to such directories, with cost
recognition commencing in the month directory distribution is substantially complete. These costs
are specifically identifiable to a particular directory and include sales commissions and print,
paper and initial distribution costs. Sales commissions include amounts paid to employees for
sales to local clients and to certified marketing representatives (CMRs), which act as our
channel to national clients. All other expenses, such as sales person salaries, sales manager
compensation, sales office occupancy, publishing and information technology services, are not
specifically identifiable to a particular directory and are recognized as incurred. Except for
certain expenses associated with advertising sales fulfilled prior to the Fresh Start Reporting
Date, which fresh start accounting precludes us from recognizing, our costs recognized in a
reporting period consist of: (i) costs incurred in that period and fully recognized in that period;
(ii) costs incurred in a prior period, a portion of which is amortized and recognized in the
current period; and (iii) costs incurred in the current period, a portion of which is amortized and
recognized in the current period and the balance of which is deferred until future periods.
Consequently, there will be a difference between costs recognized in any given period and costs
incurred in the given period, which may be significant.
Production and Distribution Expenses
Total production and distribution expenses were $223.0 million for the eleven months ended December
31, 2010. Production and distribution expenses are comprised of items such as print, paper and
distribution expenses, internet production and distribution expenses and amortization of
cost-uplift associated with print, paper and distribution expenses resulting from our adoption of
fresh start accounting. As a result of our adoption of fresh start accounting, production and
distribution expenses for the eleven months ended December 31, 2010 exclude the amortization of
deferred directory costs under the deferral and amortization method for directories published
before the Fresh Start Reporting Date totaling $88.8 million and include amortization of
cost-uplift of $7.5 million. Print paper and distribution expenses continue to be impacted by lower
page volumes associated with declines in print advertisements and negotiated price reductions in
our print and paper expenses. Internet production and distribution expenses have been affected by a
reduction in DexNet customers, purchasing efficiencies and lower headcount, partially offset by
increased purchased traffic costs incurred to direct traffic to our online properties.
44
Selling and Support Expenses
Total selling and support expenses were $378.8 million for the eleven months ended December 31,
2010. Selling and support expenses are comprised of items such as bad debt expense, commissions and
salesperson expenses, directory publishing expenses, billing, credit and collection expense,
occupancy expenses, advertising expense and amortization of cost uplift associated with commissions
resulting from our adoption of fresh start accounting. Due to our adoption of fresh start
accounting, selling and support expenses for the eleven months ended December 31, 2010 exclude the
amortization of deferred directory costs under the deferral and amortization method for directories
published before the Fresh Start Reporting Date totaling $83.8 million and include amortization of
cost-uplift of $4.8 million. Bad debt expense has been impacted by lower write-off experience
resulting from 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, partially offset by an increase to the bad debt provision for delinquent balances
associated with a CMR. If clients fail to pay within specified credit terms, we may cancel their
advertising in future directories, which could impact our ability to collect past due amounts as
well as adversely impact our advertising sales and revenue trends. Commissions and salesperson
expenses have been affected by lower advertising sales and its effect on variable-based
commissions, as well as lower headcount. Directory publishing expenses continue to be affected by
declines in print advertisements and lower headcount. Occupancy expenses have been impacted by the
renegotiation of our leased properties and reduction in the amount of leased square footage during
the bankruptcy process.
General and Administrative Expenses
General and administrative (G&A) expenses were $146.4 million for the eleven months ended
December 31, 2010. G&A expenses are comprised of items such as restructuring expenses, general
corporate expenses, incentive compensation expense and information technology (IT) expenses. G&A
related incentive compensation expense pertains to expense associated with a stock appreciation
rights (SARs) grant made on March 1, 2010 to certain employees, including executive officers,
common stock issued to members of the Companys Board of Directors on March 1, 2010, common stock
issued to members of the Executive Oversight Committee on September 13, 2010, the stock based
awards granted to Mr. Mockett on September 13, 2010 and compensation expense associated with the
Companys Long-Term Incentive Program (2009 LTIP), which includes accelerated compensation
expense associated with the departure of our former Chief Executive Officer.
Depreciation and Amortization
Depreciation and amortization expense was $217.7 million for the eleven months ended December 31,
2010. Amortization of intangible assets was $167.0 million for the eleven months ended December 31,
2010 and was impacted by the increase in fair value of our intangible assets and the establishment
of the estimated useful lives resulting from our adoption of fresh start accounting. The Company
expects to recognize amortization expense associated with its intangible assets of $152.8 million
during the year ended December 31, 2011. Depreciation of fixed assets and amortization of computer
software was $50.7 million for the eleven months ended December 31, 2010 and was affected by the
increase in fair value of our fixed assets and computer software resulting from our adoption of
fresh start accounting as well as capital projects placed into service during the eleven months
ended December 31, 2010.
Impairment Charges
Based upon the decline in the trading value of our debt and equity securities and the departure of
our Chairman and Chief Executive Officer on May 28, 2010, among other indicators, the Company
performed impairment tests of its goodwill, definite-lived intangible assets and other long-lived
assets as of September 30, 2010 and June 30, 2010. The testing results of our definite-lived
intangible assets and other long-lived assets resulted in an impairment charge associated with
trade names and trademarks, technology, local customer relationships and other from our former
Business.com reporting unit of $4.3 million and $17.3 million during the three months ended
September 30, 2010 and June 30, 2010, respectively, for a total non-goodwill intangible asset
impairment charge of $21.6 million during the eleven months ended December 31, 2010. The testing
results of our goodwill resulted in an impairment charge of $385.3 million and $752.3 million
during the three months ended September 30, 2010 and June 30, 2010, respectively, for a total
goodwill impairment charge of $1,137.6 million during the eleven months ended December 31, 2010.
The sum of the goodwill and non-goodwill intangible asset impairment charges totaled $1,159.3
million for the eleven months ended December 31, 2010. See Item 8, Financial Statements and
Supplementary Data Note 2, Summary of Significant Accounting Policies Identifiable
Intangible Assets and Goodwill for additional information.
45
Operating Loss
Operating loss was $(1,294.3) million for the eleven months ended December 31, 2010. Under fresh
start accounting, most deferred net revenues related to directories published prior to the Fresh
Start Reporting Date have been eliminated however, only certain deferred direct expenses related to
these directories have been eliminated. Expenses that are not directly associated with net revenues
from these directories will continue to be recognized as period expenses subsequent to the Fresh
Start Reporting Date. As such, fresh start accounting has had a disproportionate adverse effect on
reported net revenues versus expenses in determining operating loss for the eleven months ended
December 31, 2010. Each month subsequent to the Fresh Start Reporting Date until the impact of
fresh start accounting expires in the first quarter of 2011, the ratio of reported net revenue to
expense will increase. Operating loss for the eleven months ended December 31, 2010 was directly
impacted by the goodwill and non-goodwill intangible asset impairment charges noted above, the
significant effects of fresh start accounting as well as the revenue and expense trends described
above.
Interest Expense, Net
Net interest expense was $249.5 million for the eleven months ended December 31, 2010. 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 $29.3 million for the eleven months
ended December 31, 2010.
In connection with the amendment and restatement of the Dex Media East and RHDI credit facilities
on the Effective Date, we entered into interest rate swap and interest rate cap agreements during
the first quarter of 2010, which have not been designated as cash flow hedges. The Companys
interest expense for the eleven months ended December 31, 2010 includes expense of $8.2 million
resulting from the change in fair value of these interest rate swaps and interest rate caps.
Income Taxes
The effective tax rate on loss before income taxes is 40.2% for the eleven months ended December
31, 2010. Our effective tax rate benefit of 40.2% is higher than the federal statutory tax rate of
35.0% primarily due to increases in income tax benefits from the recognition of an unrecognized tax
position offset, in part, by an increase in income tax expense related to a non-deductible
impairment charge.
During 2009, the Predecessor Company accrued an unrecognized tax benefit for the uncertainty
surrounding a potential ownership change under Internal Revenue Code (IRC) Section 382 (Section
382) that occurred prior to the date on which it made a check-the-box election for two of its
subsidiaries. The date of the change in ownership was in question since as of the December 31, 2009
balance sheet date, the Predecessor Company was unable to confirm the actual date of the ownership
change until all SEC Forms 13-G were filed. However, 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 it was more likely than not that certain check-the-box elections were
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
$352.3 million in the Companys statement of operations for the eleven months ended December 31,
2010, which significantly impacted our effective tax rate for the period.
As a result of the goodwill and non-goodwill intangible asset impairment charges during the eleven
months ended December 31, 2010, we recognized a non-deductible adjustment to our effective tax rate
of 19.5%, or $299.9 million.
46
The income tax benefit of $620.1 million for the eleven months ended December 31, 2010 is comprised
of a federal tax benefit of $567.7 million and a state tax benefit of $52.4 million. The federal
tax benefit of $567.7 million is comprised of a current tax provision of $(1.3) million, primarily
related to unrecognized tax benefits, and a deferred tax benefit of $569.0 million, primarily
related to current year net operating loss, recognition of an unrecognized tax position and
goodwill impairment charges during the eleven months ended December 31, 2010. The state tax benefit
of $52.4 million is comprised of a current tax benefit of $3.8 million, primarily related to
expected state tax refunds, and a deferred tax benefit of $48.6 million, primarily related to the
recognition of an unrecognized tax position during the eleven months ended December 31, 2010.
See Item 8, Financial Statements and Supplementary Data Note 8, Income Taxes for additional
information.
Net Loss and Loss Per Share
Net loss of $(923.6) million for the eleven months ended December 31, 2010 was directly impacted by
the goodwill and non-goodwill intangible asset impairment charges as noted above, as well as the
significant effects of fresh start accounting and the revenue and expense trends described above,
offset by the income tax benefit recorded for the eleven months ended December 31, 2010 as noted
above.
The calculation of basic and diluted earnings (loss) per share (EPS) is presented below.
|
|
|
|
|
|
|
Successor Company |
|
|
|
Eleven Months Ended |
|
(amounts in thousands except per share amounts) |
|
December 31, 2010 |
|
|
Basic EPS |
|
|
|
|
Net loss |
|
$ |
(923,592 |
) |
Weighted average common shares outstanding |
|
|
50,020 |
|
|
|
|
|
Basic EPS |
|
$ |
(18.46 |
) |
|
|
|
|
|
Diluted EPS |
|
|
|
|
Net loss |
|
$ |
(923,592 |
) |
Weighted average common shares outstanding |
|
|
50,020 |
|
Dilutive effect of stock awards (1) |
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
50,020 |
|
|
|
|
|
Diluted EPS |
|
$ |
(18.46 |
) |
|
|
|
|
|
|
|
(1) |
|
Due to the net loss reported for the eleven months ended December 31, 2010, the effect of all
stock-based awards was anti-dilutive and therefore is not included in the calculation of
diluted EPS. For the eleven months ended December 31, 2010, 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 period. |
47
Predecessor Company One Month Ended January 31, 2010
Net Revenues
The components of the Predecessor Companys net revenues for the one month ended January 31, 2010
were as follows:
|
|
|
|
|
|
|
Predecessor Company |
|
|
|
One Month Ended |
|
(amounts in millions) |
|
January 31, 2010 |
|
| |
Gross advertising revenues |
|
$ |
161.4 |
|
Sales claims and allowances |
|
|
(3.5 |
) |
|
|
|
|
Net advertising revenues |
|
|
157.9 |
|
Other revenues |
|
|
2.5 |
|
|
|
|
|
Total. |
|
$ |
160.4 |
|
|
|
|
|
Gross advertising revenues were $161.4 million for the one month ended January 31, 2010. Gross
advertising revenues continue to be impacted by declines in advertising sales over the past twelve
months, primarily as a result of declines in new and recurring business, mainly driven by (1)
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.
Sales claims and allowances were $3.5 million for the one month ended January 31, 2010. Sales
claims and allowances were affected by lower claims experience due to process improvements and
operating efficiencies, which improved print copy quality in certain of our markets, as well as
lower advertising sales volume.
Other revenues were $2.5 million for the one month ended January 31, 2010. Other revenues include
late fees received on outstanding customer balances, barter revenues, commissions earned on sales
contracts with respect to advertising placed into other publishers directories, and sales of
directories and certain other advertising-related products.
Expenses
The components of the Predecessor Companys total expenses for the one month ended January 31, 2010
were as follows:
|
|
|
|
|
|
|
Predecessor Company |
|
|
|
One Month Ended |
|
(amounts in millions) |
|
January 31, 2010 |
|
| |
Production and distribution expenses |
|
$ |
27.2 |
|
Selling and support expenses |
|
|
40.7 |
|
General and administrative expenses |
|
|
8.2 |
|
Depreciation and amortization |
|
|
20.2 |
|
|
|
|
|
Total |
|
$ |
96.3 |
|
|
|
|
|
Production and Distribution Expenses
Total production and distribution expenses were $27.2 million for the one month ended January 31,
2010. Production and distribution expenses are comprised of items such as print, paper and
distribution expenses and internet production and distribution expenses. Print paper and
distribution expenses continue to be impacted by lower page volumes associated with declines in
print advertisements, negotiated price reductions in our print and paper expenses and favorable
paper inventory expenses. Internet production and distribution expenses have been affected by a
reduction in DexNet customers, purchasing efficiencies and lower headcount, partially offset by
increased purchased traffic costs incurred to direct traffic to our online properties.
48
Selling and Support Expenses
Total selling and support expenses were $40.7 million for the one month ended January 31, 2010.
Selling and support expenses are comprised of items such as bad debt expense, commissions and
salesperson expenses, directory publishing expenses, billing, credit and collection expense,
occupancy expenses and advertising expense. Bad debt expense has been impacted by effective credit
and collections practices, which have driven improvement in our accounts receivable portfolio, as
well as lower billing volumes associated with declines in advertisers. Directory publishing
expenses continue to be affected by declines in print advertisements and lower headcount. Billing,
credit and collections expense has been impacted by lower billing volumes associated with declines
in advertisers and advertisements. Occupancy expenses have been impacted by the renegotiation of
our leased properties and reduction in the amount of leased square footage during the bankruptcy
process.
General and Administrative Expenses
G&A expenses were $8.2 million for the one month ended January 31, 2010. G&A expenses are comprised
of items such as restructuring expenses, general corporate expenses, incentive compensation
expense, and IT expenses. Restructuring expenses have been impacted by lower severance expense and
fees associated with outside consultant services. G&A related incentive compensation expense
includes the remaining unrecognized compensation expense related to stock-based awards that were
cancelled upon emergence from Chapter 11 and pursuant to the Plan, compensation expense associated
with the Predecessor Companys 2009 LTIP and the reversal of an accrual associated with the
Predecessor Companys incentive compensation plan.
Depreciation and Amortization
Depreciation and amortization expense was $20.2 million for the one month ended January 31, 2010.
Amortization of intangible assets was $15.6 million for the one month ended January 31, 2010 and
was impacted by the reduced carrying values of intangible assets resulting from impairment charges
recorded by the Predecessor Company during the fourth quarter of 2009 and the associated reduction
in remaining useful lives effective January 1, 2010.
Depreciation of fixed assets and amortization of computer software was $4.6 million for the one
month ended January 31, 2010. Depreciation of fixed assets and amortization of computer software
was impacted by capital projects placed into service during the one month ended January 31, 2010.
Operating Income
Operating income was $64.1 million for the one month ended January 31, 2010 and was determined
based on the revenue and expense trends described above.
Interest Expense, Net
Contractual interest expense that would have appeared on the Predecessor Companys consolidated
statement of operations if not for the filing of the Chapter 11 petitions was $65.9 million for the
one month ended January 31, 2010. Net interest expense for the one month ended January 31, 2010
was $19.7 million and includes $1.8 million of non-cash amortization of deferred financing costs.
The Predecessor Companys interest expense for the one month ended January 31, 2010 includes
expense of $0.8 million associated with the change in fair value of the Dex Media East LLC interest
rate swaps no longer deemed financial instruments as a result of filing the Chapter 11 petitions.
The Predecessor Companys interest expense for the one month ended January 31, 2010 also includes
expense of $1.1 million resulting from amounts previously charged to accumulated other
comprehensive loss related to these interest rate swaps. The amounts previously charged to
accumulated other comprehensive loss related to the Dex Media East LLC interest rate swaps were to
be amortized to interest expense over the remaining life of the interest rate swaps based on future
interest payments, as it was not probable that those forecasted transactions would not occur. In
accordance with fresh start accounting and reporting, unamortized amounts previously charged to
accumulated other comprehensive loss related to these interest rate swaps have been eliminated as
of the Fresh Start Reporting Date.
49
As a result of the amendment of the RHDI credit facility and the refinancing of the former Dex
Media West LLC credit facility on June 6, 2008, the Predecessor Companys interest rate swaps
associated with these two debt arrangements were no longer highly effective in offsetting changes
in cash flows. Accordingly, cash flow hedge accounting treatment was no longer permitted. In
addition, as a result of filing the Chapter 11 petitions, these interest rate swaps were required
to be settled or terminated during 2009. As a result of the change in fair value of these interest
rate swaps prior to the Effective Date, the Predecessor Companys interest expense includes expense
of $0.4 million for the one month ended January 31, 2010.
Reorganization Items, Net
Reorganization items directly associated with the process of reorganizing the business under
Chapter 11 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 |
|
|
|
|
|
Fresh start accounting adjustments: |
|
|
|
|
Goodwill |
|
|
2,097,124 |
|
Write off of deferred revenue and deferred directory costs |
|
|
655,555 |
|
Fair value adjustment to intangible assets |
|
|
415,132 |
|
Fair value adjustment to the amended and restated credit facilities |
|
|
120,245 |
|
Fair value adjustment to fixed assets and computer software |
|
|
49,814 |
|
Write-off of deferred financing costs |
|
|
(48,443 |
) |
Other fresh start accounting adjustments |
|
|
(20,450 |
) |
|
|
|
|
Total fresh start accounting adjustments |
|
|
3,268,977 |
|
|
|
|
|
Total reorganization items, net |
|
$ |
7,793,132 |
|
|
|
|
|
See Item 8, Financial Statements and Supplementary Data Note 3, Fresh Start Accounting for
information on the gain on reorganization / settlement of liabilities subject to compromise and the
fresh start accounting adjustments presented above.
Income Taxes
The effective tax rate on income before income taxes was 11.7% for the one month ended January 31,
2010. Our effective tax rate provision of 11.7% was lower than the statutory federal tax rate of
35.0% primarily due to decreases in income tax expense for non-taxable fresh start adjustments and
the release of our valuation allowance offset, in part, by increases in income tax expense for the
estimated loss of tax attributes due to cancellation of debt income at emergence, and the impact of
state taxes.
The discharge of our debt in conjunction with our emergence from Chapter 11 resulted in a tax gain
of $5,016.6 million. Generally, the discharge of a debt obligation for an amount less than the
adjusted issue price creates cancellation of indebtedness income (CODI), which must be included
in the Companys taxable income. However, recognition of CODI is limited for a taxpayer that is a
debtor in a reorganization case if the discharge is granted by the Bankruptcy Court or pursuant to
a plan of reorganization approved by the Bankruptcy Court. The Plan enabled the Predecessor
Company to qualify for this bankruptcy exclusion rule and exclude all of the gain on the settlement
of debt obligations and derivative liabilities from taxable income. Under IRC Section 108, the
Company has reduced its tax attributes primarily in net operating loss carry-forwards, intangible
asset basis and stock basis.
50
The income tax provision of $(917.5) million for the one month ended January 31, 2010 is comprised
of a federal tax provision of $(792.8) million and a state tax provision of $(124.8) million. The
federal tax provision is comprised of a current tax provision of $(0.6) million, primarily related
to an increase in the federal tax accrual
related to unrecognized tax benefits, and a deferred tax provision of $(792.2) million, primarily
related to the reduction of the Predecessor Companys tax attributes in accordance with IRC Section
108. The state tax provision of $(124.8) million is comprised of a current tax provision of less
than $(0.1) million and a deferred tax provision of $(124.7) million, primarily related to the
reduction of the Predecessor Companys tax attributes in accordance with IRC Section 108.
See Item 8, Financial Statements and Supplementary Data Note 8, Income Taxes for additional
information.
Net Income and Earnings Per Share
Net income of $6,920.0 million for the one month ended January 31, 2010 is primarily due to the
gain on reorganization and fresh start accounting adjustments that comprise reorganization items,
net. In addition, net income for the one month ended January 31, 2010 was determined based on the
revenue and expense trends and income taxes described above.
The calculation of basic and diluted EPS is presented below.
|
|
|
|
|
|
|
Predecessor Company |
|
|
|
One Month Ended |
|
(amounts in thousands except per share amounts) |
|
January 31, 2010 |
|
|
Basic EPS |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,920,009 |
|
Weighted average common shares outstanding |
|
|
69,013 |
|
|
|
|
|
Basic EPS |
|
$ |
100.3 |
|
|
|
|
|
Diluted EPS |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,920,009 |
|
Weighted average common shares outstanding |
|
|
69,013 |
|
Dilutive effect of stock awards |
|
|
39 |
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
69,052 |
|
|
|
|
|
Diluted EPS |
|
$ |
100.2 |
|
|
|
|
|
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.
51
Non-GAAP Financial Information Combined Adjusted Results
Management believes that the presentation of Non-GAAP Financial Information Combined Adjusted
Results will help financial statement users better understand the material impact fresh start
accounting has on the Companys results of operations for the eleven months ended December 31, 2010
and also offers a non-GAAP normalized comparison to GAAP results of the Predecessor Company for the
year ended December 31, 2009. The Non-GAAP Financial Information Combined Adjusted Results
presented below are reconciled to the most comparable GAAP measures. While the Non-GAAP Financial
Information Combined Adjusted Results exclude the effects of fresh start accounting and certain
other items such as the goodwill and non-goodwill intangible asset impairment charges during the
eleven months ended December 31, 2010, it must be noted that the Non-GAAP Financial Information
Combined Adjusted Results are not comparable to the Predecessor Companys GAAP results for the year
ended December 31, 2009 or Adjusted Results for the year ended December 31, 2009, which exclude the
effects of the non-goodwill intangible asset impairment charges during 2009, and should not be
treated as such.
Successor Company Combined Adjusted Results for the Year Ended December 31, 2010 and
Predecessor Company GAAP and Adjusted Results for the Year Ended December 31, 2009
Net Revenues
The components of our combined adjusted net revenues for the year ended December 31, 2010 and the
Predecessor Company GAAP net revenues for the year ended December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
One |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Month |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eleven Months |
|
|
Ended |
|
|
|
|
|
|
Combined Adjusted |
|
|
Predecessor Company |
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
January |
|
|
Fresh Start |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
|
|
|
% |
|
(amounts in millions) |
|
December 31, 2010 |
|
|
31, 2010 |
|
|
Adjustments |
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
$ Change |
|
|
Change |
|
|
Gross advertising
revenues |
|
$ |
824.4 |
|
|
$ |
161.4 |
|
|
$ |
799.3 |
(1) |
|
$ |
1,785.1 |
|
|
$ |
2,219.9 |
|
|
$ |
(434.8 |
) |
|
|
(19.6 |
)% |
Sales claims and
allowances |
|
|
(9.9 |
) |
|
|
(3.5 |
) |
|
|
(14.0 |
)(1) |
|
|
(27.4 |
) |
|
|
(43.8 |
) |
|
|
16.4 |
|
|
|
37.4 |
|
|
|
|
Net advertising
revenues
|
|
|
814.5 |
|
|
|
157.9 |
|
|
|
785.3 |
|
|
|
1,757.7 |
|
|
|
2,176.1 |
|
|
|
(418.4 |
) |
|
|
(19.2 |
) |
Other revenues |
|
|
16.4 |
|
|
|
2.5 |
|
|
|
5.6 |
(1) |
|
|
24.5 |
|
|
|
26.3 |
|
|
|
(1.8 |
) |
|
|
(6.8 |
) |
|
|
|
Total |
|
$ |
830.9 |
|
|
$ |
160.4 |
|
|
$ |
790.9 |
|
|
$ |
1,782.2 |
|
|
$ |
2,202.4 |
|
|
$ |
(420.2 |
) |
|
|
(19.1 |
)% |
|
|
|
|
|
|
(1) |
|
Represents gross advertising revenues, sales claims and allowances and other
revenues for advertising sales fulfilled prior to the Fresh Start Reporting Date, which would have
been recognized during the eleven months ended December 31, 2010 absent our adoption of fresh start
accounting required under GAAP. |
Combined adjusted gross advertising revenues for the year ended December 31, 2010 decreased
$434.8 million, or 19.6%, from the Predecessor Company year ended December 31, 2009. The decline in
combined adjusted gross advertising revenues for the year ended December 31, 2010 is primarily due
to declines in advertising sales over the past twelve months, primarily as a result of declines in
new and recurring business, mainly driven by (1) 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.
Combined adjusted sales claims and allowances for the year ended December 31, 2010 decreased $16.4
million, or 37.4%, from the Predecessor Company year ended December 31, 2009. The decline in
combined adjusted sales claims and allowances for the year ended December 31, 2010 is primarily due
to lower claims experience as a result of process improvements and operating efficiencies, which
improved print copy quality in certain of our markets, as well as lower advertising sales volume.
52
Expenses
The components of our combined adjusted total expenses for the year ended December 31, 2010 and the
Predecessor Company adjusted total expenses for the year ended December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Company |
|
|
|
|
|
|
Combined |
|
|
|
Eleven |
|
|
One Month
|
|
|
Fresh Start and |
|
|
Adjusted |
|
|
|
Months Ended |
|
|
Ended January |
|
|
Other |
|
|
Year Ended |
|
(amounts in millions) |
|
December 31, 2010 |
|
|
31, 2010 |
|
|
Adjustments |
|
|
December 31, 2010 |
|
|
Production and distribution
expenses |
|
$ |
223.0 |
|
|
$ |
27.2 |
|
|
$ |
81.3 |
(1) |
|
$ |
331.5 |
|
Selling and support expenses |
|
|
378.8 |
|
|
|
40.7 |
|
|
|
79.0 |
(1) |
|
|
498.5 |
|
General and administrative
expenses |
|
|
146.4 |
|
|
|
8.2 |
|
|
|
|
|
|
|
154.6 |
|
Depreciation and
amortization |
|
|
217.7 |
|
|
|
20.2 |
|
|
|
|
(2) |
|
|
237.9 |
|
Impairment charges |
|
|
1,159.3 |
|
|
|
|
|
|
|
(1,159.3 |
)(3) |
|
|
|
|
|
|
|
Total |
|
$ |
2,125.2 |
|
|
$ |
96.3 |
|
|
$ |
(999.0 |
) |
|
$ |
1,222.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
Adjusted |
|
|
|
|
|
|
|
|
|
|
|
|
December |
|
|
|
|
|
|
Year Ended |
|
|
$ |
|
|
% |
|
(amounts in millions) |
|
31, 2009 |
|
|
Adjustments |
|
|
December 31, 2009 |
|
|
Change |
|
|
Change |
|
|
Production and distribution
expenses |
|
$ |
375.3 |
|
|
$ |
|
|
|
$ |
375.3 |
|
|
$ |
(43.8 |
) |
|
|
(11.7 |
)% |
Selling and support expenses |
|
|
610.3 |
|
|
|
|
|
|
|
610.3 |
|
|
|
(111.8 |
) |
|
|
(18.3 |
) |
General and administrative expenses |
|
|
97.7 |
|
|
|
|
|
|
|
97.7 |
|
|
|
56.9 |
|
|
|
58.2 |
|
Depreciation and
amortization |
|
|
578.8 |
|
|
|
|
|
|
|
578.8 |
|
|
|
(340.9 |
) |
|
|
(58.9 |
) |
Impairment charges |
|
|
7,337.8 |
|
|
|
(7,337.8 |
)(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,999.9 |
|
|
$ |
(7,337.8 |
) |
|
$ |
1,662.1 |
|
|
$ |
(439.6 |
) |
|
|
(26.4 |
)% |
|
|
|
|
|
|
(1) |
|
Represents (a) certain deferred expenses for advertising sales fulfilled
prior to the Fresh Start Reporting Date, which would have been recognized during the eleven months
ended December 31, 2010 absent our adoption of fresh start accounting required under GAAP and (b)
the exclusion of cost-uplift recorded under fresh start accounting.
|
|
(2) |
|
Depreciation and amortization expense has not been adjusted for the increase in
fair value of our intangible assets and fixed assets and computer software as a result of our
adoption of fresh start accounting, the reduced carrying values of intangible assets resulting from
impairment charges recorded by the Predecessor Company during the fourth quarter of 2009 and the
associated reduction in remaining useful lives effective January 1, 2010.
|
|
(3) |
|
The goodwill and non-goodwill intangible asset impairment charges during the eleven
months ended December 31, 2010 have been excluded for the combined adjusted year ended December 31,
2010. The non-goodwill intangible asset impairment charges during the year ended December 31, 2009
have been excluded for the adjusted year ended December 31, 2009.
|
53
Production and Distribution Expenses
Total combined adjusted production and distribution expenses for the year ended December 31, 2010
were $331.5 million, compared to $375.3 million for the Predecessor Company year ended December 31,
2009. The primary components of the $43.8 million, or 11.7%, decrease in combined adjusted
production and distribution expenses for the year ended December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
Adjusted Year Ended |
|
(amounts in millions) |
|
December 31, 2010 |
|
|
Lower print, paper and distribution expenses |
|
$ |
(30.6 |
) |
Lower internet production and distribution expenses |
|
|
(10.6 |
) |
All other, net |
|
|
(2.6 |
) |
|
|
|
|
Total decrease in
combined adjusted
production and
distribution expenses for
the year ended December
31, 2010 |
|
$ |
(43.8 |
) |
|
|
|
|
Combined adjusted print, paper and distribution expenses for the year ended December 31, 2010
declined $30.6 million, compared to the Predecessor Company year ended December 31, 2009. This
decline is primarily due to lower page volumes associated with declines in print advertisements,
negotiated price reductions in our print and paper expenses, timing of publication deliveries as
compared to the prior year period and favorable paper inventory expenses.
Combined adjusted internet production and distribution expenses for the year ended December 31,
2010 declined $10.6 million, compared to the Predecessor Company year ended December 31, 2009,
primarily due to purchasing efficiencies, lower headcount and a reduction in DexNet customers,
partially offset by increased purchased traffic costs incurred to direct traffic to our online
properties.
Selling and Support Expenses
Total combined adjusted selling and support expenses for the year ended December 31, 2010 were
$498.5 million, compared to $610.3 million for the Predecessor Company year ended December 31,
2009. The primary components of the $111.8 million, or 18.3%, decrease in combined adjusted selling
and support expenses for the year ended December 31, 2010 were as follows:
|
|
|
|
|
|
|
Combined |
|
|
|
Adjusted Year Ended |
|
(amounts in millions) |
|
December 31, 2010 |
|
|
Lower bad debt expense |
|
$ |
(81.2 |
) |
Lower commissions and salesperson expenses |
|
|
(22.3 |
) |
Lower occupancy expenses |
|
|
(5.0 |
) |
Lower directory publishing expenses |
|
|
(4.9 |
) |
All other, net |
|
|
1.6 |
|
|
|
|
|
Total decrease in
combined adjusted
selling and support
expenses for the year
ended December 31,
2010 |
|
$ |
(111.8 |
) |
|
|
|
|
Combined adjusted bad debt expense for the year ended December 31, 2010 declined $81.2 million,
compared to the Predecessor Company year ended December 31, 2009, primarily due to lower write-off
experience resulting from 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, partially offset by an increase to the bad debt provision for delinquent balances
associated with a CMR. Combined adjusted bad debt expense for the year ended December 31, 2010
represented 3.7% of our net revenue, compared to 6.7% for the Predecessor Company year ended
December 31, 2009.
Combined adjusted commissions and salesperson expenses for the year ended December 31, 2010
decreased $22.3 million, compared to the Predecessor Company year ended December 31, 2009,
primarily due to lower advertising sales and its effect on variable-based commissions, as well as
lower headcount.
Combined adjusted occupancy expenses for the year ended December 31, 2010 decreased $5.0 million,
compared to the Predecessor Company year ended December 31, 2009, primarily due to the
renegotiation of our leased properties and reduction in the amount of leased square footage during
the bankruptcy process.
54
Combined adjusted directory publishing expenses for the year ended December 31, 2010 decreased $4.9
million, compared to the Predecessor Company year ended December 31, 2009, primarily due to
declines in print advertisements and lower headcount.
General and Administrative Expenses
Combined adjusted G&A expenses for the year ended December 31, 2010 were $154.6 million, compared
to $97.7 million for the Predecessor Company year ended December 31, 2009. The primary components
of the $56.9 million, or 58.2%, increase in combined adjusted G&A expenses for the year ended
December 31, 2010 were as follows:
|
|
|
|
|
|
|
Combined |
|
|
|
Adjusted Year Ended |
|
(amounts in millions) |
|
December 31, 2010 |
|
|
Change in net curtailment gains |
|
$ |
48.2 |
|
One-time expenses associated with departure of Chief Executive Officer |
|
|
9.5 |
|
Higher restructuring expenses |
|
|
4.0 |
|
Lower general corporate expenses |
|
|
(4.6 |
) |
All other, net |
|
|
(0.2 |
) |
|
|
|
|
Total increase in combined adjusted
G&A expenses for the year ended
December 31, 2010 |
|
$ |
56.9 |
|
|
|
|
|
During the combined adjusted year ended December 31, 2010, we recognized a one-time net curtailment
gain of $3.8 million associated with the departure of the Companys former Chief Executive Officer.
This represents a decrease of $48.2 million in net curtailment gains from the year ended December
31, 2009 during which we recognized $52.0 million associated with the elimination of certain union
retiree health care and life insurance benefits.
During the combined adjusted year ended December 31, 2010, we recognized one-time expenses of $9.5
million associated with the departure of the Companys former Chief Executive Officer.
During the fourth quarter of 2010, we commenced a restructuring plan that included headcount
reductions and consolidation of responsibilities. As a result of this restructuring plan, the
Company recorded a restructuring charge of $18.6 million during the fourth quarter of 2010. During
the year ended December 31, 2009, the Predecessor Company recognized a restructuring charge of
$14.6 million related to a restructuring plan implemented during
2009. This represents an increase
in restructuring expenses of $4.0 million for the combined adjusted year ended December 31, 2010.
Combined adjusted general corporate expenses for the year ended December 31, 2010 decreased $4.6
million, compared to the Predecessor Company year ended December 31, 2009, due to lower director
and officer insurance premiums as a result of contract renegotiations and changes in coverage
limits associated with our emergence from Chapter 11.
Depreciation and Amortization
Combined depreciation and amortization expense for the year ended December 31, 2010 was $237.8
million, compared to $578.8 million for the Predecessor Company year ended December 31, 2009.
Combined amortization of intangible assets was $182.5 million for the year ended December 31, 2010,
compared to $514.6 million for the Predecessor Company year ended December 31, 2009. The decrease
in combined amortization expense for the year ended December 31, 2010 is a result of the reduced
carrying values of intangible assets subsequent to the impairment charges recorded by the
Predecessor Company during the fourth quarter of 2009, partially offset by increased amortization
expense resulting from the increase in fair value of our intangible assets as a result of our
adoption of fresh start accounting and the reduction of the remaining useful lives of intangible
assets associated with the impairment charges recorded by the Predecessor Company during the fourth
quarter of 2009.
55
Combined depreciation of fixed assets and amortization of computer software was $55.3 million for
the year ended December 31, 2010, compared to $64.2 million for the Predecessor Company year ended
December 31, 2009. The decrease in combined depreciation expense for the year ended December 31,
2010 was primarily due to the acceleration of depreciation on fixed assets no longer in service
during the year ended December 31, 2009, partially offset by the increase in depreciation expense
for the combined year ended December 31, 2010 as a result of the increase in fair value of our
fixed assets and computer software in conjunction with our adoption of fresh start accounting.
Operating Income (Loss)
Combined adjusted operating income for the year ended December 31, 2010 and the Predecessor Company
adjusted operating income for the year ended December 31, 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Predecessor Company |
|
|
|
|
|
|
|
|
|
|
Company |
|
|
OneMonth |
|
|
|
|
|
|
Combined Adjusted |
|
|
|
Eleven Months Ended |
|
|
Ended January |
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
31, |
|
|
Fresh Start and Other |
|
|
December 31, |
|
(amounts in millions) |
|
2010 |
|
|
2010 |
|
|
Adjustments |
|
|
2010 |
|
| | | | |
Total |
|
$ |
(1,294.3 |
) |
|
$ |
64.1 |
|
|
$ |
1,789.9 |
(1) |
|
$ |
559.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
|
|
|
|
Adjusted |
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
|
|
|
|
|
December |
|
|
|
|
|
|
December |
|
|
$ |
|
|
% |
|
(amounts in millions) |
|
31, 2009 |
|
|
Adjustments |
|
|
31, 2009 |
|
|
Change |
|
|
Change |
|
|
Total |
|
$ |
(6,797.5 |
) |
|
$ |
7,337.8 |
(2) |
|
$ |
540.3 |
|
|
$ |
19.4 |
|
|
|
3.6 |
% |
|
|
|
|
|
|
(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
eleven months ended December 31, 2010 absent our adoption of fresh start accounting required under
GAAP, (b) the exclusion of cost-uplift recorded under fresh start accounting (c) excludes the
goodwill and non-goodwill intangible asset impairment charges during the eleven months ended
December 31, 2010. |
|
(2) |
|
Excludes the non-goodwill intangible asset impairment charges during the year ended
December 31, 2009. |
Combined adjusted operating income for the year ended December 31, 2010 of $559.7 million,
compares to adjusted operating income of $540.3 million for the Predecessor Company year ended
December 31, 2009. The increase in combined adjusted operating income for the year ended December
31, 2010 is due to the significant decline in amortization expense associated with our intangible
assets and lower operating expenses described above, partially offset by declines in net revenues
described above.
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. Combined advertising sales for the year ended December 31, 2010 were $1,671.0 million,
representing a decline of $320.5 million, or 16.1%, from advertising sales of $1,991.5 million for
the Predecessor Company year ended December 31, 2009.
56
In order to provide more visibility into what the Company will book as revenue in the future, we
have introduced a non-GAAP statistical measure called bookings, which represent sales activity
associated with our print directories and Internet-based products and services 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. Combined bookings for the year ended December 31, 2010 were $1,566.7 million, representing
a decline of $283.1 million, or 15.3%, from bookings of $1,849.8 million for the Predecessor
Company year ended December 31, 2009.
The decrease in combined advertising sales and combined bookings for the year ended December 31,
2010 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. The decrease in combined
adjusted advertising sales and combined bookings for the year ended December 31, 2010 is also a
result of excluding advertising sales and bookings associated with a CMR who we do not expect to
collect and recognize revenue from in 2011.
Year Ended December 31, 2009 compared to Year Ended December 31, 2008
Net Revenues
The components of our net revenues for the years ended December 31, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
(amounts in millions) |
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
Gross advertising revenues |
|
$ |
2,219.9 |
|
|
$ |
2,628.5 |
|
|
$ |
(408.6 |
) |
|
|
(15.5 |
)% |
Sales claims and allowances |
|
|
(43.8 |
) |
|
|
(45.3 |
) |
|
|
1.5 |
|
|
|
3.3 |
|
|
|
|
Net advertising revenues |
|
|
2,176.1 |
|
|
|
2,583.2 |
|
|
|
(407.1 |
) |
|
|
(15.8 |
) |
Other revenues |
|
|
26.3 |
|
|
|
33.6 |
|
|
|
(7.3 |
) |
|
|
(21.7 |
) |
|
|
|
Total |
|
$ |
2,202.4 |
|
|
$ |
2,616.8 |
|
|
$ |
(414.4 |
) |
|
|
(15.8 |
)% |
|
|
|
Gross advertising revenues for the year ended December 31, 2009 decreased $408.6 million, or 15.5%,
from the year ended December 31, 2008. The decline in gross advertising revenues for the year ended
December 31, 2009 is primarily due to declines in advertising sales over the past twelve months,
primarily as a result of declines in new and recurring business, mainly driven by (1) declines in
overall advertising spending by businesses, (2) the significant impact of the weaker economy on
smaller businesses in the markets in which we do business and (3) an increase in competition and
more fragmentation in the local business search market.
Other revenues for the year ended December 31, 2009 decreased $7.3 million, or 21.7%, from the year
ended December 31, 2008. Other revenues include late fees received on outstanding client balances,
barter revenues, commissions earned on sales contracts with respect to advertising placed into
other publishers directories, and sales of directories and certain other advertising-related
products.
Non-GAAP Statistical Measures
Advertising sales for the year ended December 31, 2009 were $2,028.6 million, compared to $2,547.6
million for the year ended December 31, 2008. The $519.0 million, or 20.4%, decrease in
advertising sales for the year ended December 31, 2009, is a result of declines in new and
recurring business, mainly driven by (1) declines in overall advertising spending by businesses,
(2) the significant impact of the weaker economy on smaller businesses in the markets in which we
do business and (3) an increase in competition and more fragmentation in the local business search
market.
57
Expenses
The components of our total expenses for the years ended December 31, 2009 and 2008 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
(amounts in millions) |
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
Production and distribution expenses |
|
$ |
375.3 |
|
|
$ |
421.9 |
|
|
$ |
(46.6 |
) |
|
|
(11.1 |
)% |
Selling and support expenses |
|
|
610.3 |
|
|
|
687.5 |
|
|
|
(77.2 |
) |
|
|
(11.2 |
) |
General and administrative expenses |
|
|
97.7 |
|
|
|
159.5 |
|
|
|
(61.8 |
) |
|
|
(38.8 |
) |
Depreciation and amortization |
|
|
578.8 |
|
|
|
483.3 |
|
|
|
95.5 |
|
|
|
19.8 |
|
Impairment charges |
|
|
7,337.8 |
|
|
|
3,870.4 |
|
|
|
3,467.4 |
|
|
|
89.6 |
|
|
|
|
Total |
|
$ |
8,999.9 |
|
|
$ |
5,622.6 |
|
|
$ |
3,377.3 |
|
|
|
60.1 |
% |
|
|
|
Production and Distribution Expenses
Total production and distribution expenses for the year ended December 31, 2009 were $375.3
million, compared to $421.9 million for the year ended December 31, 2008. The primary components
of the $46.6 million, or 11.1%, decrease in production and distribution expenses for the year ended
December 31, 2009, were as follows:
|
|
|
|
|
(amounts in millions) |
|
$ Change |
|
|
Decreased print, paper and distribution costs |
|
$ |
(28.4 |
) |
Decreased internet production and distribution costs |
|
|
(9.9 |
) |
All other, net |
|
|
(8.3 |
) |
|
|
|
|
Total decrease in production and
distribution expenses for the
year ended December 31, 2009 |
|
$ |
(46.6 |
) |
|
|
|
|
During the year ended December 31, 2009, print, paper and distribution costs declined $28.4
million, compared to the year ended December 31, 2008. This decline is primarily due to lower page
volumes associated with declines in print advertisements, negotiated price reductions in our print
and paper expenses and refinement of our distribution scope across all of our markets.
During the year ended December 31, 2009, internet production and distribution costs declined $9.9
million, compared to the year ended December 31, 2008, primarily due to a reduction in headcount
and outside contractor services, partially offset by increased costs associated with traffic
purchased and distributed to multiple advertiser landing pages.
Selling and Support Expenses
Total selling and support expenses for the year ended December 31, 2009 were $610.3 million,
compared to $687.5 million for the year ended December 31, 2008. The primary components of the
$77.2 million, or 11.2%, decrease in selling and support expenses for the year ended December 31,
2009, were as follows:
|
|
|
|
|
(amounts in millions) |
|
$ Change |
|
|
Decreased commissions and salesperson costs |
|
$ |
(53.4 |
) |
Decreased directory publishing costs |
|
|
(11.7 |
) |
Decreased incentive compensation expense |
|
|
(6.6 |
) |
Decreased billing, credit and collection expenses |
|
|
(5.5 |
) |
Decreased occupancy costs |
|
|
(4.0 |
) |
Increased bad debt expense |
|
|
8.2 |
|
All other, net |
|
|
(4.2 |
) |
|
|
|
|
Total decrease in selling and
support expenses for the year
ended December 31, 2009 |
|
$ |
(77.2 |
) |
|
|
|
|
During the year ended December 31, 2009, commissions and salesperson costs decreased $53.4 million,
compared to the year ended December 31, 2008, primarily due to lower advertising sales and its
effect on variable-based commissions as well as headcount reductions and consolidation of
responsibilities.
58
During the year ended December 31, 2009, directory publishing costs decreased $11.7 million,
compared to the year ended December 31, 2008, primarily due to lower page volumes associated with
declines in print
advertisements as well as a reduction in headcount and related expenses resulting from the
consolidation of our publishing and graphics operations.
During the year ended December 31, 2009, selling and support related incentive compensation expense
declined $6.6 million, compared to the year ended December 31, 2008, primarily due to the fact that
the Company did not grant any stock-based awards during the year ended December 31, 2009, partially
offset by compensation expense associated with the 2009 LTIP.
During the year ended December 31, 2009, billing, credit and collection expenses decreased $5.5
million, compared to the year ended December 31, 2008, primarily due to lower costs resulting from
a change in vendors during the later part of 2008, lower billing volumes associated with declines
in advertisers and print advertisements, as well as headcount reductions and consolidation of
responsibilities.
During the year ended December 31, 2009, occupancy costs decreased $4.0 million, compared to the
year ended December 31, 2008, primarily due to lease re-negotiations associated with filing the
Chapter 11 petitions.
During the year ended December 31, 2009, bad debt expense increased $8.2 million, or 5.9%, as
compared to the year ended December 31, 2008, primarily due to deterioration in accounts receivable
aging categories and increased write-offs, resulting from the adverse impact on our clients from
the instability of the overall economy and tightening of the credit markets. During the year ended
December 31, 2009, our bad debt expense represented 6.7% of our net revenue, as compared to 5.3%
for the year ended December 31, 2008. If clients fail to pay within specified credit terms, we may
cancel their advertising in future directories, which could further impact our ability to collect
past due amounts as well as adversely impact our advertising sales and revenue trends. We expect
that these economic challenges will continue in our markets, and, as such, our bad debt experience
will continue to be adversely impacted for the foreseeable future.
General and Administrative Expenses
G&A expenses for the year ended December 31, 2009 were $97.7 million, compared to $159.5 million
for the year ended December 31, 2008. The primary components of the $61.8 million, or 38.8%,
decrease in G&A expenses for the year ended December 31, 2009, were as follows:
|
|
|
|
|
(amounts in millions) |
|
$ Change |
|
|
Decrease in restructuring expenses |
|
$ |
(21.5 |
) |
Increase in curtailment gains, net |
|
|
(14.0 |
) |
Decrease in general corporate expenses |
|
|
(11.3 |
) |
Decreased information technology (IT) expenses |
|
|
(8.6 |
) |
Decreased incentive compensation expense |
|
|
(5.1 |
) |
All other, net |
|
|
(1.3 |
) |
|
|
|
|
Total decrease in G&A expenses for the year ended December 31, 2009 |
|
$ |
(61.8 |
) |
|
|
|
|
During the year ended December 31, 2009, restructuring expenses decreased $21.5 million, compared
to the year ended December 31, 2008, primarily due to lower costs associated with outside
consultants, headcount reductions, consolidation of responsibilities and vacated leased facilities
as well as a reclassification of certain previously recognized expenses associated with the Chapter
11 proceedings on the consolidated statement of operations during the year ended December 31, 2009.
During the year ended December 31, 2009, the Company recognized one-time net curtailment gains of
$52.0 million associated with the elimination of certain retiree health care and life insurance
benefits for its union employees. During the year ended December 31, 2008, we recognized one-time
net curtailment gains of $38.0 million associated with the elimination of certain retiree health
care and life insurance benefits for its non-union employees. The net increase in curtailment gains
of $14.0 million for the year ended December 31, 2009 is presented in the table above.
59
During the year ended December 31, 2009, general corporate expenses declined $11.3 million,
compared to the year ended December 31, 2008, primarily due to declines in legal fees not
associated with the Chapter 11 proceedings, declines in benefit-related expenses and fees
associated with outside contractor services.
During the year ended December 31, 2009, IT expenses declined $8.6 million, compared to the year
ended December 31, 2008. This decline is primarily due to higher spending associated with our IT
infrastructure to support our products and services and enhancements and technical support of
multiple production systems during the year ended December 31, 2008, as compared to the year ended
December 31, 2009.
During the year ended December 31, 2009, G&A related incentive compensation expense declined $5.1
million, compared to the year ended December 31, 2008, primarily due to the fact that the Company
did not grant any stock-based awards during the year ended December 31, 2009, partially offset by
compensation expense associated with the 2009 LTIP.
Depreciation and Amortization
Depreciation and amortization expense for the year ended December 31, 2009 was $578.8 million,
compared to $483.3 million for the year ended December 31, 2008. Amortization of intangible assets
was $514.6 million for the year ended December 31, 2009, compared to $415.9 million for the year
ended December 31, 2008. The increase in amortization expense for the year ended December 31, 2009
is a direct result of reducing the remaining useful lives associated with our directory services
agreements acquired in prior acquisitions to 33 years effective January 1, 2009, partially offset
by a reduction in amortization expense associated with a revision to the carrying values of our
local and national customer relationships subsequent to impairment charges recorded during the
fourth quarter of 2008.
Depreciation of fixed assets and amortization of computer software was $64.3 million for the year
ended December 31, 2009, compared to $67.4 million for the year ended December 31, 2008. The
decrease in depreciation expense for the year ended December 31, 2009 was primarily due to
accelerated amortization during the year ended December 31, 2008 associated with software projects
that were retired prior to their initial estimated service life.
Impairment Charges
As a result of filing the Chapter 11 petitions, the Company performed impairment tests of its
definite-lived intangible assets and other long-lived assets during the year ended December 31,
2009. During the fourth quarter of 2009 and in conjunction with the filing of our amended Plan and
amended Disclosure Statement, the Company finalized an extensive analysis associated with our
emergence from Chapter 11. The Company utilized the following information and assumptions obtained
from this analysis to complete its impairment evaluation:
|
|
|
Historical financial information, including revenue, profit margins, customer attrition
data and price premiums enjoyed relative to competing independent publishers; |
|
|
|
|
Long-term financial projections, including, but not limited to, revenue trends and
profit margin trends; and |
|
|
|
|
Intangible asset carrying values. |
As a result of these impairment tests, the Company recognized an impairment charge of $7.3 billion
during the fourth quarter of 2009 associated with directory services agreements, advertiser
relationships, third party contracts and network platforms acquired in prior acquisitions. The fair
values of these intangible assets were derived from a discounted cash flow analysis using a
discount rate that is indicative of the risk that a market participant would be willing to accept.
This analysis included a review of relevant financial metrics of peers within our industry.
In connection with our impairment testing during 2009, the Company also evaluated the remaining
useful lives of its definite-lived intangible assets and other long-lived assets by considering,
among other things, the effects of obsolescence, demand, competition, which takes into
consideration the price premium benefit the Company has over competing independent publishers in
its 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. At December 31, 2009, the Company determined that due to
the compression of our price premium benefit over competing independent publishers in our markets
as well as a decline in market share during the year ended December 31, 2009, the remaining useful
lives of the directory services agreements acquired in prior acquisitions will each be reduced from
33 years to weighted average remaining useful lives of 25 years for Dex Media East, 26 years for
Dex Media West, 29 years for AT&T and 28
60
years for CenturyLink, effective January 1, 2010. Based on
an assessment of future estimated cash flows, increased attrition rates and the impact on our
long-term financial projections, the remaining useful lives of third party contracts, advertiser
relationships and network platforms acquired in a prior acquisition will be reduced to 1, 5 and 9
years, respectively, effective January 1, 2010. The reduction to the remaining useful lives was
necessary in order to better reflect the period these intangible assets are expected to contribute
to our future cash flow.
As a result of the decline in the trading value of our debt and equity securities during 2008 and
continuing negative industry and economic trends that directly affected our business, we performed
impairment tests of our goodwill, definite-lived intangible assets and other long-lived assets. We
used estimates and assumptions in our impairment evaluations, including, but not limited to,
projected future cash flows, revenue growth and customer attrition rates. Based upon the impairment
test of our goodwill, we recognized goodwill impairment charges of $2.5 billion and
$660.2 million during the three months ended March 31, 2008 and June 30, 2008, respectively, for
total goodwill impairment charges of $3.1 billion during the year ended December 31, 2008. As a
result of these impairment charges, we had no recorded goodwill at December 31, 2008. In addition,
as a result of these tests, the Company recognized an impairment charge of $744.0 million during
the fourth quarter of 2008 associated with the local and national customer relationships acquired
in prior acquisitions. Lastly, in connection with the launch of the next version of DexKnows.com,
the tradenames and technology acquired in a prior acquisition were discontinued, which resulted in
an impairment charge of $2.2 million during the fourth quarter of 2008. Total impairment charges
related to our intangible assets, excluding goodwill, were $746.2 million during the year ended
December 31, 2008.
Operating Loss
Operating loss for the years ended December 31, 2009 and 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
(amounts in millions) |
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
Total |
|
$ |
(6,797.5 |
) |
|
$ |
(3,005.7 |
) |
|
$ |
(3,791.8 |
) |
|
|
N/M |
|
|
|
|
(N/M: Not Meaningful)
Operating loss for the year ended December 31, 2009 of $6.8 billion, compares to operating
loss of $3.0 billion for the year ended December 31, 2008. The change in operating loss for the
year ended December 31, 2009 from operating loss for the year ended December 31, 2008 is primarily
due to the significant 2009 intangible asset impairment charges noted above, as well as the revenue
and expense trends described above, partially offset by the 2008 impairment charges.
Interest Expense, Net
Contractual interest expense that would have appeared on the consolidated statement of operations
if not for the filing of the Chapter 11 petitions was $802.4 million for the year ended December
31, 2009. Net interest expense for the year ended December 31, 2009 was $489.5 million and includes
$27.5 million of non-cash amortization of deferred financing costs. Net interest expense for the
year ended December 31, 2008 was $835.5 million and includes $29.0 million of non-cash amortization
of deferred financing costs.
Interest expense for the year ended December 31, 2009 includes a non-cash charge of $5.6 million
associated with the change in fair value of the Dex Media East interest rate swaps no longer deemed
financial instruments as a result of filing the Chapter 11 petitions. Interest expense for the year
ended December 31, 2009 also includes a non-cash charge of $9.6 million resulting from amounts
previously charged to accumulated other comprehensive loss related to these interest rate swaps.
The amounts previously charged to accumulated other comprehensive loss related to the Dex Media
East interest rate swaps will be amortized to interest expense over the remaining life of the
interest rate swaps based on future interest payments, as it is not probable that those forecasted
transactions will not occur. In accordance with fresh start accounting and reporting, unamortized
amounts previously charged to accumulated other comprehensive loss will be eliminated on the Fresh
Start Reporting Date.
61
As a result of the change in fair value of our interest rate swaps associated with the amendment of
the RHDI credit facility and the refinancing of the former Dex Media West credit facility on June
6, 2008 and settlement and termination of certain of these interest rate swaps during the second
quarter of 2009, interest expense includes a reduction of $10.7 million for the year ended December
31, 2009, compared to a non-cash charge of $3.7 million for the year ended December 31, 2008.
Interest expense for the year ended December 31, 2008 also includes a non-cash charge of $21.0
million resulting from amounts previously charged to accumulated other comprehensive loss related
to these interest rate swaps.
In conjunction with our acquisition of Dex Media on January 31, 2006 (the Dex Media Merger) and
as a result of purchase accounting required under GAAP, we recorded Dex Medias debt at its fair
value on January 31, 2006. We recognized an offset to interest expense in each period subsequent to
the Dex Media Merger through May 28, 2009 for the amortization of the corresponding fair value
adjustment. The offset to interest expense was $7.7 million for the year ended December 31, 2009,
compared to $17.6 million for the year ended December 31, 2008. The offset to interest expense was
to be recognized over the life of the respective debt, however due to filing the Chapter 11
petitions, unamortized fair value adjustments at May 28, 2009 of $78.5 million were written-off and
recognized as a reorganization item on the consolidated statement of operations for the year ended
December 31, 2009.
The decrease in net interest expense of $346.0 million, or 41.4%, for the year ended December 31,
2009, is primarily due to (1) ceasing interest expense on our notes in default as a result of
filing the Chapter 11 petitions, (2) the non-cash charge of $21.0 million during the year ended
December 31, 2008 resulting from amounts previously charged to accumulated other comprehensive loss
noted above and (3) a reduction in outstanding debt from the prior corresponding period due to the
financing transactions conducted during the latter half of 2008. The decrease in net interest
expense for the year ended December 31, 2009 is offset by (1) the non-cash charges associated with
the change in fair value of the Dex Media East interest rate swaps and amounts previously charged
to accumulated other comprehensive loss related to the Dex Media East interest rate swaps noted
above, (2) a reduction in interest income associated with our interest rate swaps due to a decline
in interest rates, (3) additional interest expense associated with borrowing the unused portions of
our revolving credit facilities on February 13, 2009 and (4) a decline in the offset to interest
expense associated with the fair value adjustment of Dex Medias debt noted above.
Gain on Debt Transactions, Net
As a result of voluntary prepayments made under the RHDI credit facility during the fourth quarter
of 2008, we recognized a gain of $20.0 million during the year ended December 31, 2008, consisting
of the difference between the face amount of the Term Loans repaid and the voluntary prepayments
made, offset by the write-off of unamortized deferred financing costs.
As a result of the debt repurchases in October 2008, we recorded a gain of $13.6 million during the
year ended December 31, 2008, consisting of the difference between the par value and purchase price
of our senior notes, offset by the write-off of unamortized deferred financing costs.
As a result of the debt repurchases in September 2008, we recorded a gain of $72.4 million during
the year ended December 31, 2008, representing the difference between the accreted value or par
value, as applicable, and purchase price of our senior notes and senior discount notes, offset by
the write-off of unamortized deferred financing costs.
As a result of the exchange of our senior notes and senior discount notes (RHD Notes) for RHDIs
11.75% Senior Notes due May 15, 2015 (RHDI Senior Notes) on June 25, 2008, we recorded a gain of
$161.3 million during the year ended December 31, 2008, representing the difference between the
accreted value or par value, as applicable, of the extinguished RHD Notes and the RHDI Senior
Notes, offset by the write-off of unamortized deferred financing costs related to the extinguished
RHD Notes, which has been accounted for as an extinguishment of debt.
During the year ended December 31, 2008, we recognized a charge of $2.2 million for the write-off
of unamortized deferred financing costs associated with the refinancing of the former Dex Media
West credit facility and portions of the amended RHDI credit facility, which have been accounted
for as extinguishments of debt.
As a result of these debt transactions, we recorded a net non-cash gain of $265.2 million during
the year ended December 31, 2008. See Item 8, Financial Statements and Supplementary Data Note
2, Summary of Significant Accounting Policies Gain (Loss) on Debt Transactions, Net for
additional information.
62
Reorganization Items, Net
For the year ended December 31, 2009, the Company has recorded $94.8 million of reorganization
items on a separate line item on the consolidated statement of operations. Reorganization items
represent charges that are directly associated with the process of reorganizing the business under
Chapter 11. The following table displays the details of reorganization items for the year ended
December 31, 2009:
|
|
|
|
|
|
|
Year Ended |
|
(amounts in thousands) |
|
December 31, 2009 |
|
|
Professional fees |
|
$ |
77,375 |
|
Write-off of unamortized deferred financing costs |
|
|
64,475 |
|
Write-off of unamortized net premiums / discounts on
long-term debt |
|
|
34,886 |
|
Write-off of
debt related unamortized fair value adjustments |
|
|
(78,511 |
) |
Lease rejections, abandoned property and other |
|
|
(3,457 |
) |
|
|
|
|
Total reorganization items |
|
$ |
94,768 |
|
|
|
|
|
The Company incurred professional fees associated with filing the Chapter 11 petitions of $77.4
million during the year ended December 31, 2009, of which $67.6 million was paid in cash.
Professional fees include financial, legal and valuation services directly associated with the
reorganization process.
The write-off of unamortized deferred financing costs of $64.5 million, unamortized net premiums /
discounts of $34.9 million and unamortized fair value adjustments required by GAAP as a result of
the Dex Media Merger of $78.5 million at May 28, 2009, relate to long-term debt classified as
liabilities subject to compromise at December 31, 2009.
The Company recognized $3.5 million during the year ended December 31, 2009 associated with
rejected leases, abandoned property and other, which have been approved by the Bankruptcy Court
through December 31, 2009 as part of the Chapter 11 Cases.
In 2009, the Company did not receive any operating cash receipts resulting from the filing of the
Chapter 11 petitions.
Benefit for Income Taxes
The effective tax rate on loss before income taxes of 12.6% for the year ended December 31, 2009
compares to an effective tax rate of 35.7% on loss before income taxes for the year ended December
31, 2008. The significant change in the effective tax rate for the year ended December 31, 2009 as
compared to the year ended December 31, 2008 is primarily due to the valuation allowance recorded
at December 31, 2009 noted below as well as the tax consequences of the Section 382 limitation
recorded during the year ended December 31, 2009, partially offset by the impairment charges
recorded during the year ended December 31, 2008. The change in the effective tax rate for the year
ended December 31, 2009 is also attributable to estimates of non-deductible reorganization costs
and changes in estimates of state tax apportionment factors that impact our effective state tax
rates.
The 2009 income tax benefit of $928.5 million is comprised of a federal tax benefit of $783.5
million and a state tax benefit of $145.0 million. The 2009 federal tax benefit is comprised of a
current tax benefit of $2.9 million, primarily related to a decrease in the federal tax accrual due
to our amended return filings and a deferred tax benefit of $780.7 million, primarily related to
non-cash intangible asset impairment charges during 2009, offset in part by a valuation allowance
as discussed below. The 2009 state tax benefit of $145.0 million is comprised of a current tax
benefit of $11.8 million, which relates to the favorable settlement of prior year state tax audits
in 2009 and reversal of the associated state liabilities, and a deferred tax benefit of $133.2
million, primarily related to non-cash intangible asset impairment charges during 2009, offset in
part by a valuation allowance as discussed below.
63
At December 31, 2009, the Company had federal and state net operating loss carryforwards of
approximately $1,315.4 million (net of carryback) and $1,685.9 million, respectively, which will
begin to expire in 2020 and 2010, respectively. These amounts include consideration of net
operating losses expected to expire unused due to the Internal Revenue Code Section 382 (Section
382) limitation for changes in ownership, which the Company believes occurred on March 6, 2009.
Under Section 382, potential limitations are triggered when there has been an ownership change,
which is generally defined as a greater than 50% change in stock ownership (by value) over a
three-year period. Such change in ownership will restrict the Companys ability to use certain net
operating losses and other corporate tax attributes in the future, however, the ownership change
does not constitute a change in control under any of the Companys debt agreements or other
contracts.
We have provided full valuation allowances for state and federal net operating loss and tax credit
carryforwards to the extent it is more likely than not the deferred tax benefits will not be
realized. At December 31, 2009, in accordance with FASB ASC 740 and upon evaluation of the future
reversals of existing taxable differences, taxable income in net operating loss carryback years and
liabilities required under ASC 740, we recorded a valuation allowance of $1,531.9 million for
deferred tax assets.
In December 2009, we effectively settled all issues under consideration with the Department of
Finance for New York State for its audit of tax years 2000 through 2006 and the Department of
Revenue for North Carolina for its audit of tax years 2003 through 2008. As a result of these
settlements, the unrecognized tax benefit associated with our uncertain state tax positions
decreased by $7.6 million for New York State and by $9.7 million for North Carolina during the year
ended December 31, 2009. The decrease in the unrecognized tax benefits has decreased our effective
tax rate for the year ended December 31, 2009. The unrecognized tax benefits impacted by the New
York State and North Carolina audits primarily related to apportionment and allocation of income
among our legal entities.
During 2009, the Company increased its liability for unrecognized tax benefits by $276.4 million
reflecting the uncertainty as to whether the ownership change under Section 382, as discussed
above, occurred prior to the date on which it elected to modify the tax classification for two of
its subsidiaries. The date of the change in ownership is in question because as of the balance
sheet date the Company is not able to confirm the actual date of the ownership change until all SEC
Forms 13-G are filed. Stockholders have until forty five days following the end of the calendar
year to file these forms with the SEC. Based on this due date, the actual ownership change date
will not be confirmed until February 15, 2010. In addition, we increased the liability for
unrecognized tax benefits by $1.5 million relating to the uncertainty surrounding the deductibility
of certain other accrued expenses.
The 2008 income tax benefit of $1,277.7 million is comprised of a federal tax benefit of $1,128.7
million and a state tax benefit of $149.0 million. The 2008 federal tax benefit is comprised of a
current tax provision of $23.9 million, primarily related to an increase to our FIN No. 48
liability, offset by a deferred income tax benefit of $1,152.6 million, primarily related to the
goodwill impairment charges during 2008. The 2008 state tax benefit of $149.0 million is comprised
of a current tax provision of $10.3 million, which relates to taxes due in states where
subsidiaries of the Company file separate tax returns, as well as an increase in our FIN No. 48
liability, offset by a deferred income tax benefit of $159.3 million, primarily related to the
goodwill impairment charges during 2008. During 2008, the Company utilized federal net operating
losses for income tax purposes of $4.1 million primarily resulting from taxable gains associated
with certain financing activities conducted during 2008.
The 2008 income tax benefit includes an income tax benefit of $20.3 million from correcting
overstated income tax expense in fiscal years 2004 through 2007. We evaluated the materiality of
this correction and concluded it was not material to current or prior year financial statements.
Accordingly we recorded this correction during the fourth quarter of 2008.
In September 2008, we effectively settled all issues under consideration with the Department of
Finance for New York City related to its audit for taxable year 2000. As a result of the
settlement, the unrecognized tax benefits associated with our uncertain state tax positions
decreased by $0.9 million during the year ended December 31, 2008. The decrease in the
unrecognized tax benefits has decreased our effective tax rate for the year ended December 31,
2008. The unrecognized tax benefits impacted by the New York City audit primarily related to
allocation of income among our legal entities.
64
Net Loss and Loss Per Share
Net loss for the year ended December 31, 2009 of $(6.5) billion, compares to net loss of $(2.3)
billion for the year ended December 31, 2008. The change in net loss for the year ended December
31, 2009, as compared to the year ended December 31, 2008, is primarily due to the impairment
charges noted above as well as the revenue and expense trends described above, partially offset by
the impact of the reorganization items during the year ended December 31, 2009.
The calculation of basic and diluted earnings (loss) per share (EPS) is presented below.
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
December 31, |
|
(amounts in thousands except per share amounts) |
|
2009 |
|
|
2008 |
|
|
Basic EPS |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(6,453,293 |
) |
|
$ |
(2,298,327 |
) |
Weighted average common shares outstanding |
|
|
68,896 |
|
|
|
68,793 |
|
|
|
|
Basic loss per share |
|
$ |
(93.67 |
) |
|
$ |
(33.41 |
) |
|
|
|
Diluted EPS |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(6,453,293 |
) |
|
$ |
(2,298,327 |
) |
Weighted average common shares outstanding |
|
|
68,896 |
|
|
|
68,793 |
|
Dilutive effect of stock awards (1) |
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
68,896 |
|
|
|
68,793 |
|
|
|
|
Diluted loss per share |
|
$ |
(93.67 |
) |
|
$ |
(33.41 |
) |
|
|
|
(1) Due to the net loss reported for the years ended December 31, 2009 and 2008, the effect of
all stock-based awards was anti-dilutive and therefore is not included in the calculation of
diluted EPS. For the years ended December 31, 2009 and 2008, 4.6 million shares and 4.1 million shares, respectively, of stock-based awards had exercise prices that exceeded the average market
price of the Companys common stock for the respective periods.
65
LIQUIDITY AND CAPITAL RESOURCES
The following table presents the fair market value of our long-term debt at December 31, 2010 based
on quoted market prices on that date, as well as the carrying value of our long-term debt at
December 31, 2010, which includes $91.0 million of unamortized fair value discount adjustments
required by GAAP in connection with the Companys adoption of fresh start accounting on the Fresh
Start Reporting Date. See Item 8, Financial Statements and Supplementary Data Note 3, Fresh
Start Accounting for additional information.
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
Fair Market Value |
|
|
Carrying Value |
|
|
|
December 31, 2010 |
|
|
December 31, 2010 |
|
RHDI Amended and Restated Credit Facility |
|
$ |
800,175 |
|
|
$ |
1,014,485 |
|
Dex Media East Amended and Restated Credit Facility |
|
|
597,185 |
|
|
|
739,090 |
|
Dex Media West Amended and Restated Credit Facility |
|
|
618,214 |
|
|
|
683,646 |
|
Dex One 12%/14% Senior Subordinated Notes due 2017 |
|
|
204,750 |
|
|
|
300,000 |
|
|
|
|
Total Dex One consolidated |
|
|
2,220,324 |
|
|
|
2,737,221 |
|
Less current portion |
|
|
208,340 |
|
|
|
249,301 |
|
|
|
|
Long-term debt |
|
$ |
2,011,984 |
|
|
$ |
2,487,920 |
|
|
|
|
Credit Facilities
RHDI Amended and Restated Credit Facility
As of December 31, 2010, the outstanding balance under the amended and restated RHDI credit
facility (RHDI Amended and Restated Credit Facility) totaled $1,014.5 million. The RHDI Amended
and Restated Credit Facility requires quarterly principal and interest payments at our option at
either:
|
|
|
The highest (subject to a floor of 4.00%) of (i) the Prime Rate (as
defined in the RHDI Amended and Restated Credit Facility), (ii) the Federal Funds
Effective Rate (as defined in the RHDI Amended and Restated Credit Facility) plus
0.50%, and (iii) one month LIBOR plus 1.00% in each case, plus an interest rate
margin for base rate loans. The interest rate margin for base rate loans is
initially 5.25% per annum, and such interest rate margin adjusts pursuant to a
pricing grid that provides for a margin equal to 5.25% per annum if RHDIs
consolidated leverage ratio is greater than or equal to 4.25 to 1.00, and equal to
5.00% per annum if RHDIs consolidated leverage ratio is less than 4.25 to 1.00; or |
|
|
|
|
The higher of (i) LIBOR rate and (ii) 3.00%, in each case, plus an
interest rate margin for Eurodollar loans. The interest rate margin for Eurodollar
loans is initially 6.25% per annum, and such interest rate margin adjusts pursuant
to a pricing grid that provides for a margin equal to 6.25% per annum if RHDIs
consolidated leverage ratio is greater than or equal to 4.25 to 1.00, and equal to
6.00% per annum if RHDIs consolidated leverage ratio is less than 4.25 to 1.00.
RHDI may elect interest periods of 1, 2, 3 or 6 months for LIBOR borrowings. |
The RHDI Amended and Restated Credit Facility matures on October 24, 2014. The weighted average
interest rate of outstanding debt under the RHDI Amended and Restated Credit Facility was 9.0% at
December 31, 2010.
Dex Media East Amended and Restated Credit Facility
As of December 31, 2010, the outstanding balance under the amended and restated Dex Media East
credit facility (Dex Media East Amended and Restated Credit Facility) totaled $739.1 million. The
Dex Media East Amended and Restated Credit Facility requires quarterly principal and interest
payments at our option at either:
|
|
|
The highest of (i) the Prime Rate (as defined in the Dex Media East
Amended and Restated Credit Facility), (ii) the Federal Funds Effective Rate (as
defined in the Dex Media East Amended and Restated Credit Facility) plus 0.50%, and
(iii) one month LIBOR plus 1.00% in each case, plus an interest rate margin for
base rate loans. The interest rate margin for base rate loans is initially 1.50%
per annum, and such interest rate margin adjusts pursuant to a pricing grid that
provides for a margin equal to 1.50% per annum if DME Inc.s consolidated |
66
|
|
|
leverage ratio is greater than or equal to 2.75 to 1.00, equal to 1.25% per annum if DME
Inc.s consolidated leverage ratio is greater than or equal to 2.50 to 1.00 but
less than 2.75 to 1.00 and equal to 1.00% per annum if DME Inc.s consolidated
leverage ratio is less than 2.50 to 1.00; or |
|
|
|
|
The LIBOR rate plus an interest rate margin for Eurodollar loans. The
interest rate margin for Eurodollar loans is initially 2.50% per annum, and such
interest rate margin adjusts pursuant to a pricing grid that provides for a margin equal to 2.50% per annum if DME Inc.s
consolidated leverage ratio is greater than or equal to 2.75 to 1.00, equal to 2.25%
per annum if DME Inc.s consolidated leverage ratio is greater than or equal to 2.50
to 1.00 but less than 2.75 to 1.00 and equal to 2.00% per annum if DME Inc.s
consolidated leverage ratio is less than 2.50 to 1.00. DME Inc. may elect interest
periods of 1, 2, 3 or 6 months for LIBOR borrowings. |
The Dex Media East Amended and Restated Credit Facility matures on October 24, 2014. The weighted
average interest rate of outstanding debt under the Dex Media East Amended and Restated Credit
Facility was 2.8% at December 31, 2010.
Dex Media West Amended and Restated Credit Facility
As of December 31, 2010, the outstanding balance under the amended and restated Dex Media West
credit facility (Dex Media West Amended and Restated Credit Facility) totaled $683.6 million. The
Dex Media West Amended and Restated Credit Facility requires quarterly principal and interest
payments at our option at either:
|
|
|
The highest (subject to a floor of 4.00%) of (i) the Prime Rate (as
defined in the Dex Media West Amended and Restated Credit Facility), (ii) the
Federal Funds Effective Rate (as defined in the Dex Media West Amended and Restated
Credit Facility) plus 0.50%, and (iii) one month LIBOR plus 1.00% in each case,
plus an interest rate margin for base rate loans. The interest rate margin for
base rate loans is initially 3.50% per annum, and such interest rate margin adjusts
pursuant to a pricing grid that provides for a margin equal to 3.50% per annum if
DMW Inc.s consolidated leverage ratio is greater than or equal to 2.75 to 1.00,
equal to 3.25% per annum if DMW Inc.s consolidated leverage ratio is greater than
or equal to 2.50 to 1.00 but less than 2.75 to 1.00 and equal to 3.00% per annum if
DMW Inc.s consolidated leverage ratio is less than 2.50 to 1.00; or |
|
|
|
|
The higher of (i) LIBOR rate and (ii) 3.00%, in each case, plus an
interest rate margin for Eurodollar loans. The interest rate margin for Eurodollar
loans is initially 4.50% per annum, and such interest rate margin adjusts pursuant
to a pricing grid that provides for a margin equal to 4.50% per annum if DMW Inc.s
consolidated leverage ratio is greater than or equal to 2.75 to 1.00, equal to
4.25% per annum if DMW Inc.s consolidated leverage ratio is greater than or equal
to 2.50 to 1.00 but less than 2.75 to 1.00 and equal to 4.00% per annum if DMW
Inc.s consolidated leverage ratio is less than 2.50 to 1.00. DMW Inc. may elect
interest periods of 1, 2, 3 or 6 months for LIBOR borrowings. |
The Dex Media West Amended and Restated Credit Facility matures on October 24, 2014. The weighted
average interest rate of outstanding debt under the Dex Media West Amended and Restated Credit
Facility was 7.0% at December 31, 2010.
Each of the amended and restated credit facilities described above includes an uncommitted
revolving credit facility available for borrowings up to $40.0 million. The availability of such
uncommitted revolving credit facility is subject to certain conditions including the prepayment of
the term loans under each of the amended and restated credit facilities in an amount equal to such
revolving credit facility.
The amended and restated credit facilities contain provisions for prepayment from net proceeds of
asset dispositions, equity issuances and debt issuances subject to certain exceptions, from a
ratable portion of the net proceeds received by the Company from asset dispositions by the Company,
subject to certain exceptions, and from a portion of excess cash flow.
67
Each of the amended and restated credit facilities described above contain certain covenants that,
subject to exceptions, limit or restrict each borrower and its subsidiaries incurrence of liens,
investments (including acquisitions), sales of assets, indebtedness, payment of dividends,
distributions and payments of certain indebtedness, sale and leaseback transactions, swap
transactions, affiliate transactions, capital expenditures and mergers, liquidations and
consolidations. Each amended and restated credit facility also contains certain covenants that,
subject to exceptions, limit or restrict each borrowers incurrence of liens, indebtedness,
ownership of assets, sales of assets, payment of dividends or distributions or modifications of the
$300.0 million aggregate principal amount of 12%/14% Senior Subordinated Notes due 2017 (Dex One
Senior Subordinated Notes). Each borrower is required to maintain compliance with a consolidated
leverage ratio covenant. RHDI and DMW Inc. are also required to maintain compliance with a
consolidated interest coverage ratio covenant. DMW Inc. is also required to maintain compliance
with a consolidated senior secured leverage ratio covenant. The Dex Media West Amended and
Restated Credit Agreement includes an option for additional covenant relief under the senior
secured leverage covenant through the fourth quarter of 2011, subject to increased amortization of
the loans through the first quarter of 2012, an increase in the excess cash flow sweep for 2011 and
payment of a 25 basis point fee ratably to the lenders under the Dex Media West Amended and
Restated Credit Agreement. On March 31, 2010, the Company exercised the Senior Secured Leverage
Ratio Election, as defined in the Dex Media West Amended and Restated Credit Agreement. The Company
incurred a fee of $2.1 million to exercise this option.
The obligations under each of the amended and restated credit facilities are guaranteed by our
subsidiaries and are secured by a lien on substantially all of our and our subsidiaries tangible
and intangible assets, including a pledge of the stock of their respective subsidiaries, as well as
a mortgage on certain real property, if any.
Pursuant to a shared guaranty and collateral agreement and subject to an intercreditor agreement
among the administrative agents under each of the amended and restated credit facilities, the
Company and, subject to certain exceptions, certain subsidiaries of the Company, guaranty the
obligations under each of the amended and restated credit facilities and the obligations are
secured by a lien on substantially all of such guarantors tangible and intangible assets (other
than the assets of the Companys subsidiary, Business.com), including a pledge of the stock of
their respective subsidiaries, as well as a mortgage on certain real property, if any.
Notes
Dex One Senior Subordinated Notes
On the Effective Date, we issued the $300.0 million Dex One Senior Subordinated Notes in exchange
for the Dex Media West 8.5% Senior Notes due 2010 and 5.875% Senior Notes due 2011. Interest on the
Dex One Senior Subordinated Notes is payable semi-annually on March 31st and September
30th of each year, commencing on March 31, 2010 through January 2017. The Dex One Senior
Subordinated Notes accrue interest at an annual rate of 12% for cash interest payments and 14% if
the Company elects paid-in-kind (PIK) interest payments. The Company may elect, prior to the
start of each interest payment period, whether to make each interest payment on the Dex One Senior
Subordinated Notes (i) entirely in cash or (ii) 50% in cash and 50% in PIK interest, which is
capitalized as incremental or additional senior secured notes. During the eleven months ended
December 31, 2010, the Company elected to make interest payments entirely in cash. The interest
rate on the Dex One Senior Subordinated Notes may be subject to adjustment in the event the Company
incurs certain specified debt with a higher effective yield to maturity than the yield to maturity
of the Dex One Senior Subordinated Notes. The Dex One Senior Subordinated Notes are unsecured
obligations of the Company, effectively subordinated in right of payment to all of the Companys
existing and future secured debt, including Dex Ones guarantee of borrowings under each of the
amended and restated credit facilities and are structurally subordinated to any existing or future
liabilities (including trade payables) of our direct and indirect subsidiaries.
The indenture governing the Dex One Senior Subordinated Notes contains certain covenants that,
subject to certain exceptions, among other things, limit or restrict the Companys (and, in certain
cases, the Companys restricted subsidiaries) incurrence of indebtedness, making of certain
restricted payments, incurrence of liens, entry into transactions with affiliates, conduct of its
business and the merger, consolidation or sale of all or substantially all of its property. The
indenture governing the Dex One Senior Subordinated Notes also requires the Company to offer to
repurchase the Dex One Senior Subordinated Notes at par after certain changes of control involving
the Company or the sale of substantially all of the assets of the Company. Holders of the Dex One
Senior Subordinated Notes also may cause the Company to repurchase the Dex One Senior Subordinated
Notes at a price of 101% of the principal amount upon the incurrence by the Company of certain
acquisition indebtedness.
68
The Dex One Senior Subordinated Notes with a remaining face value of $300.0 million at December 31,
2010 are redeemable at our option beginning in 2011 at the following prices (as a percentage of
face value):
|
|
|
|
|
Redemption Year |
|
Price |
|
2011 |
|
|
106.000 |
% |
2012 |
|
|
102.000 |
% |
2013 |
|
|
101.000 |
% |
2014 and thereafter |
|
|
100.000 |
% |
Item 8, Financial Statements and Supplementary Data Note 6, Long-Term Debt, Credit Facilities
and Notes for additional information on our long-term debt.
Impact of Fresh Start Accounting
In conjunction with our adoption of fresh start accounting, an adjustment was established to record
our outstanding debt at fair value on the Fresh Start Reporting Date. The Company was required to
record our amended and restated credit facilities at a discount as a result of their fair value on
the Fresh Start Reporting Date. Therefore, the carrying amount of these debt obligations is lower
than the principal amount due at maturity. A total discount of $120.2 million was recorded upon
adoption of fresh start accounting associated with our amended and restated credit facilities, of
which $91.0 million remains unamortized at December 31, 2010, as shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Debt at |
|
|
|
|
|
|
|
Unamortized Fair |
|
|
December 31, 2010 |
|
|
|
Carrying Value at |
|
|
Value Adjustments |
|
|
Excluding the Impact of |
|
|
|
December 31, |
|
|
at December 31, |
|
|
Unamortized Fair Value |
|
|
|
2010 |
|
|
2010 |
|
|
Adjustments |
|
|
RHDI Amended and Restated Credit Facility |
|
$ |
1,014,485 |
|
|
$ |
14,463 |
|
|
$ |
1,028,948 |
|
Dex Media East Amended and Restated
Credit Facility |
|
|
739,090 |
|
|
|
64,735 |
|
|
|
803,825 |
|
Dex Media West Amended and Restated
Credit Facility |
|
|
683,646 |
|
|
|
11,769 |
|
|
|
695,415 |
|
Dex One 12%/14% Senior Subordinated
Notes due 2017 |
|
|
300,000 |
|
|
|
|
|
|
|
300,000 |
|
|
|
|
Total |
|
$ |
2,737,221 |
|
|
$ |
90,967 |
|
|
$ |
2,828,188 |
|
|
|
|
See Item 8, Financial Statements and Supplementary Data Note 3, Fresh Start Accounting for a
presentation of the impact of emergence from reorganization and fresh start accounting on our
financial position, results of operations and cash flows.
Issuance of New Common Stock
Upon emergence from Chapter 11 and pursuant to the Plan, all of the issued and outstanding shares
of the Predecessor Companys common stock and any other outstanding equity securities of the
Predecessor Company including all stock options, SARs and restricted stock, were cancelled. On the
Effective Date, the Company issued an aggregate amount of 50,000,001 shares of new common stock,
par value $.001 per share. See Item 8, Financial Statements and Supplementary Data Note 15,
Capital Stock for additional information regarding our new common stock.
69
Registration Rights Agreement
On the Effective Date and pursuant to the Plan, the Company entered into a Registration Rights
Agreement (the Agreement), requiring the Company to register with the Securities and Exchanges
Commission (SEC) certain shares of its common stock and/or the Dex One Senior Subordinated Notes
upon the request of one or more Eligible Holders (as defined in the Agreement), in accordance with
the terms and conditions set forth therein. On April 8, 2010 and pursuant to the Agreement, the
Company filed a shelf registration statement to register for resale by Franklin Advisers, Inc. and
certain of its affiliates 15,262,488 shares of our common stock and $116.6 million aggregate
principal amount of the Dex One Senior Subordinated Notes. These securities were registered
pursuant to the Agreement to permit the sale of the securities from time to time at fixed prices,
prevailing market prices at the times of sale, prices related to the prevailing market prices,
varying prices determined at the times of sale or negotiated prices. The shelf registration
statement became effective on April 16, 2010.
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.
In conjunction with our going concern analysis as of December 31, 2010, based on current financial
projections, but in any event for the next 12-15 months, the Company expects to be able to continue
to generate cash flows from operations in amounts sufficient to fund operations and capital
expenditures, as well as meet debt service requirements. 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 going concern
analysis as of December 31, 2010 could change in the future as a result of changes in estimates and
assumptions as well as risks noted in Item 1A, Risk Factors.
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 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 Item 1A, Risk Factors for additional information regarding risks and uncertainties associated
with our business, which could have a significant impact on our future liquidity and cash flows.
See Item 7, 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.
70
Successor Company
Aggregate outstanding debt at December 31, 2010 was $2,737.2 million, which includes fair value
adjustments of $91.0 million required by GAAP in connection with the Companys adoption of fresh
start accounting. During the eleven months ended December 31, 2010, we made scheduled and
accelerated principal payments of $167.6 million and $389.0 million, respectively, for total
principal payments of $556.6 million under our amended and restated credit facilities. For the
eleven months ended December 31, 2010, we made aggregate net cash interest payments of $182.2
million. At December 31, 2010, we had $127.9 million of cash and cash equivalents before checks not
yet presented for payment of $17.2 million.
Cash provided by operating activities was $512.4 million for the eleven months ended
December 31, 2010. Key components to operating cash flow include the following:
|
|
|
$(923.6) million in net loss, which includes the goodwill and non-goodwill intangible
asset impairment charges, offset by the impact of the tax benefit recognized during the
eleven months ended December 31, 2010. |
|
|
|
|
$541.7 million of net non-cash items consisting of the goodwill and non-goodwill
intangible asset impairment charges of $1,159.3 million, offset by $(617.6) million in
deferred income taxes, which includes the tax impact of the goodwill and non-goodwill
intangible asset impairment charges. |
|
|
|
|
$158.4 million non-cash reduction of goodwill related to the finalization of
cancellation of indebtedness income and tax attribute reduction calculations associated
with fresh start accounting. |
|
|
|
|
$288.7 million of other net non-cash items primarily consisting of $217.7 million of
depreciation and amortization, $24.1 million in other non-cash items, primarily
associated with the amortization of the debt fair value adjustments resulting from our
adoption of fresh start accounting, $17.8 million of restructuring expenses, $16.4
million in bad debt provision, an increase in interest expense of $8.2 million
associated with the change in fair value of our interest rate swaps and caps and $4.5
million of stock-based compensation expense. |
|
|
|
|
$763.8 million net source of cash from an increase in deferred directory revenues of
$701.6 million, primarily due to the elimination of most of the Predecessor Companys
deferred directory revenues in fresh start accounting and recording deferred directory
revenues of the Company for directories that published subsequent to the Fresh Start
Reporting Date, and a decrease in accounts receivable of $62.2 million. The change in
deferred revenues and accounts receivable are analyzed together given the fact that when
a directory is published, the annual billable value of that directory is initially
deferred and unbilled accounts receivable are established. Each month thereafter,
typically one twelfth of the billing value is recognized as revenues and billed to
clients. |
|
|
|
|
$142.3 million net use of cash from an increase in other assets, consisting of a
$156.5 million increase in other current and non-current assets, primarily due to the
elimination of all of the Predecessor Companys deferred commissions, print, paper and
delivery costs in fresh start accounting and recording deferred commissions, print,
paper and delivery costs of the Company for directories that published subsequent to the
Fresh Start Reporting Date, as well as changes in the fair value of the Companys
interest rate caps, offset by a $14.2 million decrease in prepaid directory costs
resulting from publication seasonality. |
|
|
|
|
$5.0 million net use of cash from a decrease in accounts payable and accrued
liabilities, resulting from a $33.1 million decrease in other accrued liabilities
primarily associated with the change in fair value of our interest rate swaps and a $2.8
million decrease in trade accounts payable, offset by an increase in accrued interest
payable of $30.9 million. |
|
|
|
|
$169.3 million decrease in other non-current liabilities primarily resulting from deferred income taxes and the change in fair value of our interest rate
swaps. |
71
Cash used in investing activities for the eleven months ended December 31, 2010 was $35.6
million and relates to the purchase of fixed assets, primarily computer equipment, software
and leasehold improvements of $36.5 million, offset by proceeds from the sale of assets of $0.9
million.
Cash used in financing activities for the eleven months ended December 31, 2010 was $548.4
million and includes the following:
|
|
|
$556.6 million in principal payments on our amended and restated credit
facilities. |
|
|
|
|
$1.2 million in debt issuance costs and other financing items, net. |
|
|
|
|
$9.5 million in the increased balance of checks not yet presented for
payment. |
Predecessor Company
During the one month ended January 31, 2010, the Predecessor Company made principal payments of
$511.3 million under its credit facilities in accordance with the Plan and in conjunction with our
emergence from Chapter 11 and made aggregate net cash interest payments of $15.5 million.
Cash provided by operating activities was $71.7 million for the one month ended January
31, 2010. Key components to operating cash flow include the following:
|
|
|
$6,920.0 million in net income, which includes the gain on reorganization and fresh
start accounting adjustments of $7,793.1 million. |
|
|
|
|
$(7,830.1) million of non-cash reorganization items, net. |
|
|
|
|
$945.0 million of net non-cash items primarily consisting of $916.9 million in
deferred income taxes, $20.2 million of depreciation and amortization, $7.8 million in
bad debt provision, an increase in interest expense of $2.3 million associated with the
change in fair value of the Predecessor Companys interest rate swaps, $0.6 million of
stock-based compensation expense and $(2.8) million in other non-cash items, primarily
related to the Predecessor Companys pension adjustments. |
|
|
|
|
$17.0 million net use of cash from a decrease in deferred directory revenues of $36.8
million, primarily due to lower advertising sales, offset by a net decrease in accounts
receivable of $19.8 million, which is comprised of a decrease in accounts receivable of
$27.6 million, offset by the provision for bad debts of $7.8 million. The change in
deferred revenues and accounts receivable are analyzed together given the fact that when
a directory is published, the annual billable value of that directory is initially
deferred and unbilled accounts receivable are established. Each month thereafter,
typically one twelfth of the billing value is recognized as revenues and billed to
clients. |
|
|
|
|
$10.7 million net source of cash from a decrease in other assets, consisting of a
$7.0 million decrease in prepaid directory costs resulting from publication seasonality
and a $3.7 million decrease in other current and non-current assets, primarily relating
to deferred commissions, print, paper and delivery costs. |
|
|
|
|
$9.6 million net source of cash from an increase in accounts payable and accrued
liabilities, primarily resulting from an increase of $22.0 million in trade accounts
payable and an increase in accrued interest payable of $0.3 million, partially offset by
a $12.7 million decrease in other accrued liabilities. These changes comprise items that
were reclassified from liabilities subject to compromise on the consolidated balance
sheet at January 31, 2010. The source of cash from an increase in accounts payable and
accrued liabilities is a direct result of filing the Chapter 11 petitions, whereby
payment of pre-petition obligations was delayed. |
|
|
|
|
$33.4 million increase in other non-current liabilities primarily
resulting from deferred taxes, the change in fair value of the Predecessor Companys
interest rate swaps as well as the change in pension and postretirement long-term
liabilities. |
72
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.
Cash used in financing activities for the one month ended January 31, 2010 was $536.5
million and includes the following:
|
|
|
$511.3 million in principal payments on term loans under the Predecessor Companys
credit facilities in accordance with the Plan and in conjunction with our emergence from
Chapter 11. |
|
|
|
|
$22.1 million in costs associated with the issuance of the Dex One Senior
Subordinated Notes and other financing related costs. |
|
|
|
|
$3.1 million in the decreased balance of checks not yet presented for payment. |
Cash provided by operating activities was $515.8 million for the year ended December 31,
2009. Key components to operating cash flow include the following:
|
|
|
$(6,453.3) million in net loss, which includes the impact of the intangible asset
impairment charges. |
|
|
|
|
$6,423.9 million of net non-cash items consisting of the intangible asset impairment
charges of $7,337.8 million, offset by $(913.9) million in deferred income taxes, which
includes the tax impact of the intangible asset impairment charges. |
|
|
|
|
$791.2 million of other net non-cash items primarily consisting of $578.8 million of
depreciation and amortization, $146.5 million in bad debt provision, $25.1 million in
other non-cash items, primarily related to the amortization of deferred financing costs,
$17.6 million associated with net reorganization items, $11.4 million of stock-based
compensation expense, an increase in interest expense of $10.5 million associated with
the change in fair value of our interest rate swaps and $1.3 million of restructuring
expenses. |
|
|
|
|
$171.6 million net use of cash from a decrease in deferred directory revenues of
$226.3 million, primarily due to lower advertising sales, offset by a net decrease in
accounts receivable of $54.7 million, which is comprised of a decrease in accounts
receivable of $201.2 million, offset by the provision for bad debts of $146.5 million.
During 2009, the Company has experienced deterioration in its accounts receivable aging
categories, which has been driven by weaker economic conditions. The change in deferred
revenues and accounts receivable are analyzed together given the fact that when a
directory is published, the annual billable value of that directory is initially
deferred and unbilled accounts receivable are established. Each month thereafter,
typically one twelfth of the billing value is recognized as revenues and billed to
clients. |
|
|
|
|
$39.2 million net source of cash from a decrease in other assets, consisting of a
$41.2 million decrease in other current and non-current assets, primarily relating to
deferred commissions, print, paper and delivery costs and changes in the fair value of
the Companys interest rate swap agreements, offset by a $2.0 million increase in
prepaid directory costs resulting from publication seasonality. |
|
|
|
|
$8.9 million net source of cash from an increase in accounts payable and accrued
liabilities, primarily resulting from an increase in accrued interest payable of $65.1
million and a $13.7 million increase in other accrued liabilities, offset by a $69.9
million decrease in trade accounts payable. These changes comprise items included in
liabilities subject to compromise on the consolidated balance sheet at December 31,
2009. The source of cash from an increase in accounts payable and accrued liabilities is
a direct result of filing the Chapter 11 petitions, whereby payment of pre-petition
obligations has been delayed. |
|
|
|
|
$122.5 million decrease in other non-current liabilities primarily resulting from deferred taxes, the change in pension and postretirement
long-term liabilities and the change in fair value of our interest rate swaps. |
73
Cash used in investing activities for the year ended December 31, 2009 was $33.4 million
and relates to the purchase of fixed assets, primarily computer equipment, software and leasehold
improvements.
Cash provided by financing activities for the year ended December 31, 2009 was $52.3
million and includes the following:
|
|
|
$290.1 million in principal payments on term loans under our secured credit
facilities. |
|
|
|
|
$361.0 million in borrowings under our revolvers. The Company made the
borrowings under the various revolving credit facilities to preserve its financial
flexibility in light of the continuing uncertainty in the global credit markets. |
|
|
|
|
$18.7 million in principal payments on our revolvers. |
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Contractual Obligations
The contractual obligations table presented below sets forth our annual commitments for principal
and interest payments on our debt as well as other cash obligations for the next five years and
thereafter as of December 31, 2010. The debt repayments as presented in this table include the
scheduled principal payments under the current debt agreements as well as an estimate of additional
debt repayments resulting from cash flow sweep requirements under our amended and restated credit
facilities. Our amended and restated credit facilities require that a certain percentage of annual
excess cash flow, as defined in the debt agreements, be used to repay amounts under the amended and
restated credit facilities. The debt repayments exclude fair value adjustments required by GAAP as
a result of our adoption of fresh start accounting of $91.0 million, as these adjustments do not
impact our payment obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
More than 5 |
|
(amounts in millions) |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
|
Principal Payments on Long-Term
Debt (1) |
|
$ |
2,828.2 |
|
|
$ |
283.0 |
|
|
$ |
464.1 |
|
|
$ |
1,781.1 |
|
|
$ |
300.0 |
|
Interest on Long-Term
Debt (2) |
|
|
805.2 |
|
|
|
200.3 |
|
|
|
372.4 |
|
|
|
184.7 |
|
|
|
47.8 |
|
Operating Leases (3) |
|
|
56.2 |
|
|
|
20.0 |
|
|
|
24.1 |
|
|
|
12.0 |
|
|
|
0.1 |
|
Unconditional Purchase
Obligations (4) |
|
|
72.1 |
|
|
|
34.6 |
|
|
|
36.1 |
|
|
|
1.4 |
|
|
|
|
|
Other Long-Term
Liabilities (5) |
|
|
191.6 |
|
|
|
27.1 |
|
|
|
36.6 |
|
|
|
36.1 |
|
|
|
91.8 |
|
|
|
|
Total Contractual
Obligations |
|
$ |
3,953.3 |
|
|
$ |
565.0 |
|
|
$ |
933.3 |
|
|
$ |
2,015.3 |
|
|
$ |
439.7 |
|
|
|
|
|
|
|
(1) |
|
Included in long-term debt are principal amounts owed under the amended and
restated credit facilities and the Dex One Senior Subordinated Notes, including the current portion
of long-term debt and an estimate of additional debt repayments resulting from cash flow sweep
requirements under our amended and restated credit facilities, as of December 31, 2010. |
|
(2) |
|
Interest on debt represents cash interest payment obligations assuming all
indebtedness as of December 31, 2010 will be paid in accordance with its contractual maturity and
assumes interest rates on variable interest debt as of December 31, 2010 will remain unchanged in
future periods. Please refer to Liquidity and Capital Resources for interest rates on the amended
and restated credit facilities and the Dex One Senior Subordinated Notes. |
|
(3) |
|
We enter into operating leases in the normal course of business. Substantially all
lease agreements have fixed payment terms. Some lease agreements provide us with renewal or early
termination options. Our future operating lease obligations would change if we exercised these
renewal or early termination options and if we entered into additional operating lease agreements.
The amounts in the table assume we do not exercise any such renewal or early termination options. |
74
|
|
|
(4) |
|
In connection with our software system modernization and on-going support services,
we are obligated to pay an IT outsource service provider approximately $45.0 million over the years
2011 through 2012. Effective January 1, 2010, an Internet Yellow Pages reseller agreement was amended and restated whereby we are
obligated to pay to AT&T $21.8 million over the years 2011 through 2012. We have entered into a
Directory Advertisement agreement with a CMR to cover advertising placed with the Company by the
CMR on behalf of Qwest. Under this agreement, we are obligated to pay the CMR approximately $5.2
million for commissions over the years 2011 through 2014. |
|
(5) |
|
We have defined benefit plans covering substantially all employees. Our funding
policy is to contribute an amount at least equal to the minimum legal funding requirement. Based
on past performance and the uncertainty of the dollar amounts to be paid, if any, we have excluded
such amounts from the above table. See Item 8, Financial Statements and Supplementary Data
Note 10, Benefit Plans for information related to our benefit plans. Those expected future
benefit payments, including administrative expenses, net of employee contributions, are included in
the table above. We expect to make contributions of approximately $16.0 million and $1.1 million
to our pension plans and postretirement plan, respectively, in 2011. |
75
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk and Risk Management
The Companys amended and restated credit facilities each bear interest at variable rates and,
accordingly, our earnings and cash flow are affected by changes in interest rates. Management
believes that it is prudent to mitigate the interest rate risk on a portion of its variable rate
borrowings. To satisfy our objectives and requirements, the Company has entered into interest rate
swap and interest rate cap agreements, which have not been designated as cash flow hedges, to
manage our exposure to interest rate fluctuations on our variable rate debt.
The Company has entered into the following interest rate swaps that effectively convert
approximately $500.0 million, or 21%, of the Companys variable rate debt to fixed rate debt as of
December 31, 2010. 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 December 31, 2010, both credit facilities are effectively fixed rate debt until
such time LIBOR exceeds the stated floor. At December 31, 2010, 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 29%
of our total debt portfolio as of December 31, 2010. The interest rate swaps mature at varying
dates from February 2012 through February 2013.
Interest Rate Swaps Dex Media East
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Dates |
|
Notional Amount |
|
|
Pay Rates |
|
|
Maturity Dates |
|
(amounts in millions) |
|
|
|
|
|
|
|
|
|
February 26, 2010 |
|
$ |
300 |
(2) |
|
|
1.20% - 1.796 |
% |
|
February 29, 2012 February 28, 2013 |
March 5, 2010 |
|
|
100 |
(1) |
|
|
1.688 |
% |
|
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 eleven months ended December 31, 2010. These periodic
payments and receipts are recorded as interest expense.
The notional amount of our interest rate swaps is used to measure interest to be paid or received
and does not represent the amount of exposure to credit loss. Assuming a 0.125% increase in the
interest rate associated with the floating rate borrowings under our amended and restated credit
facilities (after giving effect to the interest rate swaps), interest expense would increase $2.4
million on an annual basis.
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 |
76
We use derivative financial instruments for cash flow 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.
See Item 8, Financial Statements and Supplementary Data Note 2, Summary of Significant
Accounting Policies - Derivative Financial Instruments and Hedging Activities and Note 7,
Derivative Financial Instruments, for additional information regarding our derivative financial
instruments and hedging activities.
Market Risk Sensitive Instruments
All derivative financial instruments are recognized as either assets or liabilities on the
consolidated balance sheets with measurement at fair value. On a quarterly basis, the fair values
of 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 consolidated statements of cash flows.
See Item 8, Financial Statements and Supplementary Data Note 2, Summary of Significant
Accounting Policies Interest Expense and Deferred Financing Costs for information on the impact
our interest rate swaps and interest rate caps had on interest expense.
For derivative instruments that are designated as cash flow hedges and that are determined to
provide an effective hedge, the differences between the fair value and the book value of the
derivative instruments are recognized in accumulated other comprehensive income (loss), a component
of shareholders equity (deficit).
77
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
DEX ONE CORPORATION
|
|
|
|
|
|
|
Page |
|
|
|
|
F-2 |
|
|
|
|
F-4 |
|
|
|
|
F-5 |
|
|
|
|
F-6 |
|
|
|
|
F-7 |
|
|
|
|
F-8 |
|
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Dex One Corporation:
We have audited the accompanying consolidated balance sheets of Dex One Corporation and
subsidiaries as of December 31, 2010 (Successor) and R.H. Donnelley Corporation and subsidiaries as
of December 31, 2009 (Predecessor), and the related consolidated statements of operations and
comprehensive income (loss), cash flows and changes in shareholders equity (deficit) for the
eleven-month period ended December 31, 2010 (Successor), one-month period ended January 31, 2010
(Predecessor) and the years ended December 31, 2009 and 2008 (Predecessor). These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Dex One Corporation and subsidiaries as of December
31, 2010 (Successor) and R.H. Donnelley Corporation and subsidiaries as of December 31, 2009
(Predecessor), and the results of their operations and their cash flows for the eleven-month period
ended December 31, 2010 (Successor), one-month period ended January 31, 2010 (Predecessor) and
years ended December 31, 2009 and 2008 (Predecessor), in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Dex One Corporations internal control over financial reporting as of
December 31, 2010 (Successor), based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 4, 2011 expressed an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
/s/ KPMG LLP
Raleigh, North Carolina
March 4, 2011
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Dex One Corporation:
We have audited Dex One Corporations internal control over financial reporting as of December 31,
2010 (Successor), based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Dex One
Corporations management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Dex One Corporation maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2010, based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Dex One Corporation and subsidiaries as
of December 31, 2010 (Successor) and R.H. Donnelley Corporation and subsidiaries as of December
31, 2009 (Predecessor), and the related consolidated statements of operations and comprehensive
income (loss), cash flows and changes in shareholders equity (deficit) for the eleven-month period
ended December 31, 2010 (Successor), one-month period ended January 31, 2010 (Predecessor) and the
years ended December 31, 2009 and 2008 (Predecessor), and our report dated March 4, 2011 expressed
an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Raleigh, North Carolina
March 4, 2011
F-3
DEX ONE CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
|
Company |
|
|
Company |
|
(in thousands, except share data) |
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
127,852 |
|
|
$ |
665,940 |
|
Accounts receivable: |
|
|
|
|
|
|
|
|
Billed |
|
|
186,477 |
|
|
|
244,048 |
|
Unbilled |
|
|
567,839 |
|
|
|
636,350 |
|
Allowance for doubtful accounts |
|
|
(75,891 |
) |
|
|
(54,612 |
) |
|
|
|
Net accounts receivable |
|
|
678,425 |
|
|
|
825,786 |
|
Deferred directory costs |
|
|
147,025 |
|
|
|
138,061 |
|
Short-term deferred income taxes, net |
|
|
84,149 |
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
82,656 |
|
|
|
90,928 |
|
|
|
|
Total current assets |
|
|
1,120,107 |
|
|
|
1,720,715 |
|
|
|
|
|
|
|
|
|
|
Fixed assets and computer software, net |
|
|
188,749 |
|
|
|
157,272 |
|
Deferred income taxes, net |
|
|
|
|
|
|
399,885 |
|
Other non-current assets |
|
|
9,762 |
|
|
|
62,699 |
|
Intangible assets, net |
|
|
2,369,156 |
|
|
|
2,158,223 |
|
Goodwill, net |
|
|
801,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
4,488,848 |
|
|
$ |
4,498,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity (Deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities Not Subject to Compromise |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
154,540 |
|
|
$ |
168,488 |
|
Short-term deferred income taxes, net |
|
|
|
|
|
|
108,184 |
|
Accrued interest |
|
|
30,905 |
|
|
|
4,643 |
|
Deferred directory revenues |
|
|
722,566 |
|
|
|
848,775 |
|
Current portion of long-term debt |
|
|
249,301 |
|
|
|
993,528 |
|
|
|
|
Total current liabilities not subject to compromise |
|
|
1,157,312 |
|
|
|
2,123,618 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
2,487,920 |
|
|
|
2,561,248 |
|
Deferred income taxes, net |
|
|
205,812 |
|
|
|
|
|
Other non-current liabilities |
|
|
111,888 |
|
|
|
380,163 |
|
|
|
|
Total liabilities not subject to compromise |
|
|
3,962,932 |
|
|
|
5,065,029 |
|
|
|
|
|
|
|
|
|
|
Liabilities subject to compromise |
|
|
|
|
|
|
6,352,813 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity (Deficit) |
|
|
|
|
|
|
|
|
Successor Company common stock, par value $.001 per share, authorized 300,000,000 shares; issued and outstanding50,031,441shares at December 31, 2010 |
|
|
50 |
|
|
|
|
|
Predecessor Company common stock, par value $1 per share, authorized - 400,000,000 shares; issued88,169,275 shares and outstanding68,955,674 shares at December 31, 2009 |
|
|
|
|
|
|
88,169 |
|
Additional paid-in capital |
|
|
1,455,223 |
|
|
|
2,442,549 |
|
Accumulated deficit |
|
|
(923,592 |
) |
|
|
(9,137,160 |
) |
Predecessor Company treasury stock, at cost, 19,213,601 shares at December 31, 2009 |
|
|
|
|
|
|
(256,114 |
) |
Accumulated other comprehensive loss |
|
|
(5,765 |
) |
|
|
(56,492 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity (deficit) |
|
|
525,916 |
|
|
|
(6,919,048 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity (Deficit) |
|
$ |
4,488,848 |
|
|
$ |
4,498,794 |
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-4
DEX ONE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
Eleven Months |
|
|
One Month |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
Ended |
|
|
Ended |
|
|
December 31, |
|
|
December 31, |
|
(in thousands, except per share data) |
|
December 31, 2010 |
|
|
January 31, 2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
Net revenues |
|
$ |
830,887 |
|
|
$ |
160,372 |
|
|
$ |
2,202,447 |
|
|
$ |
2,616,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production and distribution expenses (exclusive of depreciation and amortization shown separately below) |
|
|
222,968 |
|
|
|
27,255 |
|
|
|
375,331 |
|
|
|
421,857 |
|
Selling and support expenses |
|
|
378,837 |
|
|
|
40,680 |
|
|
|
610,291 |
|
|
|
687,516 |
|
General and administrative expenses |
|
|
146,393 |
|
|
|
8,202 |
|
|
|
97,713 |
|
|
|
159,478 |
|
Depreciation and amortization |
|
|
217,679 |
|
|
|
20,161 |
|
|
|
578,840 |
|
|
|
483,268 |
|
Impairment charges |
|
|
1,159,266 |
|
|
|
|
|
|
|
7,337,775 |
|
|
|
3,870,409 |
|
|
|
|
Total expenses |
|
|
2,125,143 |
|
|
|
96,298 |
|
|
|
8,999,950 |
|
|
|
5,622,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(1,294,256 |
) |
|
|
64,074 |
|
|
|
(6,797,503 |
) |
|
|
(3,005,717 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(249,451 |
) |
|
|
(19,656 |
) |
|
|
(489,542 |
) |
|
|
(835,472 |
) |
Gain on debt transactions, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
265,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before reorganization items, net and income taxes |
|
|
(1,543,707 |
) |
|
|
44,418 |
|
|
|
(7,287,045 |
) |
|
|
(3,576,023 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization items, net |
|
|
|
|
|
|
7,793,132 |
|
|
|
(94,768 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(1,543,707 |
) |
|
|
7,837,550 |
|
|
|
(7,381,813 |
) |
|
|
(3,576,023 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision) benefit for income taxes |
|
|
620,115 |
|
|
|
(917,541 |
) |
|
|
928,520 |
|
|
|
1,277,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(923,592 |
) |
|
$ |
6,920,009 |
|
|
$ |
(6,453,293 |
) |
|
$ |
(2,298,327 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(18.46 |
) |
|
$ |
100.3 |
|
|
$ |
(93.67 |
) |
|
$ |
(33.41 |
) |
|
|
|
Diluted |
|
$ |
(18.46 |
) |
|
$ |
100.2 |
|
|
$ |
(93.67 |
) |
|
$ |
(33.41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
50,020 |
|
|
|
69,013 |
|
|
|
68,896 |
|
|
|
68,793 |
|
|
|
|
Diluted |
|
|
50,020 |
|
|
|
69,052 |
|
|
|
68,896 |
|
|
|
68,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(923,592 |
) |
|
$ |
6,920,009 |
|
|
$ |
(6,453,293 |
) |
|
$ |
(2,298,327 |
) |
Amortization of gain (loss) on interest rate swaps,
net of tax provision (benefit) of $, $ and $(4,385) for the one month ended January 31, 2010 and years ended December 31, 2009 and 2008, respectively |
|
|
|
|
|
|
1,083 |
|
|
|
5,606 |
|
|
|
(5,724 |
) |
Benefit plans adjustment, net of tax provision (benefit) of $(3,504), $, $ and $(24,902) for the eleven months ended December 31, 2010, one month
ended January 31, 2010 and years ended December 31, 2009 and 2008, respectively |
|
|
(5,765 |
) |
|
|
(4,535 |
) |
|
|
10,713 |
|
|
|
(41,347 |
) |
|
|
|
Comprehensive income (loss) |
|
$ |
(929,357 |
) |
|
$ |
6,916,557 |
|
|
$ |
(6,436,974 |
) |
|
$ |
(2,345,398 |
) |
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-5
DEX ONECORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
Eleven Months |
|
|
One Month |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
Ended |
|
|
Ended |
|
|
December 31, |
|
|
December 31, |
|
(in thousands) |
|
December 31, 2010 |
|
|
January 31, 2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(923,592 |
) |
|
$ |
6,920,009 |
|
|
$ |
(6,453,293 |
) |
|
$ |
(2,298,327 |
) |
Reconciliation of net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges |
|
|
1,159,266 |
|
|
|
|
|
|
|
7,337,775 |
|
|
|
3,870,409 |
|
Gain on debt transactions, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(265,166 |
) |
Depreciation and amortization |
|
|
217,679 |
|
|
|
20,161 |
|
|
|
578,840 |
|
|
|
483,268 |
|
Deferred income tax provision (benefit) |
|
|
(617,606 |
) |
|
|
916,921 |
|
|
|
(913,872 |
) |
|
|
(1,311,891 |
) |
Reduction in goodwill |
|
|
158,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring expenses |
|
|
17,858 |
|
|
|
|
|
|
|
1,271 |
|
|
|
10,202 |
|
Provision for bad debts |
|
|
16,364 |
|
|
|
7,822 |
|
|
|
146,553 |
|
|
|
138,353 |
|
Stock-based compensation expense |
|
|
4,489 |
|
|
|
613 |
|
|
|
11,393 |
|
|
|
29,509 |
|
Change in fair value of interest rate swaps and interest rate caps |
|
|
8,195 |
|
|
|
2,298 |
|
|
|
10,480 |
|
|
|
24,683 |
|
Other non-cash items, net |
|
|
24,118 |
|
|
|
(2,762 |
) |
|
|
25,071 |
|
|
|
4,972 |
|
Non-cash reorganization items, net |
|
|
|
|
|
|
(7,830,144 |
) |
|
|
17,576 |
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable |
|
|
62,171 |
|
|
|
19,847 |
|
|
|
54,688 |
|
|
|
(101,911 |
) |
(Increase) decrease in other assets |
|
|
(142,325 |
) |
|
|
10,690 |
|
|
|
39,150 |
|
|
|
45,020 |
|
(Decrease) increase in accounts payable and accrued liabilities |
|
|
(4,999 |
) |
|
|
9,611 |
|
|
|
8,968 |
|
|
|
(34,159 |
) |
Increase (decrease) in deferred directory revenue |
|
|
701,602 |
|
|
|
(36,773 |
) |
|
|
(226,307 |
) |
|
|
(95,764 |
) |
(Decrease) increase in other non-current liabilities |
|
|
(169,288 |
) |
|
|
33,448 |
|
|
|
(122,471 |
) |
|
|
49,496 |
|
|
|
|
Net cash provided by operating activities |
|
|
512,359 |
|
|
|
71,741 |
|
|
|
515,822 |
|
|
|
548,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to fixed assets and computer software |
|
|
(36,527 |
) |
|
|
(1,766 |
) |
|
|
(33,385 |
) |
|
|
(70,642 |
) |
Proceeds from sale of assets |
|
|
926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investment disposition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,318 |
|
|
|
|
Net cash used in investing activities |
|
|
(35,601 |
) |
|
|
(1,766 |
) |
|
|
(33,385 |
) |
|
|
(66,324 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional borrowings under the credit facilities, net of costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,017,202 |
|
Credit facilities repayments |
|
|
(556,637 |
) |
|
|
(511,272 |
) |
|
|
(290,071 |
) |
|
|
(1,281,701 |
) |
Note repurchases and related costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(92,130 |
) |
Revolver borrowings |
|
|
|
|
|
|
|
|
|
|
361,000 |
|
|
|
398,100 |
|
Revolver repayments |
|
|
|
|
|
|
|
|
|
|
(18,749 |
) |
|
|
(422,150 |
) |
Debt issuance costs and other financing items, net |
|
|
(1,233 |
) |
|
|
(22,096 |
) |
|
|
|
|
|
|
(10,647 |
) |
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,112 |
) |
Proceeds from employee stock option exercises |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95 |
|
Increase (decrease) in checks not yet presented for payment |
|
|
9,509 |
|
|
|
(3,092 |
) |
|
|
124 |
|
|
|
(84 |
) |
|
|
|
Net cash (used in) provided by financing activities |
|
|
(548,361 |
) |
|
|
(536,460 |
) |
|
|
52,304 |
|
|
|
(397,247 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
|
(71,603 |
) |
|
|
(466,485 |
) |
|
|
534,741 |
|
|
|
85,123 |
|
Cash and cash equivalents, beginning of period |
|
|
199,455 |
|
|
|
665,940 |
|
|
|
131,199 |
|
|
|
46,076 |
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
127,852 |
|
|
$ |
199,455 |
|
|
$ |
665,940 |
|
|
$ |
131,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net |
|
$ |
182,176 |
|
|
$ |
15,460 |
|
|
$ |
388,112 |
|
|
$ |
746,529 |
|
|
|
|
Income taxes, net |
|
$ |
311 |
|
|
$ |
|
|
|
$ |
7,873 |
|
|
$ |
1,587 |
|
|
|
|
Non-cash financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction of debt from Debt Exchanges |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(172,804 |
) |
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-6
DEX ONE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Shareholders |
|
|
|
|
|
|
|
Additional |
|
|
Accumulated |
|
|
Treasury |
|
|
Comprehensive |
|
|
Equity |
|
(in thousands) |
|
Common Stock |
|
|
Paid-in Capital |
|
|
Deficit |
|
|
Stock |
|
|
Loss |
|
|
(Deficit) |
|
|
|
|
Balance, December 31, 2007 (Predecessor Company) |
|
$ |
88,169 |
|
|
$ |
2,402,181 |
|
|
$ |
(385,540 |
) |
|
$ |
(256,334 |
) |
|
$ |
(25,740 |
) |
|
$ |
1,822,736 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
(2,298,327 |
) |
|
|
|
|
|
|
|
|
|
|
(2,298,327 |
) |
Employee stock option exercises |
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
95 |
|
Other adjustments related to compensatory stock awards |
|
|
|
|
|
|
(317 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(317 |
) |
Amortization of loss on interest rate swaps, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,724 |
) |
|
|
(5,724 |
) |
Benefit plans adjustment, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,347 |
) |
|
|
(41,347 |
) |
Compensatory stock awards |
|
|
|
|
|
|
29,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,509 |
|
|
|
|
Balance, December 31, 2008 (Predecessor Company) |
|
|
88,169 |
|
|
|
2,431,411 |
|
|
|
(2,683,867 |
) |
|
|
(256,277 |
) |
|
|
(72,811 |
) |
|
|
(493,375 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
(6,453,293 |
) |
|
|
|
|
|
|
|
|
|
|
(6,453,293 |
) |
Other adjustments related to compensatory stock awards |
|
|
|
|
|
|
(255 |
) |
|
|
|
|
|
|
163 |
|
|
|
|
|
|
|
(92 |
) |
Amortization of gain on interest rate swaps, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,606 |
|
|
|
5,606 |
|
Benefit plans adjustment, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,713 |
|
|
|
10,713 |
|
Compensatory stock awards |
|
|
|
|
|
|
11,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,393 |
|
|
|
|
Balance, December 31, 2009 (Predecessor Company) |
|
|
88,169 |
|
|
|
2,442,549 |
|
|
|
(9,137,160 |
) |
|
|
(256,114 |
) |
|
|
(56,492 |
) |
|
|
(6,919,048 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
6,920,009 |
|
|
|
|
|
|
|
|
|
|
|
6,920,009 |
|
Compensatory stock awards |
|
|
|
|
|
|
613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
613 |
|
Other adjustments related to compensatory stock awards |
|
|
|
|
|
|
(103 |
) |
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
|
|
Amortization of gain on interest rate swaps, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,083 |
|
|
|
1,083 |
|
Benefit plans adjustment, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,535 |
) |
|
|
(4,535 |
) |
Cancellation of Predecessor Company
common stock . |
|
|
(88,169 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(88,169 |
) |
Elimination of Predecessor Company
additional paid-in capital, accumulated
deficit, treasury stock and accumulated
other comprehensive loss |
|
|
|
|
|
|
(2,443,059 |
) |
|
|
2,217,151 |
|
|
|
256,011 |
|
|
|
59,944 |
|
|
|
90,047 |
|
|
|
|
Balance, January 31, 2010 (Predecessor Company) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
Issuance of Successor Company common stock |
|
$ |
50 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
50 |
|
Establishment of Successor Company
additional paid-in capital |
|
|
|
|
|
|
1,450,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,450,734 |
|
|
|
|
Balance, February 1, 2010 (Successor Company) |
|
|
50 |
|
|
|
1,450,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,450,784 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
(923,592 |
) |
|
|
|
|
|
|
|
|
|
|
(923,592 |
) |
Compensatory stock awards |
|
|
|
|
|
|
4,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,489 |
|
Benefit plans adjustment, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,765 |
) |
|
|
(5,765 |
) |
|
|
|
Balance, December 31, 2010 (Successor Company) |
|
$ |
50 |
|
|
$ |
1,455,223 |
|
|
$ |
(923,592 |
) |
|
$ |
|
|
|
$ |
(5,765 |
) |
|
$ |
525,916 |
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-7
DEX ONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except per share data and percentages and where otherwise indicated)
1. Business and Basis of Presentation
The consolidated financial statements include the accounts of Dex One Corporation and its direct
and indirect wholly-owned subsidiaries (Dex One, Successor Company, or Company, we, us
and our) subsequent to the Effective Date, which is defined below. As of December 31, 2010, R.H.
Donnelley Corporation, R.H. Donnelley Inc. (RHDI or RHD Inc.), Dex Media, Inc. (Dex Media),
Business.com, Inc. (Business.com) and Dex One Service, Inc. (Dex One Service) were our only
direct wholly-owned subsidiaries. The financial information set forth in this Annual Report, unless
otherwise indicated or as the context may otherwise indicate, reflects the consolidated results of
operations and financial position of Dex One as of and for the eleven months ended December 31,
2010. All intercompany transactions and balances have been eliminated.
Dex One became the successor registrant to R.H. Donnelley Corporation (RHD or the Predecessor
Company, we, us and our for operations prior to January 29, 2010, the Effective Date) upon
emergence from Chapter 11 proceedings under Title 11 of the United States Code (Chapter 11) on
the Effective Date. The financial information set forth in this Annual Report, unless otherwise
indicated or as the context may otherwise indicate, reflects the consolidated results of operations
and financial position of RHD as of and for the one month ended January 31, 2010 and for each of
the years in the two year period ended December 31, 2009. See Note 3, Fresh Start Accounting for
a presentation of the impact of emergence from reorganization and fresh start accounting on our
financial position, results of operations and cash flows.
Corporate Overview
We are a marketing solutions company that helps local businesses 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 include local business and market
analysis, message and image creation, target market identification, advertising and digital profile
creation, keyword and search engine optimization strategies and programs, distribution strategies,
social strategies, and tracking and reporting. 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.
New Chief Executive Officer and President
On September 6, 2010, the Companys Board of Directors (the Board) appointed Alfred T. Mockett as
Chief Executive Officer and President of Dex One, as well as a member of the Board, effective
September 13, 2010. Mr. Mocketts employment agreement, which expires on December 31, 2014,
requires him to receive an annual base salary of $975,000 and makes him eligible to participate in
the Companys annual incentive program. Mr. Mocketts annual cash bonus will have a target amount
of 100% of his base salary based upon the attainment of pre-established performance goals
established by the Board, or a committee thereof, after consultation with Mr. Mockett and prorated
for any partial fiscal year during the term of his employment. In accordance with Mr. Mocketts
employment agreement, on September 13, 2010, he was awarded 200,000 shares of the Companys common
stock in the form of a restricted stock award with a grant price of $9.62 per share, which was the
closing price of the Companys common stock on September 13, 2010, that will vest ratably over
three years. On September 13, 2010, he was also granted a fair market value option to purchase
200,000 shares of the Companys common stock at an exercise price of $9.75 per share, which was the
closing price of the Companys common stock on September 3, 2010, that will vest ratably over four
years, and fully vested premium priced options to purchase 600,000 shares of the Companys common
stock, a third of which shares have an exercise price of $15 per share, a third of which shares
have an exercise price of $23 per share, and a third of which shares have an exercise price of $32
per share (collectively, the CEO Stock-Based Awards).
F-8
Departure of Former Chairman and Chief Executive Officer
Effective May 28, 2010 (the Separation Date), our former Chairman and Chief Executive Officer,
David C. Swanson, left the Company. In connection with Mr. Swansons departure, the Company entered
into a Separation Agreement with Mr. Swanson (the Separation Agreement) on May 20, 2010. The
Separation Agreement provides that Mr. Swanson will receive severance benefits to which he is
entitled under his Amended and Restated Employment Agreement (the Employment Agreement), in
connection with a termination not for Cause following a Change of Control (as such terms are
defined in the Employment Agreement). In accordance with the Separation Agreement, Mr. Swanson
received a lump-sum separation payment of $6.4 million plus accrued and unpaid salary and vacation
days totaling $0.5 million during the second quarter of 2010 and will receive a pro rata portion
of his 2010 annual bonus of approximately $0.3 million no later than March 15, 2011. As a result of
Mr. Swansons departure, the Company recognized one-time charges of $9.5 million, offset by a
curtailment gain of $3.8 million during the second quarter of 2010. During the fourth quarter of
2010, Mr. Swanson received $5.7 million in full satisfaction for amounts due to him under certain
non-qualified pension plans and $0.5 million associated with his vested benefits under the
Companys qualified pension plan and under the R.H. Donnelley Corporation Restoration Plan.
Following the Separation Date, Mr. Swanson has no equity interest in the Company or any of its
affiliates or subsidiaries other than 25,320 previously issued and currently vested stock
appreciation rights in the Company. All other unvested stock appreciation rights held by Mr.
Swanson have terminated. Mr. Swanson will continue to participate in the Companys 2009 Long Term
Incentive Plan (2009 LTIP) and will be eligible to receive payment of up to $3.5 million under
the 2009 LTIP subject to satisfaction of the performance standards contained in the 2009 LTIP.
Reclassifications
Certain prior period amounts included in the consolidated statements of operations have been
reclassified to conform to the current periods presentation. Purchased traffic costs incurred to
direct traffic to our online properties have been reclassified from advertising expense, a
component of selling and support expenses, to production and distribution expenses in the
consolidated statements of operations. In addition, information technology expenses have been
reclassified from production and distribution expenses to general and administrative expenses in
the consolidated statements of operations. These reclassifications had no impact on operating loss
or net loss for the years ended December 31, 2009 and 2008. The tables below summarize these
reclassifications.
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Year Ended December 31, 2009 |
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As |
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Previously |
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As |
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Reported |
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Reclass |
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Reclassified |
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Production and
distribution
expenses |
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$ |
350,729 |
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$ |
24,602 |
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$ |
375,331 |
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Selling and support
expenses |
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663,638 |
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(53,347 |
) |
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610,291 |
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General and
administrative
expenses |
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68,968 |
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|
28,745 |
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|
97,713 |
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Year Ended December 31, 2008 |
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As |
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Previously |
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As |
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Reported |
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Reclass |
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Reclassified |
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Production and
distribution
expenses |
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$ |
418,258 |
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$ |
3,599 |
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$ |
421,857 |
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Selling and support
expenses |
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729,663 |
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(42,147 |
) |
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687,516 |
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General and
administrative
expenses |
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120,930 |
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38,548 |
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159,478 |
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In addition, certain prior period amounts associated with accounts receivable that are included in
the consolidated balance sheets and restructuring expenses that are included in the consolidated
statements of cash flows have been reclassified to conform to the current periods presentation.
F-9
Filing of Voluntary Petitions in Chapter 11
On May 28, 2009 (the Petition Date), the Predecessor Company and its subsidiaries (collectively
with the Predecessor Company, the Debtors) filed voluntary petitions for Chapter 11 relief in the
United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court).
Confirmed Plan of Reorganization and Emergence from the Chapter 11 Proceedings
On January 12, 2010, the Bankruptcy Court entered the Findings of Fact, Conclusions of Law, and
Order Confirming the Joint Plan of Reorganization for the Predecessor Company and its subsidiaries
(the Confirmation Order). On the Effective Date, the Joint Plan of Reorganization for the
Predecessor Company and its subsidiaries (the Plan) became effective in accordance with its
terms.
From the Petition Date until the Effective Date, the Debtors operated their businesses as
debtors-in-possession in accordance with the Bankruptcy Code. The Chapter 11 cases of the Debtors
(collectively, the Chapter 11 Cases) were jointly administered under the caption In re R.H.
Donnelley Corporation, Case No. 09-11833 (KG) (Bankr. D. Del. 2009).
Restructuring
As part of a restructuring that was conducted in connection with the Debtors emergence from
bankruptcy, the Debtors merged, consolidated, dissolved, or terminated, shortly after the Effective
Date, certain of their wholly-owned subsidiaries, as set forth below:
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DonTech Holdings, LLC and R.H. Donnelley Publishing & Advertising of Illinois
Holdings, LLC were merged into their sole member, RHDI; |
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The DonTech II Partnership and R.H. Donnelley Publishing & Advertising of
Illinois Partnership technically terminated their respective partnership agreements
due to the loss of a second partner; |
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Dex Media East Finance Co. was merged into Dex Media East LLC; |
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Dex Media West Finance Co. was merged into Dex Media West LLC; |
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Work.com, Inc. was merged into Business.com, Inc.; |
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GetDigitalSmart.com, Inc. was merged into RHDI; |
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Dex Media East LLC was merged into Dex Media East, Inc. (DME Inc.); |
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Dex Media West LLC was merged into Dex Media West, Inc. (DMW Inc.); and |
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R.H. Donnelley Publishing & Advertising, Inc. was merged into RHDI. |
After effectuating the restructuring transactions, Dex One became the ultimate parent company of
each of the following surviving subsidiaries: (i) R.H. Donnelley Corporation, a newly formed
subsidiary of Dex One (ii) RHDI, (iii) Dex Media, (iv) DME Inc., (v) DMW Inc., (vi) Dex Media
Service LLC, (vii) Dex One Service LLC (which was subsequently converted into a Delaware
corporation under the name Dex One Service effective March 1, 2010, (viii) Business.com and (ix)
R.H. Donnelley APIL, Inc.
Consummation of the Plan
Issuance of New Common Stock
Upon emergence from Chapter 11 and pursuant to the Plan, all of the issued and outstanding shares
of the Predecessor Companys common stock and any other outstanding equity securities of the
Predecessor Company including all stock options, stock appreciation rights (SARs) and restricted
stock, were cancelled. On the Effective Date, the Company issued an aggregate amount of 50,000,001
shares of new common stock, par value $.001 per share. See Note 15, Capital Stock for additional
information regarding our new common stock.
F-10
Distributions Pursuant to the Plan
Since the Effective Date, the Company has consummated the various transactions contemplated under
the confirmed Plan. The Company has made the following distributions of stock and securities that
were required to be made under the Plan to creditors with allowed claims:
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On the Effective Date, in accordance with the Plan, the Company issued the
following number of shares of Dex One common stock: (i) approximately 10.5 million
shares, representing 21.0% of total outstanding common stock, to all holders of
notes issued by RHD; (ii) approximately 11.65 million shares, representing 23.3% of
total outstanding common stock, to all holders of notes issued by Dex Media, Inc.;
(iii) approximately 12.9 million shares, representing 25.8% of total outstanding
common stock, to all holders of notes issued by RHDI; (iv) approximately 6.5
million shares, representing 13.0% of total outstanding common stock, to all
holders of senior notes issued by Dex Media West; and (v) approximately 8.45
million shares, representing 16.9% of total outstanding common stock, to all
holders of senior subordinated notes issued by Dex Media West. |
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On the Effective Date, in accordance with the terms of the Plan, holders of the
Dex Media West 8.5% Senior Notes due 2010 and 5.875% Senior Notes due 2011 also
received their pro rata share of Dex Ones $300.0 million aggregate principal
amount of 12%/14% Senior Subordinated Notes due 2017 (Dex One Senior Subordinated
Notes). |
As of December 31, 2010 and pursuant to the Plan, the Company has made distributions in cash on
account of all of the allowed claims of general unsecured creditors. Pursuant to the terms of the
Plan, the Company also made certain additional payments to certain creditors, including certain
distributions that became due and owing subsequent to the initial distribution date and certain
payments to holders of administrative expense priority claims and fees earned by professional
advisors during the Chapter 11 Cases.
Discharge, Releases, and Injunctions Pursuant to the Plan and the Confirmation Order
The Plan and Confirmation Order also contain various discharges, injunctive provisions and releases
that became operative upon the Effective Date. These provisions are summarized in Sections M
through O of the Confirmation Order and more fully described in Article X of the Plan.
Registration Rights Agreement
On the Effective Date and pursuant to the Plan, the Company entered into a Registration Rights
Agreement (the Agreement), requiring the Company to register with the Securities and Exchange
Commission (SEC) certain shares of its common stock and/or the Dex One Senior Subordinated Notes
upon the request of one or more Eligible Holders (as defined in the Agreement), in accordance with
the terms and conditions set forth therein. On April 8, 2010 and pursuant to the Agreement, the
Company filed a shelf registration statement to register for resale by Franklin Advisers, Inc. and
certain of its affiliates 15,262,488 shares of our common stock and $116.6 million aggregate
principal amount of the Dex One Senior Subordinated Notes. These securities were registered
pursuant to the Agreement to permit the sale of the securities from time to time at fixed prices,
prevailing market prices at the times of sale, prices related to the prevailing market prices,
varying prices determined at the times of sale or negotiated prices. The shelf registration
statement became effective on April 16, 2010.
Impact on Long-Term Debt Upon Emergence from the Chapter 11 Proceedings
On the Effective Date and in accordance with the Plan, $6.1 billion of the Predecessor Companys
senior notes, senior discount notes and senior subordinated notes (collectively the Notes in
Default) were exchanged for (a) 100% of the reorganized Dex One equity and (b) $300.0 million of
the Dex One Senior Subordinated Notes issued to the holders of the Dex Media West 8.5% Senior Notes
due 2010 and 5.875% Senior Notes due 2011 on a pro rata basis in addition to their share of the
reorganized Dex One equity. See Note 6, Long-Term Debt, Credit Facilities and Notes for further
details of our long-term debt.
F-11
Accounting Matters Resulting from the Chapter 11 Proceedings
The filing of the Chapter 11 petitions constituted an event of default under the indentures
governing the Predecessor Companys Notes in Default and the debt obligations under those
instruments became automatically and immediately due and payable, although any actions to enforce
such payment obligations were automatically stayed under applicable bankruptcy laws. Based on the
bankruptcy petitions, the Notes in Default were included in liabilities subject to compromise on
the consolidated balance sheet at December 31, 2009.
The filing of the Chapter 11 petitions also constituted an event of default under the Predecessor
Companys credit facilities. However, pursuant to the Plan, these secured lenders received 100%
principal recovery and scheduled amortization and interest subsequent to the filing of the Chapter
11 petitions. The Predecessor Company has determined that the fair value of the collateral securing
each of its credit facilities exceeded the book value of such credit facilities, including accrued
interest and interest rate swap liabilities associated with each of the credit facilities, and
therefore, the credit facilities were excluded from liabilities subject to compromise on the
consolidated balance sheet at December 31, 2009.
As a result of filing the Chapter 11 petitions, certain interest rate swaps were terminated by the
respective counterparties and, as such, were no longer deemed financial instruments to be measured
at fair value. These interest rate swaps were not settled prior to the Effective Date. In
conjunction with the amendment and restatement of the Predecessor Companys credit facilities on
the Effective Date, these interest rate swaps were converted into a new tranche of term loans under
each of the related credit facilities. See Note 7, Derivative Financial Instruments for
additional information.
For periods subsequent to the Chapter 11 bankruptcy filing, Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 852, Reorganizations (FASB ASC 852), has been
applied in preparing the Predecessor Companys consolidated financial statements. FASB ASC 852
requires that the financial statements distinguish transactions and events that were directly
associated with the reorganization from the ongoing operations of the business. Accordingly,
certain expenses including professional fees, realized gains and losses and provisions for losses
that were realized from the reorganization and restructuring process were classified as
reorganization items on the consolidated statement of operations. Additionally, on the
consolidated balance sheet at December 31, 2009, liabilities were segregated between liabilities
not subject to compromise and liabilities subject to compromise. Liabilities subject to compromise
were reported at their pre-petition amounts or current unimpaired values, even if they were settled
for lesser amounts.
The Predecessor Companys financial statements included in this Annual Report do not purport to
reflect or provide for the consequences of the Chapter 11 bankruptcy proceeding. In particular,
the financial statements do not purport to show (i) as to assets, their realizable value on a
liquidation basis or their availability to satisfy liabilities; (ii) as to pre-petition
liabilities, the amounts that may be allowed for claims or contingencies, or the status and
priority thereof; (iii) as to shareholders deficit accounts, the effects of any changes that may
be made in the Predecessor Companys capitalization; or (iv) as to operations, the effects of any
changes that may be made to the Predecessor Companys business.
Going Concern
As a result of our emergence from the Chapter 11 proceedings and the restructuring of the
Predecessor Companys outstanding debt, we believe that Dex One will generate sufficient cash flow
from operations to satisfy all of its debt obligations according to applicable terms and conditions
for a reasonable period of time. See Note 3, Fresh Start Accounting for information and analysis
on our emergence from the Chapter 11 proceedings and the impact on our financial position. The
Companys goodwill and non-goodwill intangible asset impairment charges during the eleven months
ended December 31, 2010 do not affect our ability to continue as a going concern, as we are
permitted to exclude such charges from debt covenant evaluations.
F-12
2. Summary of Significant Accounting Policies
Fresh start accounting and reporting permits a company to select its appropriate accounting
policies. As of February 1, 2010 (the Fresh Start Reporting Date), the Company adopted the
Predecessor Companys significant accounting policies, which are disclosed below. As a result,
there is no separate distinction of significant accounting policies between the Company and the
Predecessor Company other than to present financial results for the respective reporting periods.
Revenue Recognition
Our advertising revenues are earned primarily from the sale of advertising in yellow pages
directories we publish. Advertising revenues also include revenues for Internet-based advertising
products including online directories, such as DexKnows.com and DexNet. Advertising revenues are
affected by several factors, including changes in the quantity and size of advertisements,
acquisition of new clients, renewal rates of existing clients, premium advertisements sold, changes
in advertisement pricing, the introduction of new products, an increase in competition and more
fragmentation in the local business search market and general economic factors. Revenues with
respect to print advertising and Internet-based advertising products that are sold with print
advertising are recognized under the deferral and amortization method. Revenues related to our
print advertising and Internet-based advertising products that are sold with print advertising 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 services that are sold standalone, such as DexNet, are recognized as delivered or
fulfilled. Revenues with respect to our advertising products 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 advertising products that are performance-based are
recognized as the service is delivered or fulfilled.
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. The Company recorded sales claims allowances of $9.9 million for
the eleven months ended December 31, 2010. The Predecessor Company recorded sales claims allowances
of $3.5 million, $43.8 million and $45.3 million for the one month ended January 31, 2010 and years
ended December 31, 2009 and 2008, respectively.
In certain cases, the Company enters into agreements with clients that involve the delivery of more
than one product or service. Revenue for such arrangements is allocated to the separate units of
accounting using the relative fair value method in accordance with FASB ASC 605-25, Revenue
Recognition Multiple-Element Arrangements.
Deferred Directory Costs
Costs directly related to the selling and production of our directories are initially deferred when
incurred and recognized ratably over the life of a directory, which is typically 12 months. These
costs are specifically identifiable to a particular directory and include sales commissions and
print, paper and initial distribution costs. Such costs that are paid prior to directory
publication are classified as other current assets until publication, when they are then
reclassified as deferred directory costs.
Cash and Cash Equivalents
Cash equivalents include liquid investments with a maturity of less than three months at their time
of purchase. At times, such investments may be in excess of federally insured limits.
F-13
Accounts Receivable
Accounts receivable consist of balances owed to us by our advertising clients. Our clients
typically enter into a twelve-month contract for their advertising. Most local clients are billed
a pro rata amount of their contract value on a monthly basis. On behalf of our national clients,
Certified Marketing Representatives (CMRs) pay to the Company the total contract value of their
advertising, net of their commission, within 60 days after the publication month. Billed
receivables represent the amount that has been billed to our clients. Billed receivables are
recorded net of an allowance for doubtful accounts and sales claims, estimated based on historical
experience. We increase or decrease this estimate as information or circumstances indicate that
the estimate no longer appropriately represents the amount of bad debts and sales claims that are
probable to be incurred. Unbilled receivables represent contractually owed amounts, net of an
allowance for doubtful accounts and sales claims, for published directories that have yet to be
billed to our clients.
The Companys write-off policy for accounts receivables associated with our local clients is
designed to secure the collection of past-due funds as part of the sales renewal cycle, while the
write-off policy for our national clients is determined based on the delinquency stage combined
with CMR responsiveness to collection requests. Generally, local client accounts receivable
balances are considered eligible for write-off following completion of the annual sales renewal
cycle and identification of those local clients with past due accounts receivable balances who have
not renewed contracts with the Company for the following year, as management has deemed
collectability of these past-due accounts receivables to be impaired. Exceptions to the Companys
standard write-off policy include: (1) acceleration of write-off for clients who are out of
business as demonstrated via disconnected phone lines or declaring bankruptcy, (2) deferral of
write-offs for clients prepaying in full for new advertising with a commitment to pay off past-due
balances and (3) deferral of write-off for clients continuing to make payments on past-due
accounts receivables, even if the client has not renewed its contract for the following year. The
Company does not have either a threshold dollar amount or aging period to trigger an accounts
receivable balance write-off. Collection processes are performed in accordance with the Fair Debt
Collections Practices Act where appropriate and contacts to clients are made at defined time
intervals to solicit payment and/or determine why payment has not been made. When appropriate in
the collection process, clients are transferred to Company designated resources to resolve
outstanding issues or file claims for adjustments of accounts receivable balances. The Companys
bad debt policy includes guidelines for write-off of accounts as well as authorization and approval
requirements. The process for estimating the ultimate collection of accounts receivables involves
significant assumptions and judgments regarding the write-off of accounts receivables and estimates
on recovery expectations relative to bad debt write-offs. The Company believes that its credit,
collection, bad debt recovery and reserve processes, combined with monitoring of its billing
process, help to reduce the risk associated with material revisions to reserve estimates resulting
from adverse changes in reimbursement experience.
The Company recently initiated an update to its credit policies associated with accounts
receivables, whereby we may extend partial or full open credit terms to clients with bad debt
write-offs associated with prior year contracts. Terms of this program require clients to either
complete a credit application for review and/or satisfy defined advance payment or personal
guarantee requirements. Under the terms of this program, the accounts receivable balances
previously designated as bad debt write-offs continue to be pursued for full recovery by designated
outside collection agencies.
Identifiable Intangible Assets and Goodwill
Successor Company
Goodwill of $2.1 billion was recorded in connection with the Companys adoption of fresh start
accounting as discussed in Note 3, Fresh Start Accounting and represented the excess of the
reorganization value of Dex One over the fair value of identified tangible and intangible assets.
Goodwill is not amortized but is subject to impairment testing on an annual basis as of October
31st or more frequently if indicators of potential impairment exist. Goodwill is tested
for impairment at the reporting unit level, which represents one level below an operating segment
in accordance with FASB ASC 350, Intangibles Goodwill and Other (FASB ASC 350). As of December
31, 2010, the Companys reporting units are RHDI, DME Inc., and DMW Inc. The Company performed its
annual impairment test of goodwill as of October 31, 2010 and, as a result of identifying
indicators of impairment noted below, an impairment test of goodwill as of September 30, 2010 and
June 30, 2010 in accordance with FASB ASC 350. As a result of identifying indicators of impairment
and in conjunction with our impairment test of goodwill as of September 30, 2010 and June 30, 2010,
we also performed an impairment test of our definite-lived intangible assets and other long-lived
assets in accordance with FASB ASC 360, Property, Plant and Equipment (FASB ASC 360). The results
of these tests are discussed below.
F-14
The Company and the Predecessor Company review the carrying value of goodwill, definite-lived
intangible assets and other long-lived assets whenever events or circumstances indicate that their
carrying amount may not be recoverable. The Company and the Predecessor Company reviewed the
following information, estimates and assumptions to determine if any indicators of impairment
existed during the eleven months ended December 31, 2010 and the one month ended January 31, 2010,
respectively:
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Historical financial information, including revenue, profit margins, customer attrition
data and price premiums enjoyed relative to competing independent publishers; |
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Long-term financial projections, including, but not limited to, revenue trends and
profit margin trends; |
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Intangible asset and other long-lived asset carrying values and any changes in current
and future use; |
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Trading values of our debt and equity securities; |
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Industry and economic trends; and |
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Other Company-specific and Predecessor Company-specific information. |
Based upon the decline in the trading value of our debt and equity securities during the three
months ended September 30, 2010, among other indicators, the Company concluded that there were
indicators of impairment during the three months ended September 30, 2010. In addition, based upon
the decline in the trading value of our debt and equity securities during the three months ended
June 30, 2010 and the departure of our Chairman and Chief Executive Officer on May 28, 2010, among
other indicators, the Company concluded that there were indicators of impairment during the three
months ended June 30, 2010. The Company and the Predecessor Company concluded that there were no
indicators of impairment during the three months ended December 31, 2010, two months ended March
31, 2010 and the one month ended January 31, 2010, respectively.
Our impairment tests of goodwill, definite-lived intangible assets and other long-lived assets were
performed using information, estimates and assumptions described above. The Companys
definite-lived intangible assets and other long-lived assets have been assigned to the respective
reporting unit they represent for impairment testing. The fair values of our definite-lived
intangible assets were determined using unobservable inputs (level 3 in the fair value hierarchy)
based on a discounted cash flow valuation technique. See Note 3, Fresh Start Accounting for
additional information on how the fair values of our intangible assets were determined for our
impairment testing, as a similar methodology and process was used in conjunction with our adoption
of fresh start accounting. The impairment test of our definite-lived intangible assets and other
long-lived assets was performed by comparing the carrying amount of our asset groups including
definite-lived intangible assets and other long-lived assets, including goodwill, to the sum of
their undiscounted expected future cash flows. In accordance with FASB ASC 360, impairment exists
if the sum of the undiscounted expected future cash flows is less than the carrying amount of the
intangible asset, or its related group of assets, and other long-lived assets. The testing results
of our definite-lived intangible assets and other long-lived assets resulted in an impairment
charge associated with trade names and trademarks, technology, local customer relationships and
other from our former Business.com reporting unit of $4.3 million and $17.3 million during the
three months ended September 30, 2010 and June 30, 2010, respectively, for a total non-goodwill
intangible asset impairment charge of $21.6 million during the eleven months ended December 31,
2010.
Our impairment test of goodwill was performed at the reporting unit level and involved a two-step
process. The first step involved comparing the fair value of each reporting unit with the carrying
amount of its assets and liabilities, including goodwill, as goodwill was specifically assigned to
each of the reporting units upon our adoption of fresh start accounting. The fair value was
determined by valuing the Companys debt securities at par value, as the respective debt agreements
include provisions that would require the debt securities to be repaid at par value upon a change
of control, and by using a market based approach for the Companys publicly traded common stock,
which included a trailing 20-day average of the closing market price of our common stock ending
October 31, 2010, September 30, 2010 and June 30, 2010, respectively. The aggregate debt and equity
values were used to arrive at a consolidated Business Enterprise Value (BEV) for the Company.
Since our reporting units equity securities are not publicly traded, there is no observable market
information for these securities. As such, for our impairment test as of October 31, 2010 and
September 30, 2010, we calculated a BEV for the RHDI, DME Inc. and DMW Inc. reporting units using
unobservable inputs (level 3 in the fair value hierarchy) based on a discounted cash flow valuation
technique. Our impairment test as of September 30, 2010 calculated a BEV for the former
Business.com reporting unit using unobservable inputs (level 3 in the fair value hierarchy) based
on a fair value of net asset approach. The fair value of net asset approach was deemed more
appropriate based on revised financial projections through 2014 for the former Business.com
reporting unit. Our impairment test as of June 30, 2010 calculated a BEV for each of our reporting
units using unobservable inputs (level 3 in the fair value hierarchy)
F-15
based on a discounted cash flow valuation technique. The Company ensured that the sum of the individual reporting units BEVs
was consistent with the Companys consolidated BEV using observable market pricing.
As a result of our annual impairment test of goodwill, we determined that each of our reporting
units fair value exceeded the carrying amount of its assets and liabilities. Therefore the second
step of the goodwill impairment test was not required to be performed. However, our impairment test
of goodwill as of September 30, 2010 and June 30, 2010 determined that each of our reporting units
fair value was less than the carrying amount of its assets and liabilities, requiring us to proceed
with the second step of the goodwill impairment test. In the second step of the testing process,
the impairment loss was determined by comparing the implied fair value of each reporting units
goodwill to the recorded amount of goodwill. Determining the implied fair value of a reporting unit
requires judgment and the use of significant estimates and assumptions noted above as well as other
inputs such as discount rates and terminal growth rates where applicable. We believe that the
estimates and assumptions used in our impairment assessments are reasonable and based on available
market information, but variations in any of the assumptions could result in materially different
calculations of fair value and determinations of whether or not an impairment is indicated or the
amount of impairment recorded.
Determination of reporting unit fair value using the discounted cash flow method was based on the
estimated future cash flows of each reporting unit, discounted to present value using risk-adjusted
discount rates, which reflect the overall level of inherent risk of a reporting unit and the rate
of return an outside investor would expect to earn. Cash flow projections for our impairment test
as of October 31, 2010 were derived from managements financial projections for the period 2010 to
2015. Cash flow projections for our impairment test as of September 30, 2010 were derived from
managements financial projections for the period 2010 to 2014. Cash flow projections for our
impairment test as of June 30, 2010 were derived from managements financial projections for the
period 2010 to 2013. Subsequent period cash flows were developed for each reporting unit using
growth rates that the Company believes are reasonably likely to occur along with a terminal value
derived from the reporting units earnings before interest, taxes, depreciation and amortization.
Supporting analyses used to determine each reporting units fair value included (a) a comparison of
selected financial data of the Company with similar data of other publicly held companies in
businesses similar to ours and (b) an assessment of tax attributes. A detailed discussion of the
discounted cash flow methodology, supporting analyses used and development of the Companys
business plan and long-term financial projections is presented in Note 3, Fresh Start Accounting -
Methodology, Analysis and Assumptions, as a similar methodology and process was utilized to value
the Company for fresh start accounting on February 1, 2010.
The fair value of net assets approach used for the valuation of the former Business.com reporting
unit as of September 30, 2010 included a review of Business.coms balance sheet at September 30,
2010 and resulted in an adjustment of certain amounts to their respective fair value. The
methodology and assumptions used to determine the fair value of Business.coms net assets at
September 30, 2010 were similar to the methodology and assumptions used to value our net assets in
fresh start accounting on February 1, 2010. See Note 3, Fresh Start Accounting Final Enterprise
Value, Accounting Policies and Reorganized Consolidated Balance Sheet for information on the
methodologies and assumptions used to value our net assets in fresh start accounting. As of
September 30, 2010, we determined that the remaining goodwill assigned to the former Business.com
reporting unit was fully impaired.
Based upon this analysis, we recognized a goodwill impairment charge of $385.3 million and $752.3
million during the three months ended September 30, 2010 and June 30, 2010, respectively, for a
total goodwill impairment charge of $1,137.6 million during the eleven months ended December 31,
2010, which has been recorded at each of our reporting units as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Eleven Months Ended |
|
Reporting Unit |
|
September 30, 2010 |
|
|
June 30, 2010 |
|
|
December 31, 2010 |
|
|
RHDI |
|
$ |
134,072 |
|
|
$ |
243,674 |
|
|
$ |
377,746 |
|
DME Inc. |
|
|
103,169 |
|
|
|
241,512 |
|
|
|
344,681 |
|
DMW Inc. |
|
|
141,868 |
|
|
|
225,955 |
|
|
|
367,823 |
|
Business.com |
|
|
6,174 |
|
|
|
41,199 |
|
|
|
47,373 |
|
|
|
|
Total |
|
$ |
385,283 |
|
|
$ |
752,340 |
|
|
$ |
1,137,623 |
|
|
|
|
F-16
The following tables present a summary of the Companys goodwill by reporting unit as well as
critical assumptions used in the valuation of the reporting units at October 31, 2010, September
30, 2010 and June 30, 2010, respectively:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Which |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit Fair |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years of Cash |
|
|
Unit |
|
|
Exceeds |
|
Reporting Unit |
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminal |
|
|
Flow Before |
|
|
Fair Value |
|
|
its |
|
at October 31, |
|
Goodwill |
|
|
Percentage of |
|
|
Discount |
|
|
Growth |
|
|
Terminal |
|
|
at October |
|
|
Carrying |
|
2010 |
|
Balance |
|
|
Total |
|
|
Rate |
|
|
Rate (1) |
|
|
Value |
|
|
31, 2010 |
|
|
Value |
|
|
RHDI |
|
$ |
246,089 |
|
|
|
25.7 |
% |
|
|
9.3 |
% |
|
|
0.0 |
% |
|
5.0 years |
|
$ |
1,385,000 |
|
|
|
10.8 |
% |
DME Inc. |
|
|
327,402 |
|
|
|
34.1 |
|
|
|
9.3 |
% |
|
|
0.0 |
% |
|
5.0 years |
|
|
1,010,000 |
|
|
|
1.9 |
% |
DMW Inc. |
|
|
386,010 |
|
|
|
40.2 |
|
|
|
9.3 |
% |
|
|
0.0 |
% |
|
5.0 years |
|
|
1,150,000 |
|
|
|
1.2 |
% |
|
|
|
Total |
|
$ |
959,501 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,545,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Which |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting |
|
|
Unit Fair |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years of Cash |
|
|
Fair Value |
|
|
Exceeds |
|
Reporting Unit |
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminal |
|
|
Flow Before |
|
|
at |
|
|
its |
|
at September |
|
Goodwill |
|
|
Percentage of |
|
|
Discount |
|
|
Growth |
|
|
Terminal |
|
|
September |
|
|
Carrying |
|
30, 2010 |
|
Balance |
|
|
Total |
|
|
Rate |
|
|
Rate (1) |
|
|
Value |
|
|
30, 2010 |
|
|
Value |
|
|
RHDI |
|
$ |
246,089 |
|
|
|
25.7 |
% |
|
|
10.3 |
% |
|
|
0.0 |
% |
|
4.25 years |
|
$ |
1,310,000 |
|
|
|
0.0 |
% |
DME Inc. |
|
|
327,402 |
|
|
|
34.1 |
|
|
|
10.3 |
% |
|
|
0.0 |
% |
|
4.25 years |
|
|
1,045,000 |
|
|
|
0.0 |
% |
DMW Inc. |
|
|
386,010 |
|
|
|
40.2 |
|
|
|
10.3 |
% |
|
|
0.0 |
% |
|
4.25 years |
|
|
1,145,000 |
|
|
|
0.0 |
% |
Business.com |
|
|
|
|
|
|
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
6,100 |
|
|
|
0.0 |
% |
|
|
|
Total |
|
$ |
959,501 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,506,100 |
|
|
|
|
|
|
|
|
N/A: Not applicable as the fair value of net assets approach was used for the valuation of the
former Business.com reporting unit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Which |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit Fair |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years of Cash |
|
|
Unit |
|
|
Exceeds |
|
Reporting Unit |
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminal |
|
|
Flow Before |
|
|
Fair Value |
|
|
its |
|
At June |
|
Goodwill |
|
|
Percentage of |
|
|
Discount |
|
|
Growth |
|
|
Terminal |
|
|
at June 30, |
|
|
Carrying |
|
30, 2010 |
|
Balance |
|
|
Total |
|
|
Rate |
|
|
Rate (1) |
|
|
Value |
|
|
2010 |
|
|
Value |
|
|
RHDI |
|
$ |
380,161 |
|
|
|
28.3 |
% |
|
|
10.5 |
% |
|
|
0.0 |
% |
|
3.5 years |
|
$ |
1,540,000 |
|
|
|
0.0 |
% |
DME Inc. |
|
|
430,571 |
|
|
|
32.0 |
|
|
|
10.5 |
% |
|
|
0.0 |
% |
|
3.5 years |
|
|
1,180,000 |
|
|
|
0.0 |
% |
DMW Inc. |
|
|
527,878 |
|
|
|
39.2 |
|
|
|
10.5 |
% |
|
|
0.0 |
% |
|
3.5 years |
|
|
1,335,000 |
|
|
|
0.0 |
% |
Business.com |
|
|
6,174 |
|
|
|
0.5 |
|
|
|
16.0 |
% |
|
|
1.0 |
% |
|
9.5 years |
|
|
15,600 |
|
|
|
0.0 |
% |
|
|
|
Total |
|
$ |
1,344,784 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,070,600 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Terminal growth rate is determined by reconciling the market value of our debt and
equity securities as of October 31, 2010, September 30, 2010 and June 30, 2010, respectively, to
the Companys long-term financial projections. |
F-17
The change in the carrying amount of goodwill for the eleven months ended December 31, 2010 is as
follows:
|
|
|
|
|
Balance at February 1, 2010. |
|
$ |
2,097,124 |
|
Goodwill impairment charge during the three months ended June
30, 2010 |
|
|
(752,340 |
) |
Goodwill
impairment charge during the three months ended September 30, 2010 |
|
|
(385,283 |
) |
Reduction in goodwill during the three months ended December
31, 2010 |
|
|
(158,427 |
) |
|
|
|
|
Balance at December 31, 2010 |
|
$ |
801,074 |
|
|
|
|
|
The sum of the goodwill and non-goodwill intangible asset impairment charges totaled $1,159.3
million during the eleven months ended December 31, 2010. These impairment charges had no impact on
current or future operating cash flow, compliance with debt covenants or tax attributes.
During the three months ended December 31, 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.
The allocation of goodwill by reporting unit at December 31, 2010 is as follows:
|
|
|
|
|
|
|
Allocation of Goodwill at |
|
Reporting Unit |
|
December 31, 2010 |
|
|
RHDI |
|
$ |
250,518 |
|
DME Inc. |
|
|
236,159 |
|
DMW Inc. |
|
|
314,397 |
|
|
|
|
|
Total |
|
$ |
801,074 |
|
|
|
|
|
In connection with the Companys adoption of fresh start accounting, identifiable intangible assets
that were either developed by the Predecessor Company or acquired by the Predecessor Company in
prior acquisitions have been recorded at their estimated fair value and are being amortized over
their estimated useful lives in a manner that best reflects the economic benefit derived from such
assets. See Note 3, Fresh Start Accounting for additional information and how the fair values of
our intangible assets were determined. Amortization expense related to the Companys intangible
assets was $167.0 million for the eleven months ended December 31, 2010 and was impacted by the
increase in fair value of our intangible assets and the establishment of the estimated useful lives
resulting from our adoption of fresh start accounting. Amortization expense for these intangible
assets for the five succeeding years is estimated to be approximately $152.8 million, $152.2
million, $163.4 million, $152.9 million and $142.7 million, respectively. Amortization of
intangible assets for tax purposes is approximately $481.0 million in 2010.
Our identifiable intangible assets and their respective book values at December 31, 2010, which are
shown in the following table, have been adjusted for the impairment charges during the eleven
months ended December 31, 2010 as noted above. The adjusted book values of these intangible assets
represent their new cost basis. Accumulated amortization prior to the impairment charges has been
eliminated and the new cost basis will be amortized over the remaining useful lives of the
intangible assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
$ |
381,000 |
|
|
$ |
85,500 |
|
|
$ |
2,531,500 |
|
Accumulated
amortization |
|
|
(80,010 |
) |
|
|
(49,388 |
) |
|
|
(6,538 |
) |
|
|
(19,848 |
) |
|
|
(6,560 |
) |
|
|
(162,344 |
) |
|
|
|
Net intangible
assets at December
31, 2010 |
|
$ |
1,249,990 |
|
|
$ |
510,612 |
|
|
$ |
168,462 |
|
|
$ |
361,152 |
|
|
$ |
78,940 |
|
|
$ |
2,369,156 |
|
|
|
|
F-18
The combined weighted average useful life of our identifiable intangible assets at December
31, 2010 is 21 years. The weighted average useful lives and amortization methodology for each of
our identifiable intangible assets at December 31, 2010 are shown in the following table:
|
|
|
|
|
|
|
Weighted Average |
|
|
Intangible Asset |
|
Useful Lives |
|
Amortization 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 and the Predecessor Company evaluate the remaining useful lives of identifiable
intangible assets and other long-lived assets whenever events or circumstances indicate that a
revision to the remaining period of amortization is warranted. If the estimated remaining useful
lives change, the remaining carrying amount of the intangible assets and other long-lived assets
would be amortized prospectively over that revised remaining useful life. In conjunction with our
impairment testing during the eleven months ended December 31, 2010, the Company evaluated the
remaining useful lives of identifiable intangible assets and other long-lived assets by
considering, among other things, the effects of obsolescence, demand, competition, which takes into
consideration the price premium benefit we have over competing independent publishers in our
markets as a result of directory services agreements acquired in prior acquisitions, and other
economic factors, including the stability of the industry in which we operate, known technological
advances, legislative actions that result in an uncertain or changing regulatory environment, and
expected changes in distribution channels. In addition, in conjunction with our adoption of fresh
start accounting and the determination of the fair value of our assets and liabilities in the first
quarter of 2010, we evaluated the remaining useful lives of identifiable intangible assets and
other long-lived assets by considering the factors noted above. Based on this evaluation, the
Company 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 are therefore deemed
appropriate.
If industry and local business conditions in our markets deteriorate in excess of current
estimates, potentially resulting in further declines in advertising sales and operating results,
and if the trading value of our debt and equity securities decline significantly, we will be
required to once again assess the recoverability of goodwill in addition to our annual evaluation
and recoverability and useful lives of our intangible assets and other long-lived assets. 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.
Predecessor Company
As a result of prior acquisitions, certain long-term intangible assets were identified and recorded
at their estimated fair values. The excess purchase price resulting from each of these acquisitions
over the net tangible and identifiable intangible assets acquired was recorded as goodwill, all of
which was impaired in 2008 as noted below.
Amortization expense related to the Predecessor Companys intangible assets was $15.6 million for
the one month ended January 31, 2010 and was impacted by the reduced carrying values of intangible
assets resulting from impairment charges recorded by the Predecessor Company during the fourth
quarter of 2009 and the associated reduction in remaining useful lives effective January 1, 2010
noted below. Amortization expense related to the Predecessor Companys intangible assets was $514.6
million and $415.9 million for the years ended December 31, 2009 and 2008, respectively.
F-19
The acquired long-term intangible assets and their respective book values at December 31, 2009 were
adjusted for the impairment charges during the fourth quarter of 2009 noted below and are shown in
the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directory Services |
|
|
Local Customer |
|
|
National CMR |
|
|
|
|
|
|
|
|
|
|
Advertising |
|
|
Technology, Network |
|
|
|
|
|
|
Agreements |
|
|
Relationships |
|
|
Relationships |
|
|
Third-Party Contract |
|
|
Trade Names |
|
|
Commitment |
|
|
Platforms & Other |
|
|
Total |
|
|
|
|
Carrying value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qwest |
|
$ |
989,738 |
|
|
$ |
229,807 |
|
|
$ |
50,044 |
|
|
$ |
|
|
|
$ |
490,000 |
|
|
$ |
25,000 |
|
|
$ |
|
|
|
$ |
1,784,589 |
|
AT&T |
|
|
151,964 |
|
|
|
90,000 |
|
|
|
10,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251,967 |
|
CenturyLink |
|
|
289,734 |
|
|
|
40,433 |
|
|
|
9,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339,667 |
|
Business.com |
|
|
|
|
|
|
1,184 |
|
|
|
|
|
|
|
4,699 |
|
|
|
18,500 |
|
|
|
|
|
|
|
17,467 |
|
|
|
41,850 |
|
|
|
|
Total |
|
|
1,431,436 |
|
|
|
361,424 |
|
|
|
69,547 |
|
|
|
4,699 |
|
|
|
508,500 |
|
|
|
25,000 |
|
|
|
17,467 |
|
|
|
2,418,073 |
|
Accumulated
amortization |
|
|
|
|
|
|
(99,666 |
) |
|
|
(11,267 |
) |
|
|
|
|
|
|
(130,418 |
) |
|
|
(8,167 |
) |
|
|
(10,332 |
) |
|
|
(259,850 |
) |
|
|
|
Net intangible
assets |
|
$ |
1,431,436 |
|
|
$ |
261,758 |
|
|
$ |
58,280 |
|
|
$ |
4,699 |
|
|
$ |
378,082 |
|
|
$ |
16,833 |
|
|
$ |
7,135 |
|
|
$ |
2,158,223 |
|
|
|
|
As a result of filing the Chapter 11 petitions, the Predecessor Company performed impairment tests
of its definite-lived intangible assets and other long-lived assets during the year ended December
31, 2009. During the fourth quarter of 2009 and in conjunction with the filing of its amended Plan
and amended Disclosure Statement, the Predecessor Company finalized an extensive analysis
associated with our emergence from Chapter 11. The Predecessor Company utilized information and
assumptions discussed above, which were obtained from this analysis, to complete its impairment
evaluation. As a result of the impairment evaluation, the Predecessor Company recognized an
impairment charge of $7.3 billion during the fourth quarter of 2009 associated with directory
services agreements, advertiser relationships, third party contracts and network platforms acquired
in prior acquisitions. The fair values of these intangible assets were derived from a discounted
cash flow analysis using a discount rate that is indicative of the risk that a market participant
would be willing to accept. This analysis included a review of relevant financial metrics of peers
within our industry.
In connection with the Predecessor Companys impairment evaluation during 2009, the Predecessor
Company also evaluated the remaining useful lives of its definite-lived intangible assets and other
long-lived assets by considering the relevant factors noted above. At December 31, 2009, the
Predecessor Company determined that due to the compression of its price premium benefit over
competing independent publishers in its markets as well as a decline in market share during the
year ended December 31, 2009, the remaining useful lives of the directory services agreements
acquired in prior acquisitions were reduced from 33 years to weighted average remaining useful
lives of 25 years for Dex Media East, 26 years for Dex Media West, 29 years for AT&T and 28 years
for CenturyLink, effective January 1, 2010. Based on an assessment of future estimated cash flows,
increased attrition rates and the impact on long-term financial projections, the remaining useful
lives of third party contracts, advertiser relationships and network platforms acquired in a prior
acquisition were reduced to 1, 5 and 9 years, respectively, effective January 1, 2010. The
reduction to the remaining useful lives was necessary in order to better reflect the period these
intangible assets were expected to contribute to future cash flow.
As a result of the decline in the trading value of the Predecessor Companys debt and equity
securities during 2008 and continuing negative industry and economic trends that directly affected
its business, the Predecessor Company performed impairment tests of its goodwill, definite-lived
intangible assets and other long-lived assets. The Predecessor Company used estimates and
assumptions as noted above in its impairment evaluation. Based upon the impairment test of its
goodwill, the Predecessor Company recognized goodwill impairment charges of $2.5 billion and $660.2
million during the three months ended March 31, 2008 and June 30, 2008, respectively, for total
goodwill impairment charges of $3.1 billion during the year ended December 31, 2008. As a result of
these impairment charges, the Predecessor Company had no recorded goodwill at December 31, 2008.
F-20
In addition, as a result of these tests, the Predecessor Company recognized an impairment charge of
$744.0 million during the fourth quarter of 2008 associated with the local and national customer
relationships acquired in prior acquisitions. The fair values of these intangible assets were
derived from a discounted cash flow analysis using a discount rate that results in the present
value of assets and liabilities equal to the then current fair value of the Predecessor Companys
debt and equity securities. Lastly, in connection with the launch of the next version of
DexKnows.com, the tradenames and technology acquired in a prior acquisition were discontinued,
which resulted in an impairment charge of $2.2 million during the fourth quarter of 2008. Total
impairment charges related to the Predecessor Companys intangible assets, excluding goodwill, were
$746.2 million during the year ended December 31, 2008.
Additional Information
In connection with our acquisition of Dex Media on January 31, 2006, (the Dex Media Merger), we
acquired directory services agreements (collectively, the Dex Directory Services Agreements)
which Dex Media had entered into with Qwest including, (1) a publishing agreement with a term of 50
years commencing November 8, 2002 (subject to automatic renewal for additional one-year terms),
which grants us the right to be the exclusive official directory publisher of listings and
classified advertisements of Qwests telephone customers in the geographic areas in the states Dex
Media East and Dex Media West operate our directory business (Qwest States) in which Qwest (and
its successors) provided local telephone services as of November 8, 2002, as well as having the
exclusive right to use certain Qwest branding on directories in those markets and (2) a
non-competition agreement with a term of 40 years commencing November 8, 2002, pursuant to which
Qwest (on behalf of itself and its affiliates and successors) has agreed not to sell directory
products consisting principally of listings and classified advertisements for subscribers in the
geographic areas in the Qwest States in which Qwest provided local telephone service as of November
8, 2002 that are directed primarily at consumers in those geographic
areas. As a result of the Dex Media Merger, we also acquired (1) an advertising commitment agreement
whereby Qwest has agreed to purchase an aggregate of $20 million of advertising per year through
2017 from us at pricing on terms at least as favorable as those offered to similar large clients
and (2) an intellectual property contribution agreement pursuant to which Qwest assigned and or
licensed to us the Qwest intellectual property previously used in the Qwest directory services
business along with (3) a trademark license agreement pursuant to which Qwest granted to us the
right until November 2007 to use the Qwest Dex and Qwest Dex Advantage marks in connection with
directory products and related marketing material in the Qwest States and the right to use these
marks in connection with DexKnows.com (the intangible assets in (2) and (3) collectively, Trade
Names).
Directory services agreements between AT&T and the Company include a directory services license
agreement, a non-competition agreement, an Internet Yellow Pages reseller agreement and a directory
publishing listing agreement (collectively, AT&T Directory Services Agreements) with certain
affiliates of AT&T. The directory services license agreement designates us as the official and
exclusive provider of yellow pages directory services for AT&T (and its successors) in Illinois and
Northwest Indiana (the Territory), grants us the exclusive license (and obligation as specified
in the agreement) to produce, publish and distribute white pages directories in the Territory as
AT&Ts agent and grants us the exclusive license (and obligation as specified in the agreement) to
use the AT&T brand and logo on print directories in the Territory. The non-competition agreement
prohibits AT&T (and its affiliates and successors), with certain limited exceptions, from (1)
producing, publishing and distributing yellow and white pages print directories in the Territory,
(2) soliciting or selling local or national yellow or white pages advertising for inclusion in such
directories, and (3) soliciting or selling local Internet yellow pages advertising for certain
Internet yellow pages directories in the Territory or licensing AT&T marks to any third party for
that purpose. The Internet Yellow Pages reseller agreement grants us the (a) exclusive right to
sell to local advertisers within the Territory Internet yellow pages advertising focused upon
products and services to be offered within that territory, and (b) non-exclusive right to sell to
local (excluding National advertisers) advertisers within the Territory Internet yellow pages
advertising focused upon products and services to be offered outside of the Territory, in each
case, onto the YellowPages.com platform. The directory publishing listing agreement gives us the
right to purchase and use basic AT&T subscriber listing information and updates for the purpose of
publishing directories. The AT&T Directory Services Agreements (other than the Internet Yellow
Pages reseller agreement) have initial terms of 50 years, commencing in September 2004, subject to
automatic renewal and early termination under specified circumstances. The Internet Yellow Pages
reseller agreement had a term of 5 years that commenced in September 2004.
F-21
Directory services agreements between CenturyLink and the Company, which were executed in May 2006
in conjunction with Sprints spin-off of its local telephone business, include a directory services
license agreement, a trademark license agreement and a non-competition agreement with certain
affiliates of CenturyLink, as well as a non-competition agreement with Sprint entered into in
January 2003 (collectively CenturyLink Directory Services Agreements). The CenturyLink Directory
Services Agreements replaced the previously existing analogous agreements with Sprint, except that
Sprint remained bound by its non-competition agreement. The directory services license agreement
grants us the exclusive license (and obligation as specified in the agreement) to produce, publish
and distribute yellow and white pages directories for CenturyLink (and its successors) in 18 states
where CenturyLink provided local telephone service at the time of the agreement. The trademark
license agreement grants us the exclusive license (and obligation as specified in the agreement) to
use certain specified CenturyLink trademarks in those markets, and the non-competition agreements
prohibit CenturyLink and Sprint (and their respective affiliates and successors) in those markets
from selling local directory advertising, with certain limited exceptions, or producing, publishing
and distributing print directories. The CenturyLink Directory Services Agreements have initial
terms of 50 years, commencing in January 2003, subject to automatic renewal and early termination
under specified circumstances.
Fixed Assets and Computer Software
Fixed assets and computer software are recorded at cost. Depreciation and amortization are provided
over the estimated useful lives of the assets using the straight-line method. Estimated useful
lives are thirty years for buildings, five years for machinery and equipment, ten years for
furniture and fixtures and three to five years for computer equipment and computer software.
Leasehold improvements are amortized on a straight-line basis over the shorter of the term of the
lease or the estimated useful life of the improvement. Fixed assets and computer software of the
Successor Company at December 31, 2010 and the Predecessor Company at December 31, 2009 consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
|
Company |
|
|
Company |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
Computer software |
|
$ |
154,485 |
|
|
$ |
208,058 |
|
Computer equipment |
|
|
777 |
|
|
|
51,370 |
|
Machinery and equipment |
|
|
27,537 |
|
|
|
9,725 |
|
Furniture and fixtures |
|
|
13,824 |
|
|
|
18,297 |
|
Leasehold improvements |
|
|
23,420 |
|
|
|
37,497 |
|
Buildings |
|
|
1,760 |
|
|
|
1,956 |
|
Construction in Process Computer software and equipment |
|
|
16,511 |
|
|
|
7,461 |
|
|
|
|
Total cost |
|
|
238,314 |
|
|
|
334,364 |
|
Less accumulated depreciation and amortization |
|
|
(49,565 |
) |
|
|
(177,092 |
) |
|
|
|
Net fixed assets and computer software |
|
$ |
188,749 |
|
|
$ |
157,272 |
|
|
|
|
Depreciation and amortization expense on fixed assets and computer software of the Successor
Company for the eleven months ended December 31, 2010 and the Predecessor Company for the one month
ended January 31, 2010 and years ended December 31, 2009 and 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
Eleven Months Ended |
|
|
One Month Ended |
|
|
|
|
|
|
December 31, |
|
|
January 31, |
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Depreciation of fixed assets |
|
$ |
15,486 |
|
|
$ |
1,416 |
|
|
$ |
16,789 |
|
|
$ |
17,841 |
|
Amortization of computer software |
|
|
35,191 |
|
|
|
3,188 |
|
|
|
47,481 |
|
|
|
49,503 |
|
|
|
|
Total depreciation and
amortization on fixed assets
and computer software |
|
$ |
50,677 |
|
|
$ |
4,604 |
|
|
$ |
64,270 |
|
|
$ |
67,344 |
|
|
|
|
During the year ended December 31, 2009, the Predecessor Company identified certain fixed assets no
longer in service, which resulted in an acceleration of depreciation expense of $8.7 million.
F-22
During the years ended December 31, 2009 and 2008, the Predecessor Company retired certain computer
software fixed assets, which resulted in an impairment charge of $0.4 million and $0.4 million,
respectively.
Interest Expense and Deferred Financing Costs
Successor Company
Gross interest expense for the eleven months ended December 31, 2010 was $249.7 million.
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 $29.3 million for the eleven
months ended December 31, 2010. See Note 3, Fresh Start Accounting for additional information.
In connection with the amendment and restatement of the Dex Media East LLC and RHDI credit
facilities on the Effective Date, we entered into interest rate swap and interest rate cap
agreements during the first quarter of 2010, which have not been designated as cash flow hedges.
The Companys interest expense for the eleven months ended December 31, 2010 includes expense of
$8.2 million 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 consolidated
statement of operations if not for the filing of the Chapter 11 petitions was $65.9 million and
$802.4 million for the one month ended January 31, 2010 and year ended December 31, 2009,
respectively.
Gross interest expense recognized for the one month ended January 31, 2010 and years ended December
31, 2009 and 2008 was $19.7 million, $489.8 million and $836.7 million, respectively. Certain costs
associated with the issuance of debt instruments were capitalized and included in other non-current
assets on the consolidated balance sheets. These costs were amortized to interest expense over the
terms of the related debt agreements. The bond outstanding method was used to amortize deferred
financing costs relating to debt instruments with respect to which we made accelerated principal
payments. Other deferred financing costs were amortized using the effective interest method.
Amortization of deferred financing costs included in interest expense was $1.8 million, $27.5
million and $29.0 million for the one month ended January 31, 2010 and years ended December 31,
2009 and 2008, respectively.
The Predecessor Companys interest expense for the one month ended January 31, 2010 and year ended
December 31, 2009 includes expense of $0.8 million and $5.6 million, respectively, associated with
the change in fair value of the Dex Media East LLC interest rate swaps no longer deemed financial
instruments as a result of filing the Chapter 11 petitions. The Predecessor Companys interest
expense for the one month ended January 31, 2010 and year ended December 31, 2009 also includes
expense of $1.1 million and $9.6 million, respectively, resulting from amounts previously charged
to accumulated other comprehensive loss related to these interest rate swaps. The amounts
previously charged to accumulated other comprehensive loss related to the Dex Media East LLC
interest rate swaps were to be amortized to interest expense over the remaining life of the
interest rate swaps based on future interest payments, as it was not probable that those forecasted
transactions would not occur. In accordance with fresh start accounting and reporting, unamortized
amounts previously charged to accumulated other comprehensive loss related to these interest rate
swaps have been eliminated as of the Fresh Start Reporting Date. See Note 3, Fresh Start
Accounting for additional information.
As a result of the amendment of the RHDI credit facility and the refinancing of the former Dex
Media West LLC credit facility on June 6, 2008, the Predecessor Companys interest rate swaps
associated with these two debt arrangements were no longer highly effective in offsetting changes
in cash flows. Accordingly, cash flow hedge accounting treatment was no longer permitted. In
addition, as a result of filing the Chapter 11 petitions, these interest rate swaps were required
to be settled or terminated during 2009. As a result of the change in fair value of these interest
rate swaps prior to the Effective Date, the Predecessor Companys interest expense includes expense
of $0.4 million for the one month ended January 31, 2010, a reduction of $10.7 million for the year
ended December 31, 2009 and expense of $3.7 million for the year ended December 31, 2008. Interest
expense for the year ended December 31, 2008 also includes a non-cash charge of $21.0 million
resulting from amounts previously charged to accumulated other comprehensive loss related to these
interest rate swaps.
F-23
In conjunction with the Dex Media Merger and as a result of purchase accounting required under
generally accepted accounting principles (GAAP), the Predecessor Company recorded Dex Medias
debt at its fair value on January 31, 2006. The Predecessor Company recognized an offset to
interest expense in each period subsequent to the Dex Media Merger through May 28, 2009 for the
amortization of the corresponding fair value adjustment. The offset to interest expense was $7.7
million and $17.6 million for the years ended December 31, 2009 and 2008, respectively. The offset
to interest expense was to be recognized over the life of the respective debt, however due to
filing the Chapter 11 petitions, unamortized fair value adjustments at May 28, 2009 of $78.5
million were written-off and recognized as a reorganization item on the consolidated statement of
operations for the year ended December 31, 2009.
Gain on Debt Transactions, Net
Predecessor Company
Effective October 21, 2008, the Predecessor Company obtained a waiver under the RHDI credit
facility to permit RHDI to make voluntary prepayments of the Term Loan D-1 and Term Loan D-2 at a
discount to par provided that such discount is acceptable to those lenders who choose to
participate. RHDI was not obligated to make any such prepayments. As a result of the voluntary
prepayments made during the year ended December 31, 2008, the Predecessor Company recognized a gain
of $20.0 million consisting of the difference between the face amount of the Term Loans repaid and
the voluntary prepayments made, offset by the write-off of unamortized deferred financing costs of
$0.2 million.
In October 2008, the Predecessor Company repurchased $21.5 million of its senior notes
(collectively with the senior notes and senior discount notes repurchased in September 2008 noted
below, referred to as the Notes) for a purchase price of $7.4 million (the October 2008 Debt
Repurchases). As a result of the October 2008 Debt Repurchases, the Predecessor Company recognized
a gain of $13.6 million during the year ended December 31, 2008, consisting of the difference
between the par value and purchase price of the Notes, offset by the write-off of unamortized
deferred financing costs of $0.5 million.
In September 2008, the Predecessor Company repurchased $165.5 million ($159.9 million accreted
value, as applicable) of its Notes for a purchase price of $84.7 million (the September 2008 Debt
Repurchases). As a result of the September 2008 Debt Repurchases, the Predecessor Company
recognized a gain of $72.4 million during the year ended December 31, 2008, consisting of the
difference between the accreted value (in the case of the senior discount notes) or par value, as
applicable, and the purchase price of the Notes, offset by the write-off of unamortized deferred
financing costs of $2.9 million.
On June 25, 2008, RHDI exchanged $594.2 million ($585.7 million accreted value, as applicable) of
RHDs senior notes and senior discount notes (collectively referred to as the RHD Notes) for
$412.9 million aggregate principal amount of RHDIs newly issued 11.75% Senior Notes due May 15,
2015 (RHDI Senior Notes), referred to as Debt Exchanges. As a result of the Debt Exchanges, the
Predecessor Companys outstanding debt was reduced by $172.8 million and a gain of $161.3 million
was recognized for the year ended December 31, 2008.
On June 6, 2008 and in conjunction with the Debt Exchanges, the Predecessor Company amended the
RHDI credit facility in order to, among other things, permit the Debt Exchanges and provide
additional covenant flexibility. In addition, on June 6, 2008, the Predecessor Company refinanced
the Dex Media West LLC credit facility. During the year ended December 31, 2008, the Predecessor
Company recognized a charge of $2.2 million for the write-off of unamortized deferred financing
costs associated with the refinancing of the former Dex Media West LLC credit facility and portions
of the amended RHDI credit facility, which have been accounted for as extinguishments of debt.
As a result of the financing activities noted above, the Predecessor Company recorded a net gain
of $265.2 million during the year ended December 31, 2008.
F-24
Advertising Expense
The Company and the Predecessor Company recognize advertising expenses as incurred. These expenses
include media, public relations, promotional and sponsorship costs and on-line advertising. Total
advertising expense of the Successor Company for the eleven months ended December 31, 2010 was
$27.9 million. Total advertising expense of the Predecessor Company for the one month ended January
31, 2010 and years ended December 31, 2009 and 2008 was $1.0 million, $31.0 million and $32.7
million, respectively.
Concentration of Credit Risk
Trade Receivables
Approximately 85% of our advertising revenue is derived from the sale of our marketing solutions to
local businesses. These clients typically enter into 12-month advertising sales contracts and make
monthly payments over the term of the contract. Some clients prepay the full amount or a portion
of the contract value. 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. Local businesses tend to have fewer
financial resources and higher failure rates than large businesses. In addition, full collection
of delinquent accounts can take an extended period of time and involve significant costs. We do
not require collateral from our clients, although we do charge late fees to clients that do not pay
by specified due dates.
The remaining approximately 15% of our advertising revenue is derived from the sale of our
marketing solutions to national or large regional chains, such as rental car companies, automobile
repair shops and pizza delivery businesses. Substantially all of the revenue derived through
national accounts is serviced through CMRs from which we accept orders. CMRs are independent third
parties that act as agents for national clients. The CMRs are responsible for billing the national
clients for their advertising. We receive payment for the value of advertising placed in our
directory, net of the CMRs commission, directly from the CMR. While we are still exposed to credit
risk associated with trade receivables, the amount of losses from these accounts has been
historically less than the local accounts as 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 December 31, 2010, we had interest rate swap and interest rate cap agreements with major
financial institutions with a notional amount of $500.0 million and $400.0 million, respectively.
We are exposed to credit risk in the event that one or more of the counterparties to the agreements
does not, or cannot, meet their obligation. The notional amount for interest rate swaps is used to
measure interest to be paid or received and does not represent the amount of exposure to credit
loss. Any loss would be limited to the amount that would have been received over the remaining
life of the interest rate swap agreement. Under the terms of the interest rate cap agreements, the
Company will receive payments based on the spread in rates if the three-month LIBOR rate increases
above the negotiated cap rates. Any loss would be limited to the amount that would have been
received based on the spread in rates over the remaining life of the interest rate cap agreement.
The counterparties to the interest rate swap and interest rate cap agreements are major financial
institutions with credit ratings of AA- or higher, or the equivalent dependent upon the credit
rating agency.
Labor Unions
Approximately 32% of our employees are represented by labor unions covered by two collective
bargaining agreements with Dex Media in the Qwest States. The unionized employees are represented
by either the International Brotherhood of Electrical Workers of America (IBEW) or the
Communication Workers of America (CWA). Dex Medias collective bargaining agreement with the
IBEW expires in May 2012 and Dex Medias collective bargaining agreement with the CWA expires in
September 2012.
F-25
Derivative Financial Instruments and Hedging Activities
We do not use derivative financial instruments for trading or speculative purposes and our
derivative financial instruments are limited to interest rate swap 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.
On the day a derivative contract is executed, the Company may designate the derivative instrument
as a hedge of the variability of cash flows to be received or paid (cash flow hedge). For all
designated hedging relationships, the Company would formally document the hedging relationship and
its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the
item, the nature of the risk being hedged, how the hedging instruments effectiveness in offsetting
the hedged risk will be assessed, and a description of the method of measuring ineffectiveness. The
Company would also formally assess, both at the hedges inception and on an ongoing basis, whether
the derivatives that are used in hedging transactions are highly effective in offsetting changes in
cash flows of hedged items.
All derivative financial instruments are recognized as either assets or liabilities on the
consolidated balance sheets with measurement at fair value. On a quarterly basis, the fair values
of 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 consolidated statements of cash flows. For derivative instruments that are designated as cash
flow hedges and that are determined to provide an effective hedge, the differences between the fair
value and the book value of the derivative instruments are recognized in accumulated other
comprehensive income (loss), a component of shareholders equity (deficit).
The Company discontinues hedge accounting prospectively when it is determined that the derivative
is no longer highly effective in offsetting changes in the cash flows of the hedged item, the
derivative or hedged item is expired, sold, terminated, exercised, or management determines that
designation of the derivative as a hedging instrument is no longer appropriate. In situations in
which hedge accounting is discontinued, the Company continues to carry the derivative at its fair
value on the consolidated balance sheet and recognizes any subsequent changes in its fair value in
earnings as a component of interest expense. Any amounts previously recorded to accumulated other
comprehensive income (loss) will be amortized to interest expense in the same period(s) in which
the interest expense of the underlying debt impacts earnings.
By using derivative financial instruments to hedge exposures to changes in interest rates, the
Company exposes itself to credit risk and market risk. Credit risk is the possible failure of the
counterparty to perform under the terms of the derivative contract. When the fair value of a
derivative contract is positive, the counterparty owes the Company, which creates credit risk for
the Company. When the fair value of a derivative contract is negative, the Company owes the
counterparty and, therefore, it is not subject to credit risk. The Company minimizes the credit
risk in derivative financial instruments by entering into transactions with major financial
institutions with credit ratings of AA- or higher, or the equivalent dependent upon the credit
rating agency.
Market risk is the adverse effect on the value of a financial instrument that results from a change
in interest rates. The market risk associated with interest-rate contracts is managed by
establishing and monitoring parameters that limit the types and degree of market risk that may be
undertaken.
See Note 7, Derivative Financial Instruments for additional information regarding our derivative
financial instruments and hedging activities.
F-26
Pension and Postretirement Benefits
Pension and other postretirement benefits represent estimated amounts to be paid to employees in
the future. The accounting for benefits reflects the recognition of these benefit costs over the
employees approximate service period based on the terms of the plan and the investment and funding
decisions made. The determination of the benefit obligation and the net periodic pension and other
postretirement benefit costs requires management to make assumptions regarding the discount rate,
return on retirement plan assets and healthcare cost trends. Changes in these assumptions can have
a significant impact on the projected benefit obligation, funding requirement and net periodic
benefit cost. The assumed discount rate is the rate at which the pension benefits could be
settled. For the eleven months ended December 31, 2010, the Company utilized an outsource
providers t yield curve to determine the appropriate discount rate for each of the defined benefit
pension plans based on the individual plans expected future cash flows. During January 2010 and
the year ended December 31, 2009, the Predecessor Company utilized an outsource providers yield
curve to determine the appropriate discount rate for the defined benefit pension plans. During the
year ended December 31, 2008, the Predecessor Company utilized the Citigroup Pension Liability
Index as the appropriate discount rate for its defined benefit pension plans. The Predecessor
Company changed to an outsource providers yield curve during 2009 to better reflect the specific
cash flows of these plans in determining the discount rate. The expected long-term rate of return
on plan assets is based on the mix of assets held by the plan and the expected long-term rates of
return within each asset class. The anticipated trend of future healthcare costs is based on
historical experience and external factors.
See Note 10, Benefit Plans, for further information regarding our benefit plans.
Income Taxes
We account for income taxes under the asset and liability method in accordance with FASB ASC 740,
Income Taxes (FASB ASC 740). Deferred income tax liabilities and assets reflect temporary
differences between amounts of assets and liabilities for financial and tax reporting. Such
amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when
the temporary differences reverse. A valuation allowance is established to offset any deferred
income tax assets if, based upon the available evidence, it is more likely than not that some or
all of the deferred income tax assets will not be realized.
FASB ASC 740 also prescribes a recognition threshold and measurement principles for the financial
statement recognition and measurement of tax positions taken or expected to be taken on a tax
return. Under FASB ASC 740, the impact of an uncertain income tax position on an income tax return
must be recognized at the largest amount that is more likely than not to be sustained upon audit by
the relevant taxing authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, FASB ASC 740 provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosures
and transition requirements.
The Companys policy is to recognize interest and penalties related to unrecognized tax benefits in
income tax expense. See Note 8, Income Taxes, for additional information regarding our
(provision) benefit for income taxes.
F-27
Earnings (Loss) Per Share
The calculation of basic and diluted earnings (loss) per share (EPS) of the Successor Company for
the eleven months ended December 31, 2010 and the Predecessor Company for the one month ended
January 31, 2010 and years ended December 31, 2009 and 2008, respectively, is presented below.
|
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Successor Company |
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Predecessor Company |
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Eleven Months Ended |
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One Month Ended |
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Years Ended December 31, |
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December 31, |
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January 31, |
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2010 |
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2010 |
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2009 |
|
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2008 |
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|
Basic EPS |
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|
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|
|
|
|
|
|
Net income (loss) |
|
$ |
(923,592 |
) |
|
$ |
6,920,009 |
|
|
$ |
(6,453,293 |
) |
|
$ |
(2,298,327 |
) |
Weighted average common shares
outstanding |
|
|
50,020 |
|
|
|
69,013 |
|
|
|
68,896 |
|
|
|
68,793 |
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|
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Basic EPS |
|
$ |
(18.46 |
) |
|
$ |
100.3 |
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|
$ |
(93.67 |
) |
|
$ |
(33.41 |
) |
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Diluted EPS |
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Net income (loss) |
|
$ |
(923,592 |
) |
|
$ |
6,920,009 |
|
|
$ |
(6,453,293 |
) |
|
$ |
(2,298,327 |
) |
Weighted average common shares
outstanding |
|
|
50,020 |
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|
|
69,013 |
|
|
|
68,896 |
|
|
|
68,793 |
|
Dilutive effect of stock awards |
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39 |
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|
Weighted average diluted shares
outstanding |
|
|
50,020 |
|
|
|
69,052 |
|
|
|
68,896 |
|
|
|
68,793 |
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|
|
Diluted EPS |
|
$ |
(18.46 |
) |
|
$ |
100.2 |
|
|
$ |
(93.67 |
) |
|
$ |
(33.41 |
) |
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|
|
Diluted EPS is calculated by dividing net income by the weighted average common shares outstanding
plus dilutive potential common stock. Potential common stock includes stock options, stock
appreciation rights (SARs) and restricted stock, the dilutive effect of which is calculated using
the treasury stock method.
Due to the Companys reported net loss for the eleven months ended December 31, 2010 and the
Predecessor Companys reported net loss for the years ended December 31, 2009 and 2008, the effect
of all stock-based awards was anti-dilutive and therefore not included in the calculation of
diluted EPS. For the eleven months ended December 31, 2010, 1.3 million shares of the Successor
Companys stock-based awards had exercise prices that exceeded the average market price of the
Successor Companys common stock for the period. For the one month ended January 31, 2010 and years
ended December 31, 2009 and 2008, 4.6 million shares, 4.6 million shares and 4.1 million shares,
respectively, of the Predecessor Companys stock-based awards had exercise prices that exceeded the
average market price of the Predecessor Companys common stock for the respective period.
Stock-Based Awards
On the Effective Date, the Companys Board of Directors ratified the Dex One Equity Incentive Plan
(EIP), which was previously approved as part of the Confirmation Order. Under the EIP, certain
employees and non-employee directors of the Company are eligible to receive stock options, SARs,
limited stock appreciation rights in tandem with stock options, restricted stock and restricted
stock units. Under the EIP, 5.6 million shares of our common stock were authorized for grant. To
the extent that shares of our common stock are not issued or delivered by reason of (i) the
expiration, termination, cancellation or forfeiture of such award, with certain exceptions, or (ii)
the settlement of such award in cash, then such shares of our common stock shall again be available
under the EIP. Stock awards will typically be granted at the market value of our common stock at
the date of the grant, become exercisable in ratable installments or otherwise, over a period of
one to four years from the date of grant, and may be exercised up to a maximum of ten years from
the date of grant. The Companys Compensation & Benefits Committee determines termination, vesting
and other relevant provisions at the date of the grant.
Non-employee directors of the Company are eligible to receive stock-based awards on an annual basis
with a grant date value equal to $75,000.
F-28
Upon emergence from Chapter 11 and pursuant to the Plan, all outstanding equity securities of the
Predecessor Company including all stock options, SARs and restricted stock, were cancelled. For
periods prior to the Effective Date, the Predecessor Company maintained a shareholder approved
stock incentive plan, the 2005 Stock Award and Incentive Plan (2005 Plan), whereby certain
employees and non-employee directors were eligible to receive stock options, SARs, limited stock
appreciation rights in tandem with stock options and restricted stock. Prior to adoption of the
2005 Plan, the Predecessor Company maintained a shareholder approved stock incentive plan, the 2001
Stock Award and Incentive Plan (2001 Plan). Under the 2005 Plan and 2001 Plan, 5 million and 4
million shares, respectively, were originally authorized for grant. Stock awards were typically
granted at the market value of the Predecessor Companys common stock at the date of the grant,
became exercisable in ratable installments or otherwise, over a period of one to five years from
the date of grant, and were able to be exercised up to a maximum of ten years from the date of
grant. The Predecessor Companys Compensation & Benefits Committee determined termination, vesting
and other relevant provisions at the date of the grant. The Predecessor Company implemented a
policy of issuing treasury shares to satisfy stock issuances associated with stock-based award
exercises.
The Company and the Predecessor Company record stock-based compensation expense in the consolidated
statements of operations for all employee stock-based awards based on their grant date fair values.
The Company and the Predecessor Company estimate forfeitures over the requisite service period when
recognizing compensation expense. Estimated forfeitures are adjusted to the extent actual
forfeitures differ, or are expected to materially differ, from such estimates. The Company used an
estimated weighted average forfeiture rate in determining stock-based compensation expense of 8.9%
during the eleven months ended December 31, 2010. The Predecessor Company used an estimated
forfeiture rate in determining stock-based compensation expense of 8.0% during the first quarter of
2009 and 10.2% for the remainder of 2009 and January 2010. For the year ended December 31, 2008,
the Predecessor Company utilized an estimated forfeiture rate of 8% in determining stock-based
compensation expense.
See Note 9, Stock Incentive Plans for additional information regarding the Companys and the
Predecessor Companys stock incentive plans.
2009 Long-Term Incentive Plan for Executive Officers
The Companys 2009 LTIP is a cash-based plan designed to provide long-term incentive compensation
to participants based on the achievement of performance goals. The 2009 LTIP was originally
approved by the Predecessor Companys Compensation & Benefits Committee in 2009. During the
bankruptcy proceedings, the Bankruptcy Court approved for the 2009 LTIP to be carried forward by
the Company upon emergence from Chapter 11. The Companys Compensation & Benefits Committee
administers the 2009 LTIP in its sole discretion and may, subject to certain exceptions, delegate
some or all of its power and authority under the 2009 LTIP to the Chief Executive Officer or other
executive officer of the Company. Participants in the 2009 LTIP consist of (i) such executive
officers of the Company and the Predecessor Company and its affiliates as the Compensation &
Benefits Committee in its sole discretion may select from time to time and (ii) such other
employees of the Company and the Predecessor Company and its subsidiaries and affiliates as the
Chief Executive Officer in his sole discretion may select from time to time. The amount of each
award under the 2009 LTIP will be paid in cash and is dependent upon the attainment of certain
performance measures related to the amount of the Companys and Predecessor Companys cumulative
free cash flow for the 2009, 2010 and 2011 fiscal years (the Performance Period). Participants
who are executive officers of the Company and Predecessor Company, and certain other participants
designated by the Chief Executive Officer, were also eligible to receive a payment upon the
achievement of a restructuring, reorganization and/or recapitalization relating to the Predecessor
Companys outstanding indebtedness and liabilities (the Specified Actions) during the Performance
Period. Payments are to be made following the end of the Performance Period or the date of a
Specified Action, as the case may be. Upon emergence from Chapter 11 and the achievement of the
Specified Actions, the Company made cash payments associated with the 2009 LTIP of $8.0 million
during the eleven months ended December 31, 2010.
These cash-based awards were granted to participants in April 2009. The Company recognized
compensation expense related to the 2009 LTIP of $4.8 million during the eleven months ended
December 31, 2010, which includes $2.3 million of accelerated compensation expense associated with
the departure of our former Chief Executive Officer. The Predecessor Company recognized
compensation expense related to the 2009 LTIP of $0.5 million and $5.0 million during the one month
ended January 31, 2010 and year ended December 31, 2009, respectively.
F-29
Fair Value of Financial Instruments
At December 31, 2010 and 2009, the fair value of cash and cash equivalents, accounts receivable,
and accounts payable and accrued liabilities approximated their carrying value based on the net
short-term nature of these instruments. As discussed in Note 3, Fresh Start Accounting, all of
the Companys assets and liabilities were fair valued as of the Fresh Start Reporting Date in
connection with our adoption of fresh start accounting. The Company has utilized quoted market
prices, where available, to compute the fair market value of our long-term debt at December 31,
2010 as disclosed in Note 6, Long-Term Debt, Credit Facilities and Notes. These estimates of
fair value may be affected by assumptions made and, accordingly, are not necessarily indicative of
the amounts the Company could realize in a current market exchange. As a result of filing the
Chapter 11 petitions and the Plan, the Predecessor Company does not believe that it is meaningful
to present the fair market value of its long-term debt at December 31, 2009.
FASB ASC 820, Fair Value Measurements and Disclosures (FASB ASC 820) defines fair value,
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value and expands disclosures about fair value measurements. FASB ASC 820 defines fair
value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. The fair value hierarchy,
which gives the highest priority to quoted prices in active markets, is comprised of the following
three levels:
Level 1 Unadjusted quoted market prices in active markets for identical assets and
liabilities.
Level 2 Observable inputs other than Level 1 inputs such as quoted prices for similar
assets or liabilities, quoted prices in markets with insufficient volume or infrequent
transactions, or model-derived valuations in which all significant inputs are observable or
can be derived principally from or corroborated by observable market data for substantially
the full term of the assets or liabilities.
Level 3 Prices or valuations that require inputs that are both significant to the
measurement and unobservable.
As required by FASB ASC 820, assets and liabilities are classified based on the lowest level of
input that is significant to the fair value measurement. The Companys and the Predecessor
Companys assessment of the significance of a particular input to the fair value measurement
requires judgment, and may affect the valuation of the fair value of assets and liabilities and
their placement within the fair value hierarchy levels. The Company and the Predecessor Company had
interest rate swaps with a notional amount of $500.0 million and $200.0 million at December 31,
2010 and 2009, respectively, that are and were measured at fair value on a recurring basis. At
December 31, 2010, the Company had interest rate caps with a notional amount of $400.0 million that
are measured at fair value on a recurring basis. The following table presents the Companys and the
Predecessor Companys assets and liabilities that were measured at fair value on a recurring basis
at December 31, 2010 and 2009, respectively, and the level within the fair value hierarchy in which
the fair value measurements were included.
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Fair Value Measurements |
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Using Significant Other Observable Inputs (Level 2) |
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Successor Company |
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|
Predecessor Company |
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Derivatives: |
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
Interest
Rate Swap Liabilities |
|
$ |
(6,365 |
) |
|
$ |
(6,695 |
) |
Interest Rate Cap Assets |
|
$ |
308 |
|
|
$ |
|
|
There were no transfers of assets or liabilities into or out of Level 2 during the eleven months
ended December 31, 2010, one month ended January 31, 2010 or year ended December 31, 2009. The
Company has established a policy of recognizing transfers between levels in the fair value
hierarchy as of the end of a reporting period. In conjunction with the classification of the
Predecessor Companys credit facilities at December 31, 2009, interest rate swap liabilities were
excluded from liabilities subject to compromise on the consolidated balance sheet at December 31,
2009, as both the Predecessor Companys credit facilities and interest rate swaps were fully
collateralized and the fair value of such collateral exceeded the carrying value of the credit
facilities and interest rate swaps.
F-30
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 and the Predecessor 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 and the Predecessor Company use 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 7, 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 December 31, 2010, the impact of applying counterparty credit risk
in determining the fair value of our derivative instruments was an increase to our derivative
instruments liability of less than $0.1 million. At December 31, 2010, the impact of applying the
Companys credit risk in determining the fair value of our derivative instruments was a decrease to
our derivative instruments liability of $1.2 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 and the
Predecessor Company are widely accepted by the financial services industry. As such and as noted
above, our derivative instruments are categorized within Level 2 of the fair value hierarchy.
Fair Value Control Processes Interest Rate Swaps and Interest Rate Caps
The Company and the Predecessor Company employ 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.
Benefit Plan Assets
The fair values of the Companys and the Predecessor Companys benefit plan assets and the
disclosures required by FASB ASC 715-20, Compensation Retirement Benefits are presented in Note
10, Benefit Plans.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and
certain expenses and the disclosure of contingent assets and liabilities. Actual results could
differ materially from those estimates and assumptions. Estimates and assumptions are used in the
determination of recoverability of long-lived assets, sales allowances, allowances for doubtful
accounts, depreciation and amortization, employee benefit plans expense, restructuring expense and
accruals, deferred income taxes, certain assumptions pertaining to our stock-based awards, certain
estimates associated with liabilities classified as liabilities subject to compromise, and certain
estimates and assumptions used in our impairment evaluation of goodwill, definite-lived intangible
assets and other long-lived assets, among others.
F-31
New Accounting Pronouncements
In July 2010, the FASB issued Accounting Standards Update (ASU) 2010-20, Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20). ASU
2010-20 improves the disclosures that an entity provides about the credit quality of its financing
receivables and the related allowance for credit losses. The objective of enhancing these
disclosures is to improve financial statement users understanding of the nature of an entitys
credit risk associated with its financing receivables and the entitys assessment of that risk in
estimating its allowance for credit losses as well as changes in the allowance and the reasons for
those changes. The enhanced disclosure requirements provided by ASU 2010-20 are not required for
short-term receivables that have maturity dates of less than one year, other than credit card
receivables. For public entities, the disclosures as of the end of a reporting period are effective
for interim and annual reporting periods ending on or after December 15, 2010. The disclosures
about activity that occurs during a reporting period are effective for interim and annual reporting
periods beginning on or after December 15, 2010. The Company has adopted the disclosure provisions
of ASU 2010-20 that are effective for interim and annual reporting periods ending on or after
December 15, 2010. Excluding credit card receivables, which are immaterial to our operations, all
of our financing receivables have maturity dates of less than one year. Therefore certain of the
enhanced disclosure requirements of ASU 2010-20 are not applicable to the Company and have not been
provided.
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements
(ASU 2010-06). ASU 2010-06 amends FASB ASC 820 to clarify existing disclosure requirements and
require additional disclosure about fair value measurements. ASU 2010-06 clarifies existing fair
value disclosures about the level of disaggregation presented and about inputs and valuation
techniques used to measure fair value for measurements that fall in either Level 2 or Level 3 of
the fair value hierarchy. The additional disclosure requirements include disclosure regarding the
amounts and reasons for significant transfers in and out of Level 1 and Level 2 of the fair value
hierarchy and separate presentation of purchases, sales, issuances and settlements of items within
Level 3 of the fair value hierarchy. ASU 2010-06 is effective for interim and annual reporting
periods beginning after December 15, 2009 except for the disclosures about Level 3 activity of
purchases, sales, issuances and settlements, which is effective for interim and annual reporting
periods beginning after December 15, 2010. Effective January 1, 2010, we adopted the disclosure
provisions of ASU 2010-06 that are effective for interim and annual reporting periods beginning
after December 15, 2009. These disclosures are required to be provided only on a prospective basis.
In September 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force (ASU
2009-13), which updates the current guidance pertaining to multiple-element revenue arrangements
included in FASB ASC 605-25, Revenue Recognition Multiple Element Arrangements. ASU 2009-13
addresses how to determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting and how the arrangement consideration should be allocated among the
separate units of accounting. ASU 2009-13 will be effective for the Company in the annual reporting
period beginning January 1, 2011. ASU 2009-13 may be applied retrospectively or prospectively and
early adoption is permitted. The Company does not expect the adoption of ASU 2009-13 to have an
impact on its financial position, results of operations or cash flows.
We have reviewed other accounting pronouncements that were issued as of December 31, 2010, which
the Company has not yet adopted, and do not believe that these pronouncements will have a material
impact on our financial position or operating results.
3. Fresh Start Accounting
The Company adopted fresh start accounting and reporting effective February 1, 2010, the Fresh
Start Reporting Date, in accordance with FASB ASC 852, as the holders of existing voting shares
immediately before confirmation of the Plan received less than 50% of the voting shares of the
emerging entity and the reorganization value of the Companys assets immediately before the date of
confirmation was less than the post-petition liabilities and allowed claims. The Company was
required to adopt fresh start accounting and reporting as of January 29, 2010, the Effective Date.
However, in light of the proximity of that date to our accounting period close immediately after
the Effective Date, which was January 31, 2010, as well as the results of a materiality assessment
discussed below, we elected to adopt fresh start accounting and reporting on February 1, 2010.
F-32
The financial statements as of the Fresh Start Reporting Date will report the results of Dex One
with no beginning retained earnings or accumulated deficit. Any presentation of Dex One represents
the financial position and results of operations of a new reporting entity and is not comparable to
prior periods presented by RHD. The consolidated financial statements for periods ended prior to
the Fresh Start Reporting Date do not include the effect of any changes in capital structure or
changes in the fair value of assets and liabilities as a result of fresh start accounting.
The Company performed a quantitative and qualitative materiality assessment in accordance with
Staff Accounting Bulletin (SAB) No. 99, Materiality, and SAB No. 108, Considering the Effects of
Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements, in
order to determine the appropriateness of choosing the Fresh Start Reporting Date for accounting
and reporting purposes instead of the Effective Date. RHD and Dex One concluded that the
quantitative assessment did not have a material impact on either RHD for the one month ended
January 31, 2010 or Dex One for the two months ended March 31, 2010 and eight months ended
September 30, 2010 and that there were no qualitative factors that would preclude the use of the
Fresh Start Reporting Date for accounting and reporting purposes.
In accordance with FASB ASC 852, the results of operations of RHD prior to the Fresh Start
Reporting Date include (i) a pre-emergence gain of approximately $4.5 billion resulting from the
discharge of liabilities under the Plan, partially offset by the issuance of new Dex One common
stock and additional paid-in capital and the Dex One Senior Subordinated Notes; (ii) pre-emergence
charges to earnings recorded as reorganization items resulting from certain costs and expenses
relating to the Plan becoming effective; and (iii) a pre-emergence increase in earnings of $3.3
billion resulting from the aggregate changes to the net carrying value of our pre-emergence assets
and liabilities to reflect their fair values under fresh start accounting, as well as the
recognition of goodwill. See Note 4, Reorganization Items, Net and Liabilities Subject to
Compromise for additional information.
Enterprise Value / Reorganization Value Determination
Enterprise value represented the fair value of an entitys interest-bearing debt and shareholders
equity. In the disclosure statement associated with the Plan, which was confirmed by the Bankruptcy
Court, we estimated a range of enterprise values between $4.2 billion and $5.3 billion, with a
midpoint of $4.8 billion. Based on the then current and anticipated economic conditions and the
direct impact these conditions have on our business, we deemed it appropriate to use the midpoint
between the low end of the range and the overall midpoint of the range to determine the final
enterprise value of $4.5 billion, comprised of debt valued at $3.3 billion and equity valued at
$1.3 billion less cash required to be on hand as a result of the Plan of $125.0 million.
FASB ASC 852 provides for, among other things, a determination of the value to be assigned to the
assets of the reorganized Company as of a date selected for financial reporting purposes. The
Company adjusted its enterprise value of $4.5 billion for certain items such as post-petition
liabilities, deferred income taxes and cash on hand post emergence to determine a reorganization
value of $5.9 billion. Under fresh start accounting, the reorganization value was allocated to Dex
Ones assets based on their respective fair values in conformity with the purchase method of
accounting for business combinations included in FASB ASC 805, Business Combinations. The excess
reorganization value over the fair value of identified tangible and intangible assets of $2.1
billion was recorded as goodwill.
The reorganization value represents the amount of resources available, or that become available,
for the satisfaction of post-petition liabilities and allowed claims, as negotiated between the
Company and its creditors (the Interested Parties). This value, along with other terms of the
Plan, was determined only after extensive arms-length negotiations between the Interested Parties.
Each Interested Party developed its view of what the value should be based upon expected future
cash flows of the business after emergence from Chapter 11, discounted at rates reflecting
perceived business and financial risks. This value is viewed as the fair value of the entity before
considering liabilities and is intended to approximate the amount a willing buyer would pay for the
assets of Dex One immediately after restructuring. The reorganization value was determined using
numerous projections and assumptions that are inherently subject to significant uncertainties and
the resolution of contingencies beyond the control of the Company. Accordingly, there can be no
assurance that the estimates, assumptions and amounts reflected in the valuation will be realized.
F-33
Methodology, Analysis and Assumptions
Dex Ones valuation was based upon a discounted cash flow methodology, which included a calculation
of the present value of expected un-levered after-tax free cash flows reflected in our long-term
financial projections, including the calculation of the present value of the terminal value of cash
flows, and supporting analysis that included (a) a comparison of selected financial data of the
Company with similar data of other publicly held companies in businesses similar to ours, (b) an
analysis of comparable valuations indicated by precedent mergers and acquisitions of such companies
and (c) a valuation of post-emergence tax attributes. A detailed discussion of this methodology and
supporting analysis is presented below.
The Companys business plan was the foundation for developing long-term financial projections used
in the valuation of our business. Specific operating and financial metrics that drive or inform the
long-term financial projections include, but are not limited to, customer numbers, customer
behaviors, average spend per customer, product usage, and sales representative productivity. The
business planning and forecasting process also included a review of Company, industry and
macroeconomic factors including, but not limited to, achievement of future financial results,
projected changes associated with our reorganization initiatives, anticipated changes in general
market conditions including variations in market regions, and known new business opportunities and
challenges. Detailed research and forecast materials from leading industry and economic analysts
were also used to form our assumptions and to provide context for the business plan and long-term
financial projections. The planning and forecasting process further included sensitivity analyses
related to key Company, industry and macroeconomic variables.
The following represents a detailed discussion of the methodology and supporting analysis used to
value our business using the business plan and long-term financial projections developed by the
Company:
Discounted Cash Flow Methodology
The Discounted Cash Flow (DCF) analysis is a forward-looking enterprise valuation methodology
that relates the value of an asset or business to the present value of expected future cash flows
to be generated by that asset or business. Under this methodology, projected future cash flows are
discounted by the business weighted average cost of capital (WACC). The WACC reflects the
estimated blended rate of return that debt and equity investors would require to invest in the
business based on its capital structure. Our DCF analysis has three components: (1) the present
value of the expected un-levered after-tax free cash flows for a determined period, (2) the present
value of the terminal value of cash flows, which represents a firm value beyond the time horizon of
the long-term financial projections, and (3) the present value of the below market cost of secured
debt at Dex Media East and Dex Media West through the term of the relevant securities.
The DCF calculation was based on managements financial projections of un-levered after-tax free
cash flows for the period 2010 to 2014. The Company used a range of WACCs to discount future cash
flows and terminal values between 9.0% and 11.0%, with a midpoint of 10.0%. These ranges were
determined based upon a market cost of debt, rather than the anticipated cost of debt of the
reorganized Company upon emergence from bankruptcy, and a market cost of equity using a capital
asset pricing model. Assumptions used in the DCF analysis, including the appropriate components of
the WACC, were deemed to be those of market participants upon analysis of peer groups capital
structures.
In conjunction with our analysis of publicly traded companies described below, the Company used a
range of exit multiples of 2014 earnings before interest, taxes, depreciation and amortization
(EBITDA) between 4.75 and 6.25, with a marginally lower than midpoint of 5.13 exit multiple
selected, to determine the present value of the terminal value of cash flows. The period of 2014
was chosen as it represents the maturity date of the secured debt held at Dex Media East and Dex
Media West and the period over which the Company will recognize the benefit of recording the
secured debt at below market cost. The present value of the below market cost of secured debt at
Dex Media East and Dex Media West was determined using the pricing of the new RHDI secured debt at
the time the valuation was performed as a proxy for a market cost of similar debt. The Company
measured the difference between the actual cost of debt at Dex Media East and Dex Media West and
the assumed market cost of debt and discounted the difference using a range of WACCs between 9.0%
and 11.0% with a midpoint of 10.0%. Upon emergence, it was determined that the pricing for the new
RHDI secured debt was also at below market cost and has been recorded by the Company accordingly.
The sum of the present value of the projected un-levered after-tax free cash flows was added to the
present value of the terminal value of cash flows and present value of the below market cost of the
secured debt at Dex Media East and Dex Media West to determine the Companys enterprise value.
F-34
Publicly Traded Company Analysis
As part of our valuation analysis, the Company identified publicly traded companies whose
businesses are relatively similar to ours and have comparable operational characteristics to derive
comparable revenue and EBITDA multiples for our DCF analysis. Criteria for selecting comparable
companies for the analysis included, among other relevant characteristics, similar lines of
businesses, business risks, growth prospects, maturity of businesses, market presence, size, and
scale of operations. The analysis included a detailed multi-year financial comparison of each
companys income statement, balance sheet and statement of cash flows. In addition, each companys
performance, profitability, margins, leverage and business trends were also examined. Based on
these analyses, a number of financial multiples and ratios were calculated to gauge each companys
relative performance and valuation. The ranges of ratios derived were then applied to the Companys
projected financial results to develop a range of implied values. The selected range of ratios was
4.75 to 6.25, with a marginally lower than midpoint of 5.13 exit multiple selected.
Precedent Transaction Analysis
Additionally, the Company utilized a precedent transaction analysis, which estimates value by
examining public merger and acquisition transactions. The valuations paid in such transactions were
analyzed as ratios of various financial results. These transaction multiples were calculated based
on the purchase price paid to acquire companies that are comparable to us. We also observed
historical expected synergies and enterprise premiums paid in selected transactions.
Analysis of Post-Emergence Tax Attributes
Following our emergence from Chapter 11, the Company was permitted to retain tax attributes to the
extent the Companys tax attributes as of the Petition Date exceeded its cancellation of debt
income. The Company valued these tax attributes by calculating the present value of the tax savings
expected to be provided relative to the taxes the Company would otherwise pay absent the
availability of such attributes. These cash flows were then discounted at a range of discount rates
based on the Companys relevant cost of capital or cost of equity. Furthermore, the Company took
into account a variety of qualitative factors in estimating the value of the tax attributes,
including such factors as implementation and utilization risk.
Final Enterprise Value, Accounting Policies and Reorganized Consolidated Balance Sheet
In determining the final enterprise value attributed to the Company of $4.5 billion, we blended our
publicly traded company analysis and precedent transaction analysis with the DCF methodology and
then factored in the post-emergence tax attributes analysis, with more emphasis on the DCF
methodology.
Fresh start accounting and reporting permits the selection of appropriate accounting policies for
Dex One. The Predecessor Companys significant accounting policies that were disclosed in its
Annual Report on Form 10-K for the year ended December 31, 2009 were adopted by Dex One as of the
Fresh Start Reporting Date, though many of the account balances were affected by the reorganization
and fresh start adjustments presented below.
The adjustments presented below were made to the January 31, 2010 condensed consolidated balance
sheet. The condensed consolidated balance sheet, reorganization adjustments and fresh start
adjustments presented below summarize the impact of the Plan and the adoption of fresh start
accounting as of the Fresh Start Reporting Date.
F-35
Reorganized Condensed Consolidated Balance Sheet
As of January 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2010 |
|
|
|
Predecessor |
|
|
Reorganization |
|
|
Fresh Start |
|
|
Successor |
|
|
|
Company |
|
|
Adjustments(1) |
|
|
Adjustments(2) |
|
|
Company(10) |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
725,955 |
|
|
$ |
(526,500 |
)(3) |
|
$ |
|
|
|
$ |
199,455 |
|
Net accounts receivable |
|
|
798,113 |
|
|
|
|
|
|
|
(41,156 |
)(2) |
|
|
756,957 |
|
Deferred directory costs |
|
|
135,479 |
|
|
|
|
|
|
|
(135,479 |
)(2) |
|
|
|
|
Prepaid expenses and other current assets |
|
|
86,925 |
|
|
|
(1,401 |
)(4)(7) |
|
|
9,657 |
(2) |
|
|
95,181 |
|
|
|
|
Total current assets |
|
|
1,746,472 |
|
|
|
(527,901 |
) |
|
|
(166,978 |
) |
|
|
1,051,593 |
|
Fixed assets and computer software, net |
|
|
154,439 |
|
|
|
|
|
|
|
49,814 |
(2) |
|
|
204,253 |
|
Other non-current assets |
|
|
60,664 |
|
|
|
|
|
|
|
(57,952 |
)(9) |
|
|
2,712 |
|
Deferred income taxes, net |
|
|
423,485 |
|
|
|
(333,275 |
)(7) |
|
|
(90,210 |
)(2) |
|
|
|
|
Intangible assets, net |
|
|
2,142,668 |
|
|
|
|
|
|
|
415,132 |
(2) |
|
|
2,557,800 |
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
2,097,124 |
(2) |
|
|
2,097,124 |
|
|
|
|
Total Assets |
|
$ |
4,527,728 |
|
|
$ |
(861,176 |
) |
|
$ |
2,246,930 |
|
|
$ |
5,913,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders (Deficit) Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
150,974 |
|
|
$ |
13,910 |
(4)(7) |
|
$ |
(3,172 |
)(2) |
|
$ |
161,712 |
|
Short-term deferred income taxes, net |
|
|
134,080 |
|
|
|
(66,651 |
)(7) |
|
|
153,573 |
(2) |
|
|
221,002 |
|
Accrued interest |
|
|
20,417 |
|
|
|
(20,417 |
)(3)(4) |
|
|
|
|
|
|
|
|
Deferred directory revenues |
|
|
811,999 |
|
|
|
|
|
|
|
(791,034 |
)(2) |
|
|
20,965 |
|
Current portion of long-term debt |
|
|
993,526 |
|
|
|
(827,579 |
)(3)(4) |
|
|
(31,575 |
)(4)(8) |
|
|
134,372 |
|
|
|
|
Total current liabilities |
|
|
2,110,996 |
|
|
|
(900,737 |
) |
|
|
(672,208 |
) |
|
|
538,051 |
|
Long-term debt |
|
|
2,561,248 |
|
|
|
657,628 |
(3)(4) |
|
|
(88,670 |
)(4)(8) |
|
|
3,130,206 |
|
Deferred income taxes, net |
|
|
|
|
|
|
245,025 |
(7) |
|
|
66,322 |
(2) |
|
|
311,347 |
|
Other non-current liabilities |
|
|
380,091 |
|
|
|
120,391 |
(4)(7) |
|
|
(17,388 |
)(2) |
|
|
483,094 |
|
Liabilities subject to compromise |
|
|
6,352,813 |
|
|
|
(6,352,813 |
)(5) |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
11,405,148 |
|
|
|
(6,230,506 |
) |
|
|
(711,944 |
) |
|
|
4,462,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders (Deficit) Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock Predecessor |
|
|
88,169 |
|
|
|
(88,169 |
)(6) |
|
|
|
|
|
|
|
|
Additional paid-in capital Predecessor |
|
|
2,443,059 |
|
|
|
(2,443,059 |
)(6) |
|
|
|
|
|
|
|
|
(Accumulated deficit) retained earnings |
|
|
(9,092,693 |
) |
|
|
6,133,819 |
(6) |
|
|
2,958,874 |
(2) |
|
|
|
|
Treasury Stock Predecessor |
|
|
(256,011 |
) |
|
|
256,011 |
(6) |
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
|
(59,944 |
) |
|
|
59,944 |
(6) |
|
|
|
|
|
|
|
|
Common stock Successor |
|
|
|
|
|
|
50 |
(5) |
|
|
|
|
|
|
50 |
|
Additional paid-in capital Successor |
|
|
|
|
|
|
1,450,734 |
(5) |
|
|
|
|
|
|
1,450,734 |
|
|
|
|
Total shareholders (deficit) equity. |
|
|
(6,877,420 |
) |
|
|
5,369,330 |
|
|
|
2,958,874 |
|
|
|
1,450,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders
(Deficit) Equity |
|
$ |
4,527,728 |
|
|
$ |
(861,176 |
) |
|
$ |
2,246,930 |
|
|
$ |
5,913,482 |
|
|
|
|
|
|
|
(1) |
|
Represents amounts to be recorded on the Fresh Start Reporting Date for the
implementation of the Plan, including the settlement of liabilities subject to compromise and
related payments, distributions of cash and new shares of Dex One common stock to pre-petition
creditors, the cancellation of RHD common stock and the elimination of the Predecessor Companys
additional paid-in capital, a portion of accumulated deficit, treasury stock and accumulated other
comprehensive loss. The reorganization adjustments also include the establishment of Dex One
additional paid-in capital of $1.5 billion based on the fair value of equity of $1.5 billion less
the par value of Dex One common stock of less than $0.1 million. Common shares outstanding of the
Predecessor Company immediately prior to their cancellation on the Effective Date were 69,058,991. |
F-36
|
|
|
(2) |
|
Represents the adjustments for fresh start accounting primarily related to recording
goodwill, recording our intangible assets, accounts receivable, fixed assets and computer software
and other assets and liabilities at fair value and related deferred income taxes in accordance with
ASC 805. Additionally, such fresh start accounting adjustments reflect the elimination of
substantially all of our deferred directory revenue of $791.0 million and all of the related
deferred directory costs of $135.5 million, based on the minimal obligations we have subsequent to
the Fresh Start Reporting Date for advertising sales fulfilled prior to the Fresh Start
Reporting Date. The remaining deferred directory revenues of $21.0 million have been recorded at
fair value in fresh start accounting and pertain to billings ahead of publications and revenues
associated with our internet products and services for which we have future obligations subsequent
to the Fresh Start Reporting Date. Prepaid expenses and other current assets include $14.4 million
of cost-uplift, which is defined and discussed below. The fresh start accounting adjustments also
include the elimination of (1) the remaining portion of the Predecessor Companys accumulated
deficit, (2) prepaid director and officer insurance included in prepaid expenses and other current
assets and (3) deferred rent included in accounts payable and accrued liabilities as well as other
non-current liabilities. |
The following table represents a reconciliation of the enterprise value attributed to Dex One
assets, determination of the total reorganization value to be allocated to these assets and the
determination of goodwill. The table also presents a reconciliation of the total reorganization
value to be allocated to assets to new Dex One common stock and additional paid-in capital:
|
|
|
|
|
Enterprise value attributed to Dex One |
|
$ |
4,515,907 |
|
Plus: cash and cash equivalents |
|
|
199,455 |
|
Plus: liabilities (excluding amended and restated credit
facilities and Dex One Senior Subordinated Notes) |
|
|
1,198,120 |
|
|
|
|
|
Total reorganization value to be allocated to assets |
|
|
5,913,482 |
|
Less: fair value assigned to tangible and intangible
assets |
|
|
(3,816,358 |
) |
|
|
|
|
Value of Dex One assets in excess of fair value (goodwill) |
|
$ |
2,097,124 |
|
|
|
|
|
|
|
|
|
|
Total reorganization value to be allocated to assets |
|
$ |
5,913,482 |
|
Less: amended and restated credit facilities and Dex One
Senior Subordinated Notes |
|
|
(3,264,578 |
) |
Less: other liabilities |
|
|
(1,198,120 |
) |
|
|
|
|
New Dex One common stock (less than $0.1 million) and
additional paid-in capital ($1,450.7 million) |
|
$ |
1,450,784 |
|
|
|
|
|
|
|
|
|
|
The following table represents the impact of fresh start accounting adjustments on retained
earnings: |
|
|
|
|
|
Fresh start accounting adjustments: |
|
|
|
|
Goodwill |
|
$ |
2,097,124 |
|
Write off of deferred revenue and deferred directory costs |
|
|
655,555 |
|
Fair value adjustment to intangible assets |
|
|
415,132 |
|
Fair value adjustment to the amended and restated credit
facilities |
|
|
120,245 |
|
Fair value adjustment to fixed assets and computer
software |
|
|
49,814 |
|
Write-off of deferred financing costs |
|
|
(48,443 |
) |
Other fresh start accounting adjustments |
|
|
(20,450 |
) |
|
|
|
|
Impact of fresh start accounting on statement of operations |
|
|
3,268,977 |
|
Adjustment to income tax provision |
|
|
(310,103 |
) |
|
|
|
|
Total impact on retained earnings for fresh start accounting
adjustments |
|
$ |
2,958,874 |
|
|
|
|
|
F-37
|
|
|
|
|
The determination of the fair value of our intangible assets resulted in a $415.1 million net
increase in intangible assets on the reorganized condensed consolidated balance sheet at January
31, 2010. The following table presents the increase (decrease) in fair value of intangible assets
by category: |
|
|
|
|
|
Directory services agreements |
|
$ |
(92,061 |
) |
Local customer relationships |
|
|
303,326 |
|
National customer relationships |
|
|
116,976 |
|
Trade names and trademarks |
|
|
16,074 |
|
Technology, advertising commitments and other |
|
|
70,817 |
|
|
|
|
|
Total increase in fair value of intangible assets |
|
$ |
415,132 |
|
|
|
|
|
|
|
|
(3) |
|
In accordance with the Plan, cash disbursements of $526.5 million were made on
the Effective Date related to the repayment of principal and accrued
interest on outstanding debt. |
|
(4) |
|
Reflects the amendment and restatement of our credit facilities as well as the
issuance of the $300.0 million Dex One Senior Subordinated Notes completed on the Effective Date.
The following tables present a reconciliation of outstanding debt, including the current portion,
at January 31, 2010 to reorganized outstanding debt, including the current portion, at January 31,
2010. |
|
|
|
|
|
|
|
January 31, 2010 |
|
Current portion of long-term debt |
|
$ |
993,526 |
|
Reclass of current portion of long-term debt |
|
|
(827,579 |
) |
Adjustment to record the current portion of
long-term debt at fair value |
|
|
(31,575 |
) |
|
|
|
|
Reorganized current portion of long-term debt |
|
$ |
134,372 |
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2010 |
|
Long-term debt |
|
$ |
2,561,248 |
|
Reorganization adjustments: |
|
|
|
|
Repayment of long-term debt |
|
|
(511,272 |
) |
Reclass of current portion of long-term debt |
|
|
827,579 |
|
Dex One Senior Subordinated Notes |
|
|
300,000 |
|
Interest rate swaps and accrued interest |
|
|
41,321 |
|
|
|
|
|
Total reorganization adjustments |
|
|
657,628 |
|
Adjustment to record long-term debt at fair value |
|
|
(88,670 |
) |
|
|
|
|
Reorganized long-term debt |
|
$ |
3,130,206 |
|
|
|
|
|
|
|
|
(5) |
|
Liabilities subject to compromise generally refer to pre-petition obligations,
secured or unsecured, that may be impaired by a plan of reorganization. FASB ASC 852 requires such
liabilities, including those that became known after filing the Chapter 11 petitions, be reported
at the amounts expected to be allowed, even if they may be settled for lesser amounts. These
liabilities represented the estimated amount expected to be resolved on known or potential claims
through the Chapter 11 process. Liabilities subject to compromise also includes items that may be
assumed under the plan of reorganization, and may be subsequently reclassified to liabilities not
subject to compromise. The Company has classified all of its Notes in Default as liabilities
subject to compromise at January 31, 2010. Liabilities subject to compromise also include certain
pre-petition liabilities including accrued interest, accounts payable and accrued liabilities, tax
related liabilities and lease related liabilities. The table below identifies the principal
categories of liabilities subject to compromise at January 31, 2010: |
|
|
|
|
|
|
|
January 31, 2010 |
|
Notes in Default |
|
$ |
6,071,756 |
|
Accrued interest |
|
|
241,585 |
|
Tax related liabilities |
|
|
28,845 |
|
Accounts payable and accrued liabilities |
|
|
10,627 |
|
|
|
|
|
Total liabilities subject to compromise |
|
$ |
6,352,813 |
|
|
|
|
|
F-38
|
|
|
|
|
Liabilities subject to compromise at January 31, 2010 were either settled by the issuance of new
Dex One common stock, the issuance of the Dex One Senior Subordinated Notes, cash disbursements or
reclassified out of liabilities subject to compromise into appropriate balance sheet accounts. As a
result of the extinguishment of liabilities subject to compromise, the Predecessor Company recorded
a gain on reorganization of $4.5 billion for the one month ended January 31, 2010, the components
of which are presented in the following table. |
|
|
|
|
|
|
|
One Month Ended |
|
|
|
January 31, 2010 |
|
Liabilities subject to compromise |
|
$ |
6,352,813 |
|
Less: |
|
|
|
|
Issuance of new Dex One common stock (par value) |
|
|
(50 |
) |
Dex One additional paid-in capital |
|
|
(1,450,734 |
) |
Dex One Senior Subordinated Notes |
|
|
(300,000 |
) |
Reclassified into other balance sheet liability accounts |
|
|
(39,471 |
) |
Professional fees and other |
|
|
(38,403 |
) |
|
|
|
|
Gain on reorganization / settlement of liabilities subject
to compromise |
|
$ |
4,524,155 |
|
|
|
|
|
|
|
|
|
|
The Predecessor Company has incurred professional fees associated with filing the Chapter 11
petitions of $30.6 million during the one month ended January 31, 2010, of which $22.7 million have
been paid in cash during the one month ended January 31, 2010. Professional fees include
financial, legal and valuation services directly associated with the reorganization process.
Professional fees for post-emergence activities related to Plan implementation and other transition
costs attributable to the reorganization are expected to continue into 2010. |
|
|
|
During the one month ended January 31, 2010, the Predecessor Company did not receive any operating
cash receipts resulting from the filing of the Chapter 11 petitions. |
|
|
|
(6) |
|
Represents the impact of reorganization adjustments on accumulated deficit: |
|
|
|
|
|
Gain on reorganization / settlement of liabilities subject
to compromise |
|
$ |
4,524,155 |
|
Elimination of Predecessor Company common stock |
|
|
88,169 |
|
Elimination of Predecessor Company additional
paid-in capital |
|
|
2,443,059 |
|
Elimination of Predecessor Company treasury stock |
|
|
(256,011 |
) |
Elimination of Predecessor Company accumulated
other comprehensive loss |
|
|
(59,944 |
) |
Adjustment to income tax provision |
|
|
(607,487 |
) |
Other charges |
|
|
1,878 |
|
|
|
|
|
Total impact on accumulated deficit for reorganization
adjustments |
|
$ |
6,133,819 |
|
|
|
|
|
|
|
|
|
|
In connection with the Companys adoption of fresh start accounting, the following table presents
the amounts included in accumulated other comprehensive loss at January 31, 2010 that were
eliminated as part of fresh start accounting adjustments: |
|
|
|
|
|
Interest rate swaps, net |
|
$ |
15,278 |
|
Employee benefit plans, net |
|
|
44,666 |
|
|
|
|
|
Total |
|
$ |
59,944 |
|
|
|
|
|
|
|
|
(7) |
|
Represents reorganization adjustments associated with the Predecessor Companys
deferred income taxes, interest rate swap liabilities and related interest receivables that have
been converted into a new tranche of term loans under the amended and restated credit facilities
and the reclass of certain liabilities from liabilities subject to compromise. |
F-39
|
|
|
(8) |
|
Represents the adjustment to record our long-term debt, including the current
portion, at fair value as of the Fresh Start Reporting Date. See Note 2, Summary of Significant
Accounting Policies Interest Expense and Deferred Financing Costs and Note 6,
Long-Term Debt, Credit Facilities and Notes for additional information. The following tables
present the fair value adjustments to our long-term debt, including the current portion, by
issuance: |
|
|
|
|
|
Current portion of long-term debt: |
|
|
|
|
RHDI Amended and Restated Credit Facility |
|
$ |
4,149 |
|
Dex Media East Amended and Restated Credit Facility |
|
|
22,424 |
|
Dex Media West Amended and Restated Credit Facility |
|
|
5,002 |
|
|
|
|
|
Total fair value adjustments |
|
$ |
31,575 |
|
|
|
|
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
RHDI Amended and Restated Credit Facility |
|
$ |
14,224 |
|
Dex Media East Amended and Restated Credit Facility |
|
|
63,633 |
|
Dex Media West Amended and Restated Credit Facility |
|
|
10,813 |
|
|
|
|
|
Total fair value adjustments |
|
$ |
88,670 |
|
|
|
|
|
|
|
|
(9) |
|
Represents elimination of deferred financing costs associated with the Predecessor
Companys existing credit facilities and the write-off of other non-current assets as a result of
fresh start accounting. |
|
(10) |
|
The following table summarizes the allocation of fair values of the Predecessor
Companys assets and liabilities as shown in the reorganized condensed consolidated balance sheet
at January 31, 2010: |
|
|
|
|
|
|
|
January 31, 2010 |
|
Cash and cash equivalents |
|
$ |
199,455 |
|
Net accounts receivable |
|
|
756,957 |
|
Prepaid expenses and other current assets |
|
|
95,181 |
|
Fixed assets and computer software, net |
|
|
204,253 |
|
Other non-current assets |
|
|
2,712 |
|
Goodwill |
|
|
2,097,124 |
|
Intangible assets, net |
|
|
2,557,800 |
|
|
|
|
|
Total assets |
|
|
5,913,482 |
|
Less: accounts payable and accrued liabilities |
|
|
161,712 |
|
Less: short-term deferred income taxes, net |
|
|
221,002 |
|
Less: deferred directory revenues |
|
|
20,965 |
|
Less: current portion of long-term debt |
|
|
134,372 |
|
Less: long-term debt |
|
|
3,130,206 |
|
Less: deferred income taxes, net |
|
|
311,347 |
|
Less: other non-current liabilities |
|
|
483,094 |
|
|
|
|
|
Net assets acquired |
|
$ |
1,450,784 |
|
|
|
|
|
The Company utilized the following methodologies and assumptions to value its assets in connection
with fresh start accounting:
Cash
Cash and cash equivalents of the Predecessor Company have been carried forward to Dex Ones opening
balance sheet. No valuation adjustments were necessary as book value is a reasonable estimate for
fair value.
Accounts Receivable
The accounts receivable balances were valued at fair value using the net realizable value approach.
The net realizable value approach was determined by reducing the gross receivable balance by our
allowance for doubtful accounts and sales claims. Due to the relatively short collection period,
the net realizable value approach was determined to result in a reasonable indication of fair value
of the assets. The Company will re-establish an allowance for doubtful accounts as accounts
receivable are billed in 2010, which will be based upon collection
F-40
history and an estimate of
uncollectible accounts. Management will exercise judgment in adjusting the allowance for known
items such as current local business conditions and credit trends.
Deferred Directory Costs
Unamortized deferred directory costs of the Predecessor Company have been eliminated on Dex Ones
opening balance sheet as they do not represent assets to Dex One. These deferred directory costs
relate entirely to directories that have already been published by the Predecessor Company as of
the Fresh Start Reporting Date. Dex One will begin to record deferred directory costs associated
with directories published subsequent to the Fresh Start Reporting Date.
Deferred income taxes, net
Deferred income taxes, net associated with the Predecessor Company have been eliminated on Dex
Ones opening balance sheet as a result of fresh start accounting. Dex One has recorded deferred
taxes, as applicable, related to any temporary differences, tax carry-forwards, and uncertain tax
positions in accordance with ASC 740, Income Taxes, commencing on the Fresh Start Reporting Date.
A summary of the Companys deferred tax balances at February 1, 2010 and the Predecessor Companys
deferred tax balances at December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
February 1, 2010 |
|
|
December 31, 2009 |
|
Gross deferred tax assets |
|
$ |
139,326 |
|
|
$ |
1,988,997 |
|
Valuation allowance |
|
|
(7,876 |
) |
|
|
(1,531,905 |
) |
Gross deferred tax liabilities |
|
|
(663,799 |
) |
|
|
(165,391 |
) |
|
|
|
|
|
|
|
Net deferred tax asset (liability) |
|
$ |
(532,349 |
) |
|
$ |
291,701 |
|
|
|
|
|
|
|
|
See Note 8, Income Taxes for additional information.
Prepaid expenses & other current assets
Prepaid directory costs relate to directories that have not yet been published as of the Fresh
Start Reporting Date. Prepaid directory costs have been recorded at fair value, determined as (a)
the estimated billable value of the published directory less (b) the expected costs to complete the
directory, plus (c) a normal profit margin. This incremental adjustment to step up the recorded
value of the prepaid directory costs to fair value is hereby referred to as cost-uplift. The fair
value of these costs was determined to be $14.4 million, which has been recorded as a fresh start
accounting adjustment on Dex Ones opening balance sheet. Cost-uplift will be reclassified from
prepaid expenses and other current assets to deferred directory costs as directories associated
with these costs are published.
Other prepaid expenses and current assets have been carried forward to Dex Ones opening balance
sheet. The nature of these items relate predominantly to prepaid deposits and rents. These amounts
have been paid in advance with cash and will be amortized over a 12 month period to match the
timing of the use of the related assets. No valuation adjustments were necessary for these items as
book value is a reasonable estimate for fair value.
Fixed Assets
Fixed assets were measured at fair value and as such, all amounts in accumulated depreciation were
reduced to zero. In establishing fair value, we used (i) the cost approach, where the current
replacement cost of the fixed asset being appraised is adjusted for the loss in value caused by
physical deterioration, functional obsolescence, and economic obsolescence and (ii) third-party
appraisals of certain fixed assets such as buildings. The Company carried forward the useful lives
for each of the fixed assets of the Predecessor Company, which were reviewed by the Predecessor
Company as of December 31, 2009. This approach was deemed reasonable since the information used and
analysis performed to determine the useful lives did not materially differ as of January 31, 2010.
F-41
Other non-current assets
Historically, other non-current assets were comprised of unamortized deferred financing costs as
well as various other items. Unamortized deferred financing costs associated with the Predecessor
Companys credit facilities have been written off in fresh start accounting. Throughout bankruptcy
and until the adoption of fresh start accounting, these credit facilities were not subject to
compromise on the condensed consolidated balance sheet and therefore the unamortized deferred
financing costs associated with these credit facilities were not written off to reorganization
items, net on the consolidated statement of operations until the Fresh Start Reporting Date.
Intangible Assets
The financial information and assumptions used to determine the fair value of individual intangible
assets was consistent with the information and assumptions used in estimating the enterprise value
of Dex One. The following is a summary of the methodology used in the valuation of each category of
intangible asset:
Directory Services Agreements The Company has acquired directory services agreements through
prior acquisitions. See Note 2, Summary of Significant Accounting Policies Identifiable
Intangible Assets and Goodwill for additional information on these directory services agreements.
As these directory services agreements have a direct contribution to the financial performance of
the business, the Company utilized the multi-period excess earnings method, which is a variant of
the income approach, to assign a fair value to these assets. The multi-period excess earnings
method uses a discounted cash flow model, whereby the projected cash flows of the intangible asset
are computed indirectly, which means that future cash flows are projected with deductions made to
recognize returns on appropriate contributory assets, leaving the excess, or residual net cash
flow, as indicative of the intangible asset fair value. The multi-period excess earnings method
assumes the value derived from the respective asset is greater in the earlier years and steadily
declines over time.
Local and National Customer Relationships The Company has acquired significant local and
national customer relationships through prior acquisitions and has also developed significant new
local and national customer relationships. These local and national customer relationships provide
ongoing and repeat business for the Company. Given the direct contribution made by these local and
national customer relationships to the financial performance of the business, the Company utilized
the multi-period excess earnings method to assign a fair value to these assets.
Trade Names and Trademarks - The fair value of trade names and trademarks obtained as a result of
prior acquisitions was determined based on an income approach known as the relief from royalty
method, which values the trade names and trademarks based on the estimated amount that a company
would have to pay in an arms length transaction to use them. Significant assumptions utilized to
value these assets were forecasted revenue streams, estimated applicable royalty rates, applicable
income tax rates and appropriate discount rates. Royalty rates were estimated based on the
assessment of risk and return on investment factors of comparable transactions.
Technology, Advertising Commitments and Other The Companys developed software technology and
content, which has a direct contribution to the financial performance of the business, was valued
using the cost approach. The cost approach measures the value of an intangible asset by
quantifying the aggregate expenditures that would be required to replace the asset, given its
future service capability. Advertising Commitments and other, which includes third-party contracts,
were valued using the multi-period excess earnings method.
The Company established useful lives for each of the intangible assets noted above in conjunction
with their fair value determination in fresh start accounting. See Note 2, Summary of Significant
Accounting Policies Identifiable Intangible Assets and Goodwill for information on the useful
lives and the analysis performed.
F-42
4. Reorganization Items, Net and Liabilities Subject to Compromise
Reorganization Items, Net
Reorganization items directly associated with the process of reorganizing the business under
Chapter 11 were recorded on a separate line item on the 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 |
|
|
|
|
|
See Note 3 Fresh Start Accounting for information on the gain on reorganization / settlement of
liabilities subject to compromise and the fresh start accounting adjustments presented above.
During the year ended December 31, 2009, the Predecessor Company recorded $94.8 million of
reorganization items on a separate line item on the consolidated statement of operations. The
following table displays the details of reorganization items for the year ended December 31, 2009:
|
|
|
|
|
|
|
Predecessor Company |
|
|
|
Year Ended |
|
|
|
December 31, 2009 |
|
Professional fees |
|
$ |
77,375 |
|
Write-off of unamortized deferred financing costs |
|
|
64,475 |
|
Write-off of unamortized net premiums / discounts on
long-term debt |
|
|
34,886 |
|
Write-off of
debt related unamortized fair value adjustments |
|
|
(78,511 |
) |
Lease rejections, abandoned property and other |
|
|
(3,457 |
) |
|
|
|
|
Total reorganization items |
|
$ |
94,768 |
|
|
|
|
|
The Predecessor Company incurred professional fees associated with filing the Chapter 11 petitions
of $77.4 million during the year ended December 31, 2009, of which $67.6 million were paid in cash.
Professional fees include financial, legal and valuation services directly associated with the
reorganization process.
F-43
The write-off of unamortized deferred financing costs of $64.5 million, unamortized net premiums /
discounts of $34.9 million and unamortized fair value adjustments required by GAAP as a result of
the Dex Media Merger of $78.5 million at May 28, 2009, relate to long-term debt classified as
liabilities subject to compromise at December 31, 2009.
The Predecessor Company recognized $3.5 million during the year ended December 31, 2009 associated
with rejected leases, abandoned property and other, which have been approved by the Bankruptcy
Court through December 31, 2009 as part of the Chapter 11 Cases.
In 2009, the Predecessor Company did not receive any operating cash receipts resulting from the
filing of the Chapter 11 petitions.
Liabilities Subject to Compromise
See Note 3, Fresh Start Accounting for information on accounting and reporting for items
identified as liabilities subject to compromise. The table below identifies the principal
categories of liabilities subject to compromise at December 31, 2009:
|
|
|
|
|
|
|
Predecessor Company |
|
|
|
December 31, 2009 |
|
Notes in default |
|
$ |
6,071,756 |
|
Accrued interest |
|
|
241,585 |
|
Tax related liabilities |
|
|
28,845 |
|
Accounts payable and accrued liabilities |
|
|
10,627 |
|
|
|
|
|
Total liabilities subject to compromise |
|
$ |
6,352,813 |
|
|
|
|
|
5. Restructuring Charges
Successor Company Actions
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 will continue into 2011. Employees affected as a result of the 2010 Actions were
notified of their termination during the fourth quarter of 2010 and none of our leased facilities
were vacated. As a result of the 2010 Actions, we have recognized a restructuring charge to
earnings of $18.6 million and made payments of $0.7 million during the eleven months ended December
31, 2010 related to severance. The following table shows the activity in our restructuring reserve
associated with the 2010 Actions.
|
|
|
|
|
|
|
2010 Actions |
|
Balance at February 1, 2010 |
|
$ |
|
|
Additions to reserve charged to earnings |
|
|
18,586 |
|
Payments |
|
|
(728 |
) |
|
|
|
|
Balance at December 31, 2010 |
|
$ |
17,858 |
|
|
|
|
|
The Company anticipates additional charges to earnings related to severance and charges to earnings
associated with vacating leased facilities in conjunction with the 2010 Actions during 2011. These
amounts have not been determined at this time.
F-44
Predecessor Company Actions
During 2009, the Predecessor Company initiated a restructuring plan that included vacating leased
facilities and headcount reductions (2009 Actions). During the eleven months ended December 31,
2010, the Company relieved the remaining restructuring reserve associated with the 2009 Actions of
$0.2 million to earnings. The Company made payments associated with the 2009 Actions of $0.3
million during the eleven months ended December 31, 2010. During the one month ended January 31,
2010, the Predecessor Company relieved a portion of the restructuring reserve associated with the
2009 Actions by $0.6 million with a corresponding credit to earnings. The Predecessor Company did
not make any payments associated with the 2009 Actions during the one month ended January 31, 2010.
During the year ended December 31, 2009, the Predecessor Company recognized a restructuring charge
to earnings associated with the 2009 Actions of $5.4 million and made payments of $2.4 million.
During the second quarter of 2008, the Predecessor Company initiated a restructuring plan that
included headcount reductions, consolidation of responsibilities and vacating leased facilities
(2008 Actions) that occurred during 2008 and continued into 2009. During the years ended December
31, 2009 and 2008, the Predecessor Company recognized a restructuring charge to earnings associated
with the 2008 Actions of $9.3 million and $38.6 million, respectively. Payments of $17.5 million
and $28.4 million were made with respect to outside consulting services, severance, and vacated
leased facilities during the years ended December 31, 2009 and 2008, respectively.
Restructuring charges that are (credited) charged to earnings are included in production and
distribution expenses, selling and support expenses or general and administrative expenses on the
consolidated statements of operations, as applicable.
6. Long-Term Debt, Credit Facilities and Notes
Successor Company
The following table presents the fair market value of our long-term debt at December 31, 2010 based
on quoted market prices on that date, as well as the carrying value of our long-term debt at
December 31, 2010, which includes $91.0 million of unamortized fair value discount adjustments
required by GAAP in connection with the Companys adoption of fresh start accounting on the Fresh
Start Reporting Date. See Note 3, Fresh Start Accounting for additional information.
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
Fair Market Value |
|
|
Carrying Value |
|
|
|
December 31, 2010 |
|
|
December 31, 2010 |
|
|
|
|
RHDI Amended and Restated Credit Facility |
|
$ |
800,175 |
|
|
$ |
1,014,485 |
|
Dex Media East Amended and Restated Credit Facility |
|
|
597,185 |
|
|
|
739,090 |
|
Dex Media West Amended and Restated Credit Facility |
|
|
618,214 |
|
|
|
683,646 |
|
Dex One 12%/14% Senior Subordinated Notes due 2017 |
|
|
204,750 |
|
|
|
300,000 |
|
|
|
|
Total Dex One consolidated |
|
|
2,220,324 |
|
|
|
2,737,221 |
|
Less current portion |
|
|
208,340 |
|
|
|
249,301 |
|
|
|
|
Long-term debt |
|
$ |
2,011,984 |
|
|
$ |
2,487,920 |
|
|
|
|
Credit Facilities
RHDI Amended and Restated Credit Facility
As of December 31, 2010, the outstanding balance under the amended and restated RHDI credit
facility (RHDI Amended and Restated Credit Facility) totaled $1,014.5 million. The RHDI Amended
and Restated Credit Facility requires quarterly principal and interest payments at our option at
either:
F-45
|
|
|
The highest (subject to a floor of 4.00%) of (i) the Prime Rate (as
defined in the RHDI Amended and Restated Credit Facility), (ii) the Federal Funds
Effective Rate (as defined in the RHDI Amended and Restated Credit Facility) plus
0.50%, and (iii) one month LIBOR plus 1.00% in each case, plus an interest rate
margin for base rate loans. The interest rate margin for base rate loans is
initially 5.25% per annum, and such interest rate margin adjusts pursuant to a
pricing grid that provides for a margin equal to 5.25% per annum if RHDIs
consolidated leverage ratio is greater than or equal to 4.25 to 1.00, and equal to
5.00% per annum if RHDIs consolidated leverage ratio is less than 4.25 to 1.00; or |
|
|
|
|
The higher of (i) LIBOR rate and (ii) 3.00%, in each case, plus an
interest rate margin for Eurodollar loans. The interest rate margin for Eurodollar
loans is initially 6.25% per annum, and such interest rate margin adjusts pursuant
to a pricing grid that provides for a margin equal to 6.25% per annum if RHDIs
consolidated leverage ratio is greater than or equal to 4.25 to 1.00, and equal to
6.00% per annum if RHDIs consolidated leverage ratio is less than 4.25 to 1.00.
RHDI may elect interest periods of 1, 2, 3 or 6 months for LIBOR borrowings. |
The RHDI Amended and Restated Credit Facility matures on October 24, 2014. The weighted average
interest rate of outstanding debt under the RHDI Amended and Restated Credit Facility was 9.0% at
December 31, 2010.
Dex Media East Amended and Restated Credit Facility
As of December 31, 2010, the outstanding balance under the amended and restated Dex Media East
credit facility (Dex Media East Amended and Restated Credit Facility) totaled $739.1 million. The
Dex Media East Amended and Restated Credit Facility requires quarterly principal and interest
payments at our option at either:
|
|
|
The highest of (i) the Prime Rate (as defined in the Dex Media East
Amended and Restated Credit Facility), (ii) the Federal Funds Effective Rate (as
defined in the Dex Media East Amended and Restated Credit Facility) plus 0.50%, and
(iii) one month LIBOR plus 1.00% in each case, plus an interest rate margin for
base rate loans. The interest rate margin for base rate loans is initially 1.50%
per annum, and such interest rate margin adjusts pursuant to a pricing grid that
provides for a margin equal to 1.50% per annum if DME Inc.s consolidated leverage
ratio is greater than or equal to 2.75 to 1.00, equal to 1.25% per annum if DME
Inc.s consolidated leverage ratio is greater than or equal to 2.50 to 1.00 but
less than 2.75 to 1.00 and equal to 1.00% per annum if DME Inc.s consolidated
leverage ratio is less than 2.50 to 1.00; or |
|
|
|
|
The LIBOR rate plus an interest rate margin for Eurodollar loans. The
interest rate margin for Eurodollar loans is initially 2.50% per annum, and such
interest rate margin adjusts pursuant to a pricing grid that provides for a margin
equal to 2.50% per annum if DME Inc.s consolidated leverage ratio is greater than
or equal to 2.75 to 1.00, equal to 2.25% per annum if DME Inc.s consolidated
leverage ratio is greater than or equal to 2.50 to 1.00 but less than 2.75 to 1.00
and equal to 2.00% per annum if DME Inc.s consolidated leverage ratio is less than
2.50 to 1.00. DME Inc. may elect interest periods of 1, 2, 3 or 6 months for LIBOR
borrowings. |
The Dex Media East Amended and Restated Credit Facility matures on October 24, 2014. The weighted
average interest rate of outstanding debt under the Dex Media East Amended and Restated Credit
Facility was 2.8% at December 31, 2010.
Dex Media West Amended and Restated Credit Facility
As of December 31, 2010, the outstanding balance under the amended and restated Dex Media West
credit facility (Dex Media West Amended and Restated Credit Facility) totaled $683.6 million. The
Dex Media West Amended and Restated Credit Facility requires quarterly principal and interest
payments at our option at either:
|
|
|
The highest (subject to a floor of 4.00%) of (i) the Prime Rate (as
defined in the Dex Media West Amended and Restated Credit Facility), (ii) the
Federal Funds Effective Rate (as defined in the Dex Media West Amended and Restated
Credit Facility) plus 0.50%, and (iii) one month LIBOR plus 1.00% in each case,
plus an interest rate margin for base rate loans. The interest rate margin for
base rate loans is initially 3.50% per annum, and such interest rate margin adjusts
pursuant to a pricing grid that provides for a margin equal to 3.50% per annum if
DMW Inc.s consolidated leverage ratio is greater than or equal to 2.75 to 1.00,
equal to 3.25% per annum if DMW Inc.s consolidated leverage ratio is greater than
or equal to 2.50 to 1.00 but less than 2.75 to 1.00 and equal to 3.00% per annum if
DMW Inc.s consolidated leverage ratio is less than 2.50 to 1.00; or
|
F-46
|
|
|
The higher of (i) LIBOR rate and (ii) 3.00%, in each case, plus an
interest rate margin for Eurodollar loans. The interest rate margin for Eurodollar
loans is initially 4.50% per annum, and such interest rate margin adjusts pursuant
to a pricing grid that provides for a margin equal to 4.50% per annum if DMW Inc.s
consolidated leverage ratio is greater than or equal to 2.75 to 1.00, equal to
4.25% per annum if DMW Inc.s consolidated leverage ratio is greater than or equal
to 2.50 to 1.00 but less than 2.75 to 1.00 and equal to 4.00% per annum if DMW
Inc.s consolidated leverage ratio is less than 2.50 to 1.00. DMW Inc. may elect
interest periods of 1, 2, 3 or 6 months for LIBOR borrowings. |
The Dex Media West Amended and Restated Credit Facility matures on October 24, 2014. The weighted
average interest rate of outstanding debt under the Dex Media West Amended and Restated Credit
Facility was 7.0% at December 31, 2010.
Each of the amended and restated credit facilities described above includes an uncommitted
revolving credit facility available for borrowings up to $40.0 million. The availability of such
uncommitted revolving credit facility is subject to certain conditions including the prepayment of
the term loans under each of the amended and restated credit facilities in an amount equal to such
revolving credit facility.
The amended and restated credit facilities contain provisions for prepayment from net proceeds of
asset dispositions, equity issuances and debt issuances subject to certain exceptions, from a
ratable portion of the net proceeds received by the Company from asset dispositions by the Company,
subject to certain exceptions, and from a portion of excess cash flow.
Each of the amended and restated credit facilities described above contain certain covenants that,
subject to exceptions, limit or restrict each borrower and its subsidiaries incurrence of liens,
investments (including acquisitions), sales of assets, indebtedness, payment of dividends,
distributions and payments of certain indebtedness, sale and leaseback transactions, swap
transactions, affiliate transactions, capital expenditures and mergers, liquidations and
consolidations. Each amended and restated credit facility also contains certain covenants that,
subject to exceptions, limit or restrict each borrowers incurrence of liens, indebtedness,
ownership of assets, sales of assets, payment of dividends or distributions or modifications of the
Dex One Senior Subordinated Notes. Each borrower is required to maintain compliance with a
consolidated leverage ratio covenant. RHDI and DMW Inc. are also required to maintain compliance
with a consolidated interest coverage ratio covenant. DMW Inc. is also required to maintain
compliance with a consolidated senior secured leverage ratio covenant. The Dex Media West Amended
and Restated Credit Agreement includes an option for additional covenant relief under the senior
secured leverage covenant through the fourth quarter of 2011, subject to increased amortization of
the loans through the first quarter of 2012, an increase in the excess cash flow sweep for 2011 and
payment of a 25 basis point fee ratably to the lenders under the Dex Media West Amended and
Restated Credit Agreement. On March 31, 2010, the Company exercised the Senior Secured Leverage
Ratio Election, as defined in the Dex Media West Amended and Restated Credit Agreement. The Company
incurred a fee of $2.1 million to exercise this option.
The obligations under each of the amended and restated credit facilities are guaranteed by our
subsidiaries and are secured by a lien on substantially all of our and our subsidiaries tangible
and intangible assets, including a pledge of the stock of their respective subsidiaries, as well as
a mortgage on certain real property, if any.
Pursuant to a shared guaranty and collateral agreement and subject to an intercreditor agreement
among the administrative agents under each of the amended and restated credit facilities, the
Company and, subject to certain exceptions, certain subsidiaries of the Company, guaranty the
obligations under each of the amended and restated credit facilities and the obligations are
secured by a lien on substantially all of such guarantors tangible and intangible assets (other
than the assets of the Companys subsidiary, Business.com), including a pledge of the stock of
their respective subsidiaries, as well as a mortgage on certain real property, if any.
Notes
Dex One Senior Subordinated Notes
On the Effective Date, we issued the $300.0 million Dex One Senior Subordinated Notes in exchange
for the Dex Media West 8.5% Senior Notes due 2010 and 5.875% Senior Notes due 2011. Interest on the
Dex One Senior Subordinated Notes is payable semi-annually on March 31st and September
30th of each year, commencing on March 31, 2010 through January 2017. The Dex One Senior
Subordinated Notes accrue interest at an annual rate of 12% for cash interest payments and 14% if
the Company elects paid-in-kind (PIK) interest payments. The
F-47
Company may elect, prior to the
start of each interest payment period, whether to make each interest payment on
the Dex One Senior Subordinated Notes (i) entirely in cash or (ii) 50% in cash and 50% in PIK
interest, which is capitalized as incremental or additional senior secured notes. During the eleven
months ended December 31, 2010, the Company elected to make interest payments entirely in cash. The
interest rate on the Dex One Senior Subordinated Notes may be subject to adjustment in the event
the Company incurs certain specified debt with a higher effective yield to maturity than the yield
to maturity of the Dex One Senior Subordinated Notes. The Dex One Senior Subordinated Notes are
unsecured obligations of the Company, effectively subordinated in right of payment to all of the
Companys existing and future secured debt, including Dex Ones guarantee of borrowings under each
of the amended and restated credit facilities and are structurally subordinated to any existing or
future liabilities (including trade payables) of our direct and indirect subsidiaries.
The indenture governing the Dex One Senior Subordinated Notes contains certain covenants that,
subject to certain exceptions, among other things, limit or restrict the Companys (and, in certain
cases, the Companys restricted subsidiaries) incurrence of indebtedness, making of certain
restricted payments, incurrence of liens, entry into transactions with affiliates, conduct of its
business and the merger, consolidation or sale of all or substantially all of its property. The
indenture governing the Dex One Senior Subordinated Notes also requires the Company to offer to
repurchase the Dex One Senior Subordinated Notes at par after certain changes of control involving
the Company or the sale of substantially all of the assets of the Company. Holders of the Dex One
Senior Subordinated Notes also may cause the Company to repurchase the Dex One Senior Subordinated
Notes at a price of 101% of the principal amount upon the incurrence by the Company of certain
acquisition indebtedness.
The Dex One Senior Subordinated Notes with a remaining face value of $300.0 million at December 31,
2010 are redeemable at our option beginning in 2011 at the following prices (as a percentage of
face value):
|
|
|
|
|
Redemption Year |
|
Price |
|
2011 |
|
|
106.000 |
% |
2012 |
|
|
102.000 |
% |
2013 |
|
|
101.000 |
% |
2014 and thereafter |
|
|
100.000 |
% |
Aggregate maturities of our long-term debt (including current portion and excluding fair value
adjustments as a result of fresh start accounting) at December 31, 2010 are as follows:
|
|
|
|
|
2011 |
|
$ |
283,022 |
|
2012 |
|
|
187,963 |
|
2013 |
|
|
276,119 |
|
2014 |
|
|
1,781,084 |
|
2015 |
|
|
|
|
Thereafter |
|
|
300,000 |
|
|
|
|
|
Total |
|
$ |
2,828,188 |
|
|
|
|
|
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 $91.0 million remains unamortized at December 31, 2010, as shown in the following table.
F-48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Debt at |
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Unamortized Fair |
|
|
Excluding the |
|
|
|
|
|
|
|
Value Adjustments |
|
|
Impact of |
|
|
|
Carrying Value at |
|
|
at December 31, |
|
|
Unamortized Fair |
|
|
|
December 31, 2010 |
|
|
2010 |
|
|
Value Adjustments |
|
|
RHDI Amended and Restated Credit Facility |
|
$ |
1,014,485 |
|
|
$ |
14,463 |
|
|
$ |
1,028,948 |
|
Dex Media East Amended and Restated
Credit Facility |
|
|
739,090 |
|
|
|
64,735 |
|
|
|
803,825 |
|
Dex Media West Amended and Restated
Credit Facility |
|
|
683,646 |
|
|
|
11,769 |
|
|
|
695,415 |
|
Dex One 12%/14% Senior Subordinated
Notes due 2017 |
|
|
300,000 |
|
|
|
|
|
|
|
300,000 |
|
|
|
|
Total |
|
$ |
2,737,221 |
|
|
$ |
90,967 |
|
|
$ |
2,828,188 |
|
|
|
|
Predecessor Company
On the Effective Date and in accordance with the Plan, $6.1 billion of the Predecessor Companys
Notes in Default, which are presented as long-term debt subject to compromise in the table below,
were exchanged for (a) 100% of the reorganized Dex One equity and (b) $300.0 million of the Dex One
Senior Subordinated Notes issued to the holders of the Dex Media West 8.5% Senior Notes due 2010
and 5.875% Senior Notes due 2011 on a pro rata basis in addition to their share of the reorganized
Dex One equity. In accordance with the Plan, the Predecessor Companys existing credit facilities
were amended and restated on the Effective Date, the terms and conditions of which are noted above.
The following table presents the carrying value of the Predecessor Companys long-term debt at
December 31, 2009. As a result of filing the Chapter 11 petitions and the Plan, we do not believe
that it is meaningful to present the fair market value of the Predecessor Companys long-term debt
at December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company |
|
|
|
Notes in Default |
|
|
Credit Facilities |
|
|
|
December 31, 2009 |
|
RHD |
|
|
|
|
|
|
|
|
6.875% Senior Notes due 2013 |
|
$ |
206,791 |
|
|
$ |
|
|
6.875% Series A-1 Senior Discount Notes due 2013 |
|
|
320,903 |
|
|
|
|
|
6.875% Series A-2 Senior Discount Notes due 2013 |
|
|
483,365 |
|
|
|
|
|
8.875% Series A-3 Senior Notes due 2016 |
|
|
1,012,839 |
|
|
|
|
|
8.875% Series A-4 Senior Notes due 2017 |
|
|
1,229,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R.H. Donnelley Inc. |
|
|
|
|
|
|
|
|
Credit Facility |
|
|
|
|
|
|
1,424,048 |
|
11.75% Senior Notes due 2015 |
|
|
412,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dex Media, Inc. |
|
|
|
|
|
|
|
|
8% Senior Notes due 2013 |
|
|
500,000 |
|
|
|
|
|
9% Senior Discount Notes due 2013 |
|
|
749,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dex Media East |
|
|
|
|
|
|
|
|
Credit Facility |
|
|
|
|
|
|
1,039,436 |
|
|
|
|
|
|
|
|
|
|
Dex Media West |
|
|
|
|
|
|
|
|
Credit Facility |
|
|
|
|
|
|
1,091,292 |
|
8.5% Senior Notes due 2010 |
|
|
385,000 |
|
|
|
|
|
5.875% Senior Notes due 2011 |
|
|
8,720 |
|
|
|
|
|
9.875% Senior Subordinated Notes due 2013 |
|
|
761,650 |
|
|
|
|
|
|
|
|
Total Predecessor Company consolidated |
|
|
6,071,756 |
|
|
|
3,554,776 |
|
Less current portion not subject to compromise |
|
|
|
|
|
|
993,528 |
|
|
|
|
Long-term debt subject to compromise |
|
$ |
6,071,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt not subject to compromise |
|
|
|
|
|
$ |
2,561,248 |
|
|
|
|
|
|
|
|
|
F-49
7. Derivative Financial Instruments
Successor Company
The Company has entered into the following interest rate swaps that effectively convert $500.0
million, or 21%, of the Companys variable rate debt to fixed rate debt as of December 31, 2010.
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
December 31, 2010, both credit facilities are effectively fixed rate debt until such time LIBOR
exceeds the stated floor. At December 31, 2010, 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 29% of our total
debt portfolio as of December 31, 2010. The interest rate swaps mature at varying dates from
February 2012 through February 2013.
Interest Rate Swaps Dex Media East
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Dates |
|
Notional Amount |
|
|
Pay Rates |
|
|
Maturity Dates |
|
(amounts in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
February 26, 2010 |
|
$ |
300 |
(2) |
|
|
1.20% - 1.796 % |
|
|
February 29, 2012 February 28, 2013 |
March 5, 2010 |
|
|
100 |
(1) |
|
|
1.688 % |
|
|
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 eleven months ended December 31, 2010. These periodic
payments and receipts are recorded as interest expense.
Under the terms of the interest rate cap agreements, the Company will receive payments based on the
spread in rates if the three-month LIBOR rate increases above the cap rates noted in the table
below. The Company paid $2.1 million for the interest rate cap agreements entered into during the
first quarter of 2010. We are not required to make any future payments related to these interest
rate cap agreements.
Interest Rate Caps RHDI
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Dates |
|
Notional Amount |
|
|
Cap Rates |
|
|
Maturity Dates |
|
(amounts in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
February 26, 2010 |
|
$ |
200 |
(3) |
|
|
3.0% - 3.5 % |
|
|
February 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 |
F-50
The following tables present the fair value of our interest rate swaps and interest rate caps at
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
consolidated balance sheet at December 31, 2010. The following tables also present the loss
recognized in interest expense from the change in fair value of our interest rate swaps and
interest rate caps for the eleven months ended December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Recognized in |
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
From the Change in Fair Value of |
|
|
|
Fair Value |
|
|
Interest Rate Swaps |
|
|
|
Measurements |
|
|
Eleven Months Ended |
|
|
|
at December 31, 2010 |
|
|
December 31, 2010 |
|
|
Interest Rate Swaps: |
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities |
|
$ |
(4,376 |
) |
|
$ |
4,376 |
|
Other non-current liabilities |
|
|
(1,989 |
) |
|
|
1,989 |
|
|
|
|
Total |
|
$ |
(6,365 |
) |
|
$ |
6,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Recognized in |
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
From the Change in Fair Value of |
|
|
|
Fair Value |
|
|
Interest Rate Caps |
|
|
|
Measurements |
|
|
Eleven Months Ended |
|
|
|
at December 31, 2010 |
|
|
December 31, 2010 |
|
|
Interest Rate Caps: |
|
|
|
|
|
|
|
|
Prepaid expenses and
other current assets |
|
$ |
5 |
|
|
$ |
64 |
|
Other non-current assets |
|
|
303 |
|
|
|
1,766 |
|
|
|
|
Total |
|
$ |
308 |
|
|
$ |
1,830 |
|
|
|
|
During the eleven months ended December 31, 2010, the Company recorded $13.2 million of losses
related to our interest rate swaps and interest rate caps into earnings, including accrued
interest.
Predecessor Company
As a result of filing the Chapter 11 petitions, the Predecessor Company does not have any interest
rate swaps designated as cash flow hedges. The following table presents the fair value of the
Predecessor Companys interest rate swaps at December 31, 2009. The fair value of the Predecessor
Companys interest rate swaps is presented in accounts payable and accrued liabilities and other
non-current liabilities on the consolidated balance sheet at December 31, 2009. The following table
also presents the (gain) loss recognized in interest expense from the change in fair value of the
Predecessor Companys interest rate swaps for the one month ended January 31, 2010 and year ended
December 31, 2009 and (gain) loss recognized in accumulated other comprehensive loss from effective
interest rate swaps for the year ended December 31, 2009.
F-51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Accumulated |
|
|
|
|
|
|
|
(Gain) Loss Recognized in |
|
|
Other Comprehensive |
|
|
|
|
|
|
|
Interest Expense |
|
|
Loss From Effective |
|
|
|
|
|
|
|
From the Change in Fair Value of |
|
|
Interest |
|
|
|
Fair Value |
|
|
Interest Rate Swaps |
|
|
Rate Swaps |
|
|
|
Measurements at |
|
|
One Month Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, 2009 |
|
|
January 31, 2010 |
|
|
December 31, 2009 |
|
|
December 31, 2009 |
|
|
Interest Rate Swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities |
|
$ |
(5,043 |
) |
|
$ |
3,898 |
|
|
$ |
16,798 |
|
|
$ |
4,480 |
|
Other non-current liabilities |
|
|
(1,652 |
) |
|
|
(1,600 |
) |
|
|
(12,260 |
) |
|
|
(8,166 |
) |
|
|
|
Total |
|
$ |
(6,695 |
) |
|
$ |
2,298 |
|
|
$ |
4,538 |
|
|
$ |
(3,686 |
) |
|
|
|
During the one month ended January 31, 2010, the Predecessor Company recorded $3.0 million of
losses related to interest rate swaps into earnings, including accrued interest. In accordance with
fresh start accounting, unamortized amounts previously charged to accumulated other comprehensive
loss of $15.3 million related to the Predecessor Companys interest rate swaps were eliminated as
of the Fresh Start Reporting Date. See Note 3, Fresh Start Accounting for additional
information. During the years ended December 31, 2009 and 2008, the Predecessor Company recorded
$41.0 million and $57.1 million of losses related to interest rate swaps into earnings, including
accrued interest.
On the Effective Date, liabilities associated with the Predecessor Companys unsettled and
terminated interest rate swaps of $37.8 million, excluding accrued interest, were converted into a
new tranche of term loans under the Companys amended and restated credit facilities as follows:
|
|
|
|
|
RHDI Amended and Restated Credit Facility |
|
$ |
11,346 |
|
Dex Media East Amended and Restated Credit Facility |
|
|
26,301 |
|
Dex Media West Amended and Restated Credit Facility |
|
|
121 |
|
|
|
|
|
Total |
|
$ |
37,768 |
|
|
|
|
|
On April 15, 2009, the Predecessor Company exercised a 30-day grace period on interest payments due
on its 8.875% Series A-4 Senior Notes due 2017. As a result of exercising the 30-day grace period,
certain existing Dex Media East LLC interest rate swaps were required to be settled on May 28,
2009. Cash settlement payments of $26.4 million were made during the second quarter of 2009
associated with these interest rate swaps.
As a result of the decline in certain of the Predecessor Companys credit ratings, an existing Dex
Media West LLC interest rate swap was required to be settled on April 23, 2009. A cash settlement
payment of $0.5 million was made during the second quarter of 2009 associated with this interest
rate swap.
F-52
8. Income Taxes
Current income tax provision or benefit represents estimated taxes payable or refundable for the
current year based on enacted tax laws and rates. Deferred income tax assets and liabilities are
determined based on the estimated future tax effects of temporary differences between the financial
statement and tax basis of assets and liabilities, as measured by tax rates at which temporary
differences are expected to reverse. Deferred income tax (provision) benefit is the result of
changes in deferred income tax assets and liabilities. A valuation allowance is recognized to
reduce gross deferred tax assets to the amount that will more likely than not be realized.
Components of (Provision) Benefit for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
Eleven Months Ended |
|
|
One Month Ended |
|
|
|
|
|
|
December 31, |
|
|
January 31, |
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Current (provision) benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(1,263 |
) |
|
$ |
(600 |
) |
|
$ |
2,875 |
|
|
$ |
(23,900 |
) |
State and local |
|
|
3,772 |
|
|
|
(20 |
) |
|
|
11,773 |
|
|
|
(10,295 |
) |
|
|
|
Total current (provision) benefit |
|
|
2,509 |
|
|
|
(620 |
) |
|
|
14,648 |
|
|
|
(34,195 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred (provision) benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
568,938 |
|
|
|
(792,162 |
) |
|
|
780,678 |
|
|
|
1,152,636 |
|
State and local |
|
|
48,668 |
|
|
|
(124,759 |
) |
|
|
133,194 |
|
|
|
159,255 |
|
|
|
|
Total deferred (provision) benefit |
|
|
617,606 |
|
|
|
(916,921 |
) |
|
|
913,872 |
|
|
|
1,311,891 |
|
|
|
|
(Provision) benefit for income taxes |
|
$ |
620,115 |
|
|
$ |
(917,541 |
) |
|
$ |
928,520 |
|
|
$ |
1,277,696 |
|
|
|
|
Reconciliation of Statutory Federal Tax Rate to Effective Tax Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
Eleven Months Ended |
|
|
One Month Ended |
|
|
|
|
|
|
December 31, |
|
|
January 31, |
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
Income (loss) before income taxes |
|
$ |
(1,543,707 |
) |
|
$ |
7,837,550 |
|
|
$ |
(7,381,813 |
) |
|
$ |
(3,576,023 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory federal tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State and local taxes, net of federal tax
benefit |
|
|
3.6 |
|
|
|
2.6 |
|
|
|
3.3 |
|
|
|
2.9 |
|
Non-taxable fresh start adjustments |
|
|
|
|
|
|
(28.0 |
) |
|
|
|
|
|
|
|
|
Non-deductible impairment expenses |
|
|
(19.5 |
) |
|
|
|
|
|
|
|
|
|
|
(3.6 |
) |
Other nondeductible expenses |
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
Section 382 limitation |
|
|
22.9 |
|
|
|
1.1 |
|
|
|
(4.5 |
) |
|
|
|
|
Section 108 tax attribution reduction |
|
|
|
|
|
|
21.4 |
|
|
|
|
|
|
|
|
|
Change in valuation allowance |
|
|
(2.3 |
) |
|
|
(19.5 |
) |
|
|
(20.7 |
) |
|
|
0.1 |
|
Other, net |
|
|
0.5 |
|
|
|
(0.9 |
) |
|
|
(0.3 |
) |
|
|
1.3 |
|
|
|
|
Effective tax rate |
|
|
40.2 |
% |
|
|
11.7 |
% |
|
|
12.6 |
% |
|
|
35.7 |
% |
|
|
|
F-53
Components of Deferred Tax Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
20,234 |
|
|
$ |
22,303 |
|
Accounts receivable |
|
|
4,009 |
|
|
|
|
|
Deferred and other compensation |
|
|
8,205 |
|
|
|
33,364 |
|
Deferred directory revenue and costs |
|
|
|
|
|
|
23,598 |
|
Deferred financing costs |
|
|
|
|
|
|
45,411 |
|
Capital investments |
|
|
6,201 |
|
|
|
6,220 |
|
Debt and other interest |
|
|
2,274 |
|
|
|
12,098 |
|
Pension and other retirement benefits |
|
|
27,093 |
|
|
|
29,915 |
|
Restructuring reserves |
|
|
6,895 |
|
|
|
|
|
Net operating loss and credit
carryforwards |
|
|
212,793 |
|
|
|
532,222 |
|
Goodwill and intangible assets |
|
|
|
|
|
|
1,246,106 |
|
Other, net |
|
|
15,590 |
|
|
|
37,760 |
|
|
|
|
Total deferred tax assets |
|
|
303,294 |
|
|
|
1,988,997 |
|
Valuation allowance |
|
|
(97,642 |
) |
|
|
(1,531,905 |
) |
|
|
|
Net deferred tax assets |
|
$ |
205,652 |
|
|
$ |
457,092 |
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Fixed assets and capitalized software |
|
$ |
56,136 |
|
|
$ |
28,321 |
|
Goodwill and intangible assets |
|
|
156,140 |
|
|
|
|
|
Debt and other interest |
|
|
|
|
|
|
135,610 |
|
Deferred directory revenue and costs |
|
|
19,596 |
|
|
|
|
|
Investment in subsidiaries |
|
|
89,481 |
|
|
|
7 |
|
Restructuring reserves |
|
|
|
|
|
|
967 |
|
Other, net |
|
|
5,962 |
|
|
|
486 |
|
|
|
|
Total deferred tax liabilities |
|
|
327,315 |
|
|
|
165,391 |
|
|
|
|
Net deferred tax asset (liability) |
|
$ |
(121,663 |
) |
|
$ |
291,701 |
|
|
|
|
Reconciliation of Gross Unrecognized Tax Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
Eleven Months Ended |
|
|
One Month Ended |
|
|
|
|
|
|
December 31, |
|
|
January 31, |
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
Balance at beginning of period |
|
$ |
390,872 |
|
|
$ |
298,001 |
|
|
$ |
32,637 |
|
|
$ |
9,988 |
|
Gross additions for tax positions
related to the current year |
|
|
693 |
|
|
|
95,555 |
|
|
|
277,740 |
|
|
|
|
|
Gross
additions for tax positions related to the prior year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,182 |
|
Gross reductions for tax positions
related to the current year |
|
|
(370,611 |
) |
|
|
(2,684 |
) |
|
|
(9,929 |
) |
|
|
|
|
Settlements |
|
|
|
|
|
|
|
|
|
|
(2,447 |
) |
|
|
(533 |
) |
|
|
|
Balance at end of period |
|
$ |
20,954 |
|
|
$ |
390,872 |
|
|
$ |
298,001 |
|
|
$ |
32,637 |
|
|
|
|
F-54
Successor Company
Components of Benefit for Income Taxes
The income tax benefit of $620.1 million for the eleven months ended December 31, 2010 is comprised
of a federal tax benefit of $567.7 million and a state tax benefit of $52.4 million. The federal
tax benefit of $567.7 million is comprised of a current tax provision of $(1.3) million, primarily
related to unrecognized tax benefits, and a deferred tax benefit of $569.0 million, primarily
related to current year net operating loss, recognition of an unrecognized tax position and
goodwill impairment charges during the eleven months ended December 31, 2010. The state tax benefit
of $52.4 million is comprised of a current tax benefit of $3.8 million, primarily related to
expected state tax refunds, and a deferred tax benefit of $48.6 million, primarily related to the
recognition of an unrecognized tax position during the eleven months ended December 31, 2010.
Reconciliation of Statutory Federal Tax Rate to Effective Tax Rate
Our effective tax rate benefit of 40.2% is higher than the federal statutory tax rate of 35.0%
primarily due to increases in income tax benefits from the recognition of an unrecognized tax
position offset, in part, by an increase in income tax expense related to a non-deductible
impairment charge.
Components of Deferred Tax Assets and Liabilities
Total deferred tax assets before the valuation allowance are $303.3 million and total deferred tax
liabilities are $327.3 million at December 31, 2010. Deferred tax assets of $212.8 million
represent net operating loss and credit carryforwards. After assessing the amount of deferred tax
assets that are more likely than not to be realized, we established a valuation allowance of $97.6
million, representing the extent to which deferred tax assets are not supported by future reversals
of existing taxable temporary differences.
Reconciliation of Gross Unrecognized Tax Benefits
Tax years 2007 through 2009 are subject to examination by the Internal Revenue Service (IRS).
Certain state tax returns are under examination by various regulatory authorities. Our state tax
return years are open to examination for an average of three years. However, certain jurisdictions
remain open to examination longer than three years due to the existence of net operating loss
carryforwards and statutory waivers.
We continually review issues raised in connection with ongoing examinations and open tax years to
evaluate the adequacy of our reserves. We believe that our accrued tax liabilities under FASB ASC
740 are adequate to cover uncertain tax positions related to federal and state income taxes.
Included in the balance of unrecognized tax benefits at December 31, 2010 are $24.6 million of tax
benefits that, if recognized, would favorably affect the effective tax rate.
Our policy is to recognize interest and penalties related to unrecognized tax benefits in income
tax expense. During the eleven months ended December 31, 2010, the Company recognized $0.5 million
in interest and penalties due to unrecognized tax benefits. As of December 31, 2010, we have
accrued $8.0 million related to interest. No amounts were accrued for tax penalties as of December
31, 2010.
During the eleven months ended December 31, 2010, we decreased our liability for unrecognized tax
benefits by $370.6 million primarily related to Internal Revenue Code Section 382 (Section 382)
limitations. See Other below for additional information on the impact this decrease in our
liability for unrecognized tax benefits had on our effective tax rate for the eleven months ended
December 31, 2010.
It is reasonably possible that $20.3 million of unrecognized tax benefits as of December 31, 2010
could decrease within the next twelve months, as this amount relates to the uncertainty surrounding
the deductibility of certain other accrued expenses. It is reasonably possible that the applicable
statute of limitations may lapse within the next twelve months, which could require the reduction
in unrecognized tax benefits.
F-55
Other
At December 31, 2010, the Company had federal and state net operating loss carryforwards of
approximately $359.8 million and $1,956.1 million, respectively, which will begin to expire in 2030
and 2011, respectively.
During 2009, the Predecessor Company accrued an unrecognized tax benefit for the uncertainty
surrounding a potential ownership change under Section 382 that occurred prior to the date on which
it made a check-the-box election for two of its subsidiaries. The date of the change in ownership
was in question since as of the December 31, 2009 balance sheet date, the Predecessor Company was
unable to confirm the actual date of the ownership change until all SEC Forms 13-G were filed.
However, 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 it was more likely than not
that certain check-the-box elections were 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 $352.3 million in the Companys statement of operations
for the eleven months ended December 31, 2010, which significantly impacted our effective tax rate
for the period.
As a result of the goodwill and non-goodwill intangible asset impairment charges during the eleven
months ended December 31, 2010, we recognized a non-deductible adjustment to our effective tax rate
of 19.5%, or $299.9 million.
Our certificate of incorporation contains provisions generally prohibiting (i) the acquisition of
4.9% or more of our common stock by any one person or group of persons whose shares would be
aggregated pursuant to Section 382 and (ii) the acquisition of additional common stock by persons
already owning 4.9% or more of our common stock, in each case until February 2, 2011, or such
shorter period as may be determined by our board of directors. Without these restrictions, it is
possible that certain changes in the ownership of our common stock could result in the imposition
of limitations on the ability of the Company and its subsidiaries to fully utilize the net
operating losses and other tax attributes currently available to them for U.S. federal and state
income tax purposes.
In connection with the Companys adoption of fresh start accounting, we evaluated all temporary
differences. The Company recorded significant deferred tax liabilities associated with intangible
assets and deferred revenue, and reduced our deferred tax liabilities to zero related to interest
costs and deferred tax assets to zero related to deferred financing costs, which were recognized
though the cancellation of our debt. Due to this reduction in tax basis, an incremental deferred
tax liability was created, which can be utilized in the Companys valuation allowance assessment.
As a result, the Company reduced its valuation allowance and is in a net deferred tax liability
position of $121.7 million at December 31, 2010.
The discharge of our debt in conjunction with our emergence from Chapter 11 resulted in a tax gain
of $5,016.6 million. Generally, the discharge of a debt obligation for an amount less than the
adjusted issue price creates cancellation of indebtedness income (CODI), which must be included
in the Companys taxable income. However, recognition of CODI is limited for a taxpayer that is a
debtor in a reorganization case if the discharge is granted by the Bankruptcy Court or pursuant to
a plan of reorganization approved by the Bankruptcy Court. The Plan enabled the Predecessor
Company to qualify for this bankruptcy exclusion rule and exclude all of the gain on the settlement
of debt obligations and derivative liabilities from taxable income. However, in accordance with
Internal Revenue Code (IRC) Section 108, in lieu of recognizing taxable income from
bankruptcy-related CODI, the Company is required to reduce existing tax attributes. As a result,
upon our emergence from bankruptcy, the Company adjusted certain deferred tax assets and
liabilities to reflect estimated future reductions in certain tax attributes primarily net
operating loss carryforwards, intangible asset basis, and subsidiary stock basis. In accordance
with FASB ASC 852, the Company has trued-up its previous attribute reduction estimates at January
31, 2010 to reflect actual attribute reduction at December 31, 2010, resulting in a $158.4 million
decrease in deferred tax liabilities and goodwill.
F-56
Predecessor Company One Month Ended January 31, 2010
Components of Provision for Income Taxes
The income tax provision of $(917.5) million for the one month ended January 31, 2010 is comprised
of a federal tax provision of $(792.8) million and a state tax provision of $(124.8) million. The
federal tax provision is comprised of a current tax provision of $(0.6) million, primarily related
to an increase in the federal tax accrual related to unrecognized tax benefits, and a deferred tax
provision of $(792.2) million, primarily related to the reduction of the Predecessor Companys tax
attributes in accordance with IRC Section 108. The state tax provision of $(124.8) million is
comprised of a current tax provision of less than $(0.1) million and a deferred tax provision of
$(124.7) million, primarily related to the reduction of the Predecessor Companys tax attributes in
accordance with IRC section 108.
Reconciliation of Statutory Federal Tax Rate to Effective Tax Rate
Our effective tax rate provision of 11.7% was lower than the statutory federal tax rate of 35.0%
primarily due to decreases in income tax expense for non-taxable fresh start adjustments and the
release of our valuation allowance offset, in part, by increases in income tax expense for the
estimated loss of tax attributes due to cancellation of debt income at emergence, and the impact of
state taxes.
Reconciliation of Gross Unrecognized Tax Benefits
Included in the balance of unrecognized tax benefits at January 31, 2010 are $377.0 million of tax
benefits that, if recognized, would favorably affect the effective tax rate.
During the one month ended January 31, 2010, the Predecessor Company recognized $0.4 million in
interest and penalties due to unrecognized tax benefits. As of January 31, 2010, the Predecessor
Company accrued $8.3 million related to interest. No amounts were accrued for tax penalties as of
January 31, 2010.
Predecessor Company Year Ended December 31, 2009
Components of Benefit for Income Taxes
The 2009 income tax benefit of $928.5 million is comprised of a federal tax benefit of $783.5
million and a state tax benefit of $145.0 million. The 2009 federal tax benefit is comprised of a
current tax benefit of $2.9 million, primarily related to a decrease in the federal tax accrual due
to our amended return filings and a deferred tax benefit of $780.7 million, primarily related to
intangible asset impairment charges during 2009, offset in part by a valuation allowance as
discussed below. The 2009 state tax benefit of $145.0 million is comprised of a current tax
benefit of $11.8 million, which relates to the favorable settlement of prior year state tax audits
in 2009 and reversal of the associated state liabilities, and a deferred tax benefit of $133.2
million, primarily related to intangible asset impairment charges during 2009, offset, in part, by
a valuation allowance as discussed below.
As a result of filing the Chapter 11 petitions, the Predecessor Company reclassified certain income
tax liabilities relating to tax periods prior to the Petition Date of $28.8 million to liabilities
subject to compromise on the consolidated balance sheet at December 31, 2009. See Note 3,
Reorganization Items, Net and Liabilities Subject to Compromise for additional information.
Reconciliation of Statutory Federal Tax Rate to Effective Tax Rate
Our 2009 effective tax rate benefit of 12.6% was lower than the statutory federal tax rate of 35.0%
primarily due to the recording of a valuation allowance against deferred tax assets and the IRC
Section 382 limitation on loss carryforwards, offset, in part, by the impact of state taxes.
F-57
Components of Deferred Tax Assets and Liabilities
Total deferred tax assets before the valuation allowance are $1,989.0 million and total deferred
tax liabilities are $165.4 million. Deferred tax assets of $1,246.1 million represent tax
deductible IRC Section 197 intangible assets amortizing over a 15-year period, of which
approximately 8 to 15 years remain. After assessing the amount of deferred tax assets that are more
likely than not to be realized, we established a full valuation allowance of $1,531.9 million,
representing the extent to which deferred tax assets are not supported by future reversals of
existing taxable temporary differences, taxable income in net operating loss carryback years and
unrecognized tax benefits.
Reconciliation of Gross Unrecognized Tax Benefits
Included in the balance of unrecognized tax benefits at December 31, 2009 are $288.9 million of tax
benefits that, if recognized, would favorably affect the effective tax rate.
During year ended December 31, 2009, the Predecessor Company recognized $(3.3) million in interest
and penalties due to unrecognized tax benefits. As of December 31, 2009, the Predecessor Company
accrued $7.5 million related to interest. No amounts were accrued for tax penalties as of December
31, 2009.
In December 2009, the Predecessor Company effectively settled all issues under consideration with
the Department of Finance for New York State for its audit of tax years 2000 through 2006 and the
Department of Revenue for North Carolina for its audit of tax years 2003 through 2008. As a result
of these settlements, the unrecognized tax benefit associated with the Predecessor Companys
uncertain state tax positions decreased by $7.6 million for New York State and by $9.7 million for
North Carolina during the year ended December 31, 2009. The decrease in the unrecognized tax
benefits has decreased the Predecessor Companys effective tax rate for the year ended December 31,
2009. The unrecognized tax benefits impacted by the New York State and North Carolina audits
primarily related to apportionment and allocation of income among the Predecessor Companys legal
entities.
During 2009, the Predecessor Company increased its liability for unrecognized tax benefits by
$276.4 million reflecting the uncertainty as to whether the ownership change under Section 382
occurred prior to the date on which it elected to modify the tax classification for two of its
subsidiaries. The date of the change in ownership was in question because as of the balance sheet
date the Predecessor Company was not able to confirm the actual date of the ownership change until
all SEC Forms 13-G were filed. Stockholders have until forty five days following the end of the
calendar year to file these forms with the SEC. Based on this due date, the actual ownership change
date was not confirmed until February 15, 2010. In addition, the Predecessor Company increased the
liability for unrecognized tax benefits by $1.5 million relating to the uncertainty surrounding the
deductibility of certain other accrued expenses.
Predecessor Company Year Ended December 31, 2008
Components of Benefit for Income Taxes
The 2008 income tax benefit of $1,277.7 million is comprised of a federal tax benefit of $1,128.7
million and a state tax benefit of $149.0 million. The 2008 federal tax benefit is comprised of a
current tax provision of $23.9 million, primarily related to an increase to the Predecessor
Companys liability for unrecognized tax benefit, offset by a deferred income tax benefit of
$1,152.6 million, primarily related to the goodwill impairment charges during 2008. The 2008 state
tax benefit of $149.0 million is comprised of a current tax provision of $10.3 million, which
relates to taxes due in states where subsidiaries of the Predecessor Company file separate tax
returns, as well as an increase in the Predecessor Companys liability for unrecognized tax
benefit, offset by a deferred income tax benefit of $159.3 million, primarily related to the
goodwill impairment charges during 2008. During 2008, the Predecessor Company utilized federal net
operating losses for income tax purposes of $4.1 million primarily resulting from taxable gains
associated with certain financing activities conducted during 2008.
The 2008 income tax benefit includes an income tax benefit of $20.3 million from correcting
overstated income tax expense in fiscal years 2004 through 2007. The Predecessor Company evaluated
the materiality of this correction and concluded it was not material to 2008 or earlier financial
statements. Accordingly the Predecessor Company recorded this correction during the fourth quarter
of 2008.
F-58
Reconciliation of Statutory Federal Tax Rate to Effective Tax Rate
Our effective tax rate benefit of 35.7% was slightly higher than the federal statutory tax rate of
35.0% primarily due to the impact of state income taxes and other permanent book/tax differences
offset, in part, by nondeductible impairment expenses.
Reconciliation of Gross Unrecognized Tax Benefits
Included in the balance of unrecognized benefits at December 31, 2008 are $34.6 million of tax
benefits that, if recognized, would favorably affect the effective tax rate. During the year ended
December 31, 2008, the Company recognized approximately $4.4 million in interest and penalties due
to unrecognized tax benefits.
9. Stock Incentive Plans
For the eleven months ended December 31, 2010, the Company recognized $4.5 million of stock-based
compensation expense related to stock-based awards granted under the EIP and the CEO Stock-Based
Awards. Prior to the cancellation of its equity awards, the Predecessor Company recognized
stock-based compensation expense related to stock-based awards granted under its various employee
and non-employee stock incentive plans of $0.6 million, $11.4 million and $29.5 million during the
one month ended January 31, 2010 and years ended December 31, 2009 and 2008, respectively.
The fair value of the Companys and the Predecessor Companys stock options and SARs that do not
have a market condition is calculated using the Black-Scholes model at the time the stock-based
awards are granted. The fair value of the Companys stock options and SARs that have a market
condition is calculated using the Monte Carlo model at the time the stock-based awards are granted.
The fair value, net of estimated forfeitures, is then amortized over the vesting period of the
respective stock-based award.
Compensation expense related to restricted stock granted to employees, including executive
officers, and non-employee directors is measured at fair value on the date of grant based on the
number of shares granted and the quoted market price of the Companys or Predecessor Companys
common stock at such time. The fair value, net of estimated forfeitures, is then amortized over
the vesting period of the respective stock-based award.
The Company granted 2.1 million stock options and SARs and 0.2 million shares of restricted stock
during the eleven months ended December 31, 2010. The Predecessor Company did not grant any stock
options, SARs or restricted stock during the one month ended January 31, 2010 or year ended
December 31, 2009. The weighted average fair value per share of stock options and SARs granted by
the Company during the eleven months ended December 31, 2010 was $8.13. The weighted average fair
value per share of stock options and SARs granted by the Predecessor Company during the year ended
December 31, 2008 was $2.49. The following assumptions were used in valuing stock-based awards and
for recognition and allocation of stock-based compensation expense for the eleven months ended
December 31, 2010 and year ended December 31, 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
Eleven Months Ended |
|
|
Year Ended |
|
|
|
December 31, 2010 |
|
|
December 31, 2008 |
|
|
|
|
Expected volatility |
|
|
37.3 % |
|
|
|
58.8 % |
|
Risk-free interest rate |
|
|
2.6 % |
|
|
|
2.8 % |
|
Expected life |
|
7.1 Years |
|
5 Years |
Derived service period (grants using Monte Carlo model) |
|
3.6 Years |
|
|
|
|
Forfeiture rate |
|
|
8.9 % |
|
|
|
8.0 % |
|
Dividend yield |
|
|
0 % |
|
|
|
0% |
|
F-59
Since the Company recently emerged from bankruptcy, we do not have sufficient Company-specific
historical data in order to determine certain assumptions used for valuing stock-based awards. As
such, the Company utilized data from industry sources and peer and competitive company data in
order to estimate the expected volatility assumption used for valuing stock based awards during the
eleven months ended December 31, 2010. The Predecessor Company estimated expected volatility based
on the historical volatility of the price of its common stock over the expected life of its
stock-based awards. The expected life represents the period of time that stock-based awards granted
are expected to be outstanding. The Company and the Predecessor Company estimated the expected life
by using the simplified method permitted by Staff Accounting Bulletin No. 110, Use of a Simplified
Method in Developing Expected Term of Share Options, as these stock-based awards satisfied the
plain vanilla criteria. The simplified method calculates the expected life as the average of the
vesting and contractual terms of the award. The risk-free interest rate for both the Company and
the Predecessor Company is based on applicable U.S. Treasury yields that approximate the expected
life of stock-based awards granted by the Company and the Predecessor Company. During the eleven
months ended December 31, 2010, the Company used actual voluntary turnover data during the first
quarter of 2010 to estimate a weighted average forfeiture rate. The Predecessor Company used
historical data to estimate a forfeiture rate for the one month ended January 31, 2010 and years
ended December 31, 2009 and 2008. Estimated forfeitures are adjusted to the extent actual
forfeitures differ, or are expected to materially differ, from such estimates. Derived service
periods associated with stock-based awards that have a market condition were calculated by
determining the average time until the Companys stock price reached the given exercise price
across the Monte Carlo simulations. For simulations where the stock price did not reach the
exercise price, the Company has excluded such paths.
The following table presents a summary of the Predecessor Companys and Successor Companys stock
options and SARs activity and related information for the one month ended January 31, 2010 and
eleven months ended December 31, 2010, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise/Grant |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price Per Share |
|
|
Value |
|
|
|
|
Predecessor Company |
|
|
|
|
|
|
|
|
|
|
|
|
Awards outstanding, January 1, 2010 |
|
|
3,754,714 |
|
|
$ |
10.55 |
|
|
$ |
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
Exercises |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures and cancellations (1) |
|
|
(3,754,714 |
) |
|
|
10.55 |
|
|
|
|
|
|
|
|
Awards outstanding, January 31, 2010 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
Successor Company |
|
|
|
|
|
|
|
|
|
|
|
|
Awards outstanding, February 1, 2010 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Granted |
|
|
2,147,008 |
|
|
|
25.42 |
|
|
|
|
|
Exercises |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures |
|
|
(481,327 |
) |
|
|
28.68 |
|
|
|
|
|
|
|
|
Awards outstanding, December 31, 2010 |
|
|
1,665,681 |
|
|
$ |
24.48 |
|
|
$ |
|
|
|
|
|
Available for future grants at December 31, 2010 |
|
|
3,889,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Upon emergence from Chapter 11 and pursuant to the Plan, all outstanding
equity securities of the Predecessor Company including all stock options, SARs and restricted
stock, were cancelled. |
There was no intrinsic value of the Companys and the Predecessor Companys stock options and SARs
vested as of December 31, 2010 and December 31, 2009, respectively. The total fair value of the
Companys stock options and SARs vested during the year ended December 31, 2010 was $2.0 million.
The total fair value of the Predecessor Companys stock options and SARs vested during the one
month ended January 31, 2010 and year ended December 31, 2009 was $3.7 million and $4.0 million,
respectively.
F-60
The following table summarizes information about the Companys stock-based awards outstanding and
exercisable at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards Outstanding |
|
|
Stock Awards Exercisable |
|
Range of |
|
|
|
|
|
Weighted Average |
|
|
Weighted Average |
|
|
|
|
|
|
Weighted Average |
|
|
Weighted Average |
|
Exercise/Grant |
|
|
|
|
|
Remaining Contractual |
|
|
Exercise/Grant |
|
|
|
|
|
|
Remaining Contractual |
|
|
Exercise/Grant |
|
Prices |
|
Shares |
|
|
Life (In Years) |
|
|
Price Per Share |
|
|
Shares |
|
|
Life (In Years) |
|
|
Price Per Share |
|
|
$9.75 - $9.75 |
|
|
200,000 |
|
|
|
9.68 |
|
|
$ |
9.75 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$15.00 - $15.00 |
|
|
200,000 |
|
|
|
9.68 |
|
|
|
15.00 |
|
|
|
200,000 |
|
|
|
9.68 |
|
|
|
15.00 |
|
$23.00 - $23.00 |
|
|
200,000 |
|
|
|
9.68 |
|
|
|
23.00 |
|
|
|
200,000 |
|
|
|
9.68 |
|
|
|
23.00 |
|
$28.68 - $28.68 |
|
|
865,681 |
|
|
|
9.17 |
|
|
|
28.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$32.00 - $32.00 |
|
|
200,000 |
|
|
|
9.68 |
|
|
|
32.00 |
|
|
|
200,000 |
|
|
|
9.68 |
|
|
|
32.00 |
|
|
|
|
|
|
|
1,665,681 |
|
|
|
9.41 |
|
|
$ |
24.48 |
|
|
|
600,000 |
|
|
|
9.68 |
|
|
$ |
23.33 |
|
|
|
|
There is no aggregate intrinsic value of the Companys exercisable stock-based awards as of
December 31, 2010.
The following table summarizes the status of the Predecessor Companys and Successor Companys
non-vested stock awards as of January 31, 2010 and December 31, 2010, respectively, and changes
during the one month ended January 31, 2010 and eleven months ended December 31, 2010,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested Stock |
|
|
Weighted Average |
|
|
Non-Vested |
|
|
Weighted Average |
|
|
|
Options |
|
|
Grant Date Exercise |
|
|
Restricted |
|
|
Grant Date Fair |
|
|
|
and SARs |
|
|
Price Per Award |
|
|
Stock |
|
|
Value Per Award |
|
|
Predecessor Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at January 1, 2010 |
|
|
2,174,282 |
|
|
$ |
6.48 |
|
|
|
521,215 |
|
|
$ |
4.52 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested |
|
|
(698,305 |
) |
|
|
7.79 |
|
|
|
(349,481 |
) |
|
|
5.40 |
|
Forfeitures and cancellations |
|
|
(1,475,977 |
) |
|
|
5.86 |
|
|
|
(171,734 |
) |
|
|
2.74 |
|
|
|
|
Non-vested at January 31, 2010 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
Successor Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at February 1, 2010 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Granted |
|
|
2,147,008 |
|
|
|
25.42 |
|
|
|
231,440 |
|
|
|
10.97 |
|
Vested |
|
|
(600,000 |
) |
|
|
23.33 |
|
|
|
(31,440 |
) |
|
|
19.59 |
|
Forfeitures |
|
|
(481,327 |
) |
|
|
28.68 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2010 |
|
|
1,065,681 |
|
|
$ |
25.12 |
|
|
|
200,000 |
|
|
$ |
9.62 |
|
|
|
|
As of December 31, 2010, there was $10.2 million of total unrecognized compensation cost related to
non-vested stock-based awards. There was no intrinsic value of non-vested stock-based awards
expected to vest as of December 31, 2010 and the corresponding weighted average grant date exercise
price is $25.12 per share.
F-61
Components of Successor Company Stock-Based Compensation Expense
All of the CEO Stock-Based Awards have a grant date for accounting and reporting purposes of
September 13, 2010, which represents the date on which the grant date determination provisions
outlined in FASB ASC 718, Compensation Stock Compensation, were satisfied. See Note 1, Business
and Basis of Presentation New Chief Executive Officer and President, for information on all of
the CEO Stock-Based Awards. During the eleven months ended December 31, 2010, we recognized
stock-based compensation expense of $0.4 million associated with the CEO Stock-Based Awards.
On September 13, 2010, the Company issued less than 0.1 million shares of common stock to members
of the Executive Oversight Committee (EOC) for their service on the EOC. These shares of common
stock vested immediately upon issuance. The Company recorded $0.2 million of stock-based
compensation expense related to this issuance during the eleven months ended December 31, 2010.
On March 1, 2010 and pursuant to the Plan, the Company granted 1.3 million SARs to certain
employees, including executive officers, as intended in the Plan and in conjunction with the EIP.
These SARs, which are settled in our common stock, were granted at a grant price of $28.68 per
share, which was equal to the volume weighted average market value of our common stock during the
first thirty calendar days upon emergence from Chapter 11, and vest ratably over three years. On
March 1, 2010, the Company also issued less than 0.1 million shares of common stock to members of
its Board of Directors. These shares of common stock vested immediately upon issuance. The Company
recorded $3.9 million of stock-based compensation expense related to the March 1, 2010 grants
during the eleven months ended December 31, 2010.
Components of Predecessor Company Stock-Based Compensation Expense
Upon emergence from Chapter 11 and pursuant to the Plan, all outstanding equity securities of the
Predecessor Company including all stock options, SARs and restricted stock, were cancelled. As a
result, the Predecessor Company recognized $1.9 million of remaining unrecognized compensation
expense related to these stock-based awards as reorganization items, net during the one month ended
January 31, 2010.
In April 2009, the Predecessor Company increased its estimated forfeiture rate in determining
compensation expense from 8% to 10.2%. This adjustment was based on a review of historical
forfeiture information and resulted in a reduction to compensation expense of $0.4 million during
the year ended December 31, 2009.
On March 4, 2008, the Predecessor Company granted 2.2 million SARs to certain employees, including
executive officers, in conjunction with its annual grant of stock incentive awards. These SARs were
granted at a grant price of $7.11 per share, which was equal to the market value of the Predecessor
Companys common stock on the grant date, and vested ratably over three years. The Predecessor
Company recognized compensation expense related to these SARs of $0.1 million, $2.2 million and
$4.3 million for the one month ended January 31, 2010 and years ended December 31, 2009 and 2008,
respectively.
On February 27, 2007, the Predecessor Company granted 1.1 million SARs to certain employees,
including executive officers, in conjunction with its annual grant of stock incentive awards. These
SARs were granted at a grant price of $74.31 per share, which was equal to the market value of the
Predecessor Companys common stock on the grant date, and vested ratably over three years. The
Predecessor Company recognized compensation expense related to these SARs of $0.4 million, $5.2
million and $5.5 million for the one month ended January 31, 2010 and years ended December 31, 2009
and 2008, respectively.
As a result of the Business.com Acquisition, 4.2 million outstanding Business.com equity awards
were converted into 0.2 million RHD equity awards on August 23, 2007. For the one month ended
January 31, 2010 and years ended December 31, 2009 and 2008, the Predecessor Company recognized
compensation expense related to these converted equity awards of $0.1 million, $0.3 million and
$3.7 million, respectively.
F-62
On December 13, 2006, the Predecessor Company granted 0.1 million shares of restricted stock to
certain executive officers. These restricted shares were granted at a grant price of $60.64 per
share, which was equal to the market value of the Predecessor Companys common stock on the date of
grant. The vesting of these restricted shares was contingent upon the Predecessor Companys common
stock equaling or exceeding $65.00 per share for 20 consecutive trading days and continued
employment with the Predecessor Company through the third anniversary of the date of grant. The
Predecessor Company recognized compensation expense related to these restricted shares of $0.7
million for each of the years ended December 31, 2009 and 2008.
On February 21, 2006, the Predecessor Company granted 0.1 million shares of restricted stock to
certain employees, including executive officers. These restricted shares were granted at a grant
price of $64.26 per share, which was equal to the market value of the Predecessor Companys common
stock on the date of grant, and vested ratably over three years. The Predecessor Company recognized
compensation expense related to these restricted shares of $0.3 million and $1.6 million for the
years ended December 31, 2009 and 2008, respectively.
On February 21, 2006, the Predecessor Company granted 0.6 million SARs to certain employees, not
including executive officers, in conjunction with its annual grant of stock incentive awards. These
SARs were granted at a grant price of $64.26 per share, which was equal to the market value of the
Predecessor Companys common stock on the grant date, and vested ratably over three years. The
Predecessor Company recognized compensation expense related to this and other smaller SAR grants of
$0.6 million and $3.6 million for the years ended December 31, 2009 and 2008, respectively.
In connection with the Dex Media Merger, the Predecessor Company granted on October 3, 2005, 1.1
million SARs to certain employees, including executive officers. These SARs were granted at an
exercise price of $65.00 (above the then prevailing market price of the Predecessor Companys
common stock) and vested ratably over three years. The award of these SARs was contingent upon the
successful completion of the Dex Media Merger. These SARs became fully vested during 2008 and as
such, no compensation expense was recognized for the year ended December 31, 2009. The Predecessor
Company recognized compensation expense related to these SARs of $5.4 million for the year ended
December 31, 2008.
As a result of the Dex Media Merger, all outstanding Dex Media equity awards were converted to RHD
equity awards on February 1, 2006. The Predecessor Company did not recognize compensation expense
related to these converted awards for the year ended December 31, 2009. For the year ended
December 31, 2008, compensation expense related to these converted awards totaled $1.8 million.
The Dex Media Merger triggered a change in control under the Predecessor Companys stock incentive
plans. Accordingly, all awards granted to employees through January 31, 2006, with the exception
of stock-based awards held by executive officers and members of the Board of Directors (who waived
the change of control provisions of such awards), became fully vested. The Predecessor Company did
not recognize compensation expense related to these modifications for the year ended December 31,
2009. For the year ended December 31, 2008, $0.2 million of compensation expense, which is
included in the total compensation expense amounts noted above, was recognized as a result of these
modifications. Stock-based compensation expense relating to existing stock options held by
executive officers and members of the Predecessor Companys Board of Directors as of January 1,
2006, which were not modified as a result of the Dex Media Merger, as well as stock-based
compensation expense from smaller grants issued subsequent to the Dex Media Merger not mentioned
above, totaled $2.1 million and $2.8 million for the years ended December 31, 2009 and 2008,
respectively.
F-63
10. Benefit Plans
The Company has two defined benefit pension plans (the Dex One Retirement Plan, formerly the RHD
Retirement Plan, and the Dex Media Pension Plan, defined below), which participate in the Dex One
Corporation Retirement Account Master Trust (Master Trust), three defined contribution plans (the
Dex One 401(k) Savings Plan, the Dex Media, Inc. Employee Savings Plan and the Business.com, Inc.
401(k) Plan) and two postretirement plans (the Dex One Group Benefit Plan and the Dex Media Group
Benefit Plan). A summary of each of these plans is provided below.
Dex One Retirement Plan. The Dex One cash balance defined benefit pension plan (Dex One Retirement
Plan) covers substantially all legacy Dex One employees with at least one year of service. The
benefits to be paid to employees are based on age, years of service and a percentage of total
annual compensation. The percentage of compensation allocated to a retirement account ranges from
3.0% to 12.5% depending on age and years of service (cash balance benefit). Benefits for certain
employees who were participants in the predecessor The Dun & Bradstreet Corporation (D&B) defined
benefit pension plan are also determined based on the participants average compensation and years
of service (final average pay benefit) and benefits to be paid will equal the greater of the
final average pay benefit or the cash balance benefit. Annual pension costs are determined using
the projected unit credit actuarial cost method. Our funding policy is to contribute an amount at
least equal to the minimum legal funding requirement. The Company was required to make
contributions of $1.0 million to the Dex One Retirement Plan during the eleven months ended
December 31, 2010. The Predecessor Company was not required to make contributions to the Dex One
Retirement Plan during the one month ended January 31, 2010. The Predecessor Company was required
to make contributions of $10.2 million and $5.7 million to the Dex One Retirement Plan during the
years ended December 31, 2009 and 2008, respectively. The underlying pension plan assets are
invested in diversified portfolios consisting primarily of equity and debt securities. A
measurement date of December 31 is used for all of our plan assets.
We also have an unfunded non-qualified defined benefit pension plan, the Pension Benefit
Equalization Plan (PBEP), which covers senior executives and certain key employees. Benefits are
based on years of service and compensation (including compensation not permitted to be taken into
account under the previously mentioned defined benefit pension plan).
Dex Media Pension Plan. We have a noncontributory defined benefit pension plan covering
substantially all non-union and union employees within Dex Media (Dex Media Pension Plan). Annual
pension costs are determined using the projected unit credit actuarial cost method. Our funding
policy is to contribute an amount at least equal to the minimum legal funding requirement. The
Company was required to make contributions of $8.8 million to the Dex Media Pension Plan during the
eleven months ended December 31, 2010. The Predecessor Company was not required to make
contributions to the Dex Media Pension Plan during the one month ended January 31, 2010. The
Predecessor Company was required to make contributions of $39.8 million and $9.5 million to the Dex
Media Pension Plan during the years ended December 31, 2009 and 2008, respectively. The underlying
pension plan assets are invested in diversified portfolios consisting primarily of equity and debt
securities. A measurement date of December 31 is used for all of our plan assets.
The Company has frozen the Dex Media Pension Plan covering CWA and IBEW represented employees and
the Dex One Retirement Plan and Dex Media Pension Plan covering all non-union employees. In
connection with the freeze, all pension plan benefit accruals for CWA and IBEW plan participants
ceased as of December 31, 2009 and all pension plan benefit accruals for non-union plan
participants ceased as of December 31, 2008, however, all plan balances remained intact and
interest credits on participant account balances under an account balance formula, as well as
service credits for vesting and retirement eligibility, continue in accordance with the terms of
the plans. In addition, supplemental transition credits have been provided to certain plan
participants nearing retirement who would otherwise lose a portion of their anticipated pension
benefit at age 65 as a result of freezing the current plans. Similar supplemental transition
credits will be provided to certain plan participants who were grandfathered under a final average
pay formula when the defined benefit plans were previously converted from traditional pension plans
to cash balance plans.
Dex One, Dex Media and Business.com Savings Plans. Under each of our savings plans, we contribute
100% for each dollar contributed by participating employees, up to a maximum of 6% of each
participating employees salary, including bonus and commissions, and contributions made by the
Company are fully vested for participants who have completed one year of service with the Company.
The Company made contributions to the Dex One 401(k) Savings Plan of $8.7 million, the Dex Media,
Inc. Employee Savings Plan of $4.7 million and the Business.com, Inc. 401(k) Plan of $0.3 million
during the eleven months ended December 31, 2010. Contributions made by the Predecessor
F-64
Company to the Dex One 401(k) Savings Plan were $0.5 million, $8.8 million and $2.7 million for the
one month ended January 31, 2010 and years ended December 31, 2009 and 2008, respectively.
Contributions made by the Predecessor Company to the Dex Media, Inc. Employee Savings Plan were
$0.4 million, $2.3 million and $5.1 million for the one month ended January 31, 2010 and years
ended December 31, 2009 and 2008, respectively. Contributions made by the Predecessor Company to
the Business.com, Inc. 401(k) Plan were $0.1 million and $0.5 million for the one month ended
January 31, 2010 and year ended December 31, 2009, respectively. No contributions were made by the
Predecessor Company to the Business.com, Inc. 401(k) Plan during 2008.
The Company maintains the Dex One 401(k) Restoration Plan for those employees with compensation in
excess of the IRS annual limits.
Other Benefits Information Union Employees
|
|
|
All access to retiree health care and life insurance benefits has been eliminated for
IBEW represented employees retiring after May 8, 2009 and for CWA represented employees
retiring after October 2, 2009; |
|
|
|
|
Retiree life insurance benefits have been eliminated effective January 1, 2010; |
|
|
|
|
The two-year phase out of subsidized retiree health care benefits commenced January 1,
2010; and |
|
|
|
|
Effective January 1, 2012, retiree health care benefits will be eliminated for all
retirees. |
Other Benefits Information Non-Union Employees
|
|
|
All non-subsidized access to retiree health care and life insurance benefits were
eliminated effective January 1, 2009; |
|
|
|
|
Subsidized retiree health care benefits for any Medicare-eligible retirees were
eliminated effective January 1, 2009; and |
|
|
|
|
The three-year phase out of subsidized retiree health care benefits commenced January 1,
2009 (with non-union retiree health care benefits terminating December 31, 2011, except for
continued non-subsidized access to retiree benefits for retirees enrolled as of December
31, 2008). With respect to the phase out of subsidized retiree health care benefits, if an
eligible retiree becomes Medicare-eligible at any point in time during the phase out
process noted above, such retiree will no longer be eligible for retiree health care
coverage. |
During the second quarter of 2010, we recognized a one-time curtailment gain of $3.8 million
associated with the departure of the Companys former Chief Executive Officer, which is included in
general and administrative expenses on the consolidated statement of operations for the eleven
months ended December 31, 2010.
As a result of implementing the freeze on the Dex Media Pension Plan covering CWA and IBEW
represented employees, the Predecessor Company recognized a one-time net curtailment gain of $4.2
million during the year ended December 31, 2009, which has been entirely offset by losses incurred
on plan assets and previously unrecognized prior service costs that had been charged to accumulated
other comprehensive loss. As a result of eliminating retiree health care and life insurance
benefits for CWA and IBEW represented employees, the Predecessor Company recognized a one-time
curtailment gain of $52.0 million, which is included in general and administrative expenses on the
consolidated statement of operations for the year ended December 31, 2009. As a result of these
actions, we will no longer incur funding expenses and administrative costs associated with the
retiree health care and life insurance plans for CWA and IBEW represented employees.
As a result of implementing the freeze on the defined benefit plans covering non-union employees,
the Predecessor Company recognized a one-time net curtailment loss of $1.6 million during the year
ended December 31, 2008, consisting of a curtailment gain of $13.6 million, entirely offset by
losses incurred on plan assets and recognition of previously unrecognized prior service costs that
had been charged to accumulated other comprehensive loss. As a result of eliminating retiree health
care and life insurance benefits for non-union employees, the Predecessor Company recognized a
one-time curtailment gain of $39.6 million, which is included in general and administrative
expenses on the consolidated statement of operations for the year ended December 31, 2008. As a
result of these actions, we will no longer incur funding expenses and administrative costs
associated with the retiree health care and life insurance plans for non-union employees.
F-65
Benefit Obligation and Funded Status
A summary of the funded status of the Companys benefit plans at December 31, 2010 and the
Predecessor Companys benefit plans at December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans |
|
|
Postretirement Plans |
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
Change in benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, February 1, 2010 |
|
$ |
250,671 |
|
|
|
|
|
|
$ |
3,475 |
|
|
|
|
|
Benefit obligation, January 1, 2009 |
|
|
|
|
|
$ |
278,290 |
|
|
|
|
|
|
$ |
55,282 |
|
Transfer of
Supplemental Executive Retirement Plan liability |
|
|
|
|
|
|
6,228 |
|
|
|
|
|
|
|
|
|
Service cost |
|
|
|
|
|
|
4,394 |
|
|
|
|
|
|
|
647 |
|
Interest cost |
|
|
12,432 |
|
|
|
14,481 |
|
|
|
107 |
|
|
|
2,608 |
|
Actuarial loss (gain) |
|
|
19,133 |
|
|
|
2,203 |
|
|
|
(675 |
) |
|
|
(4,253 |
) |
Plan curtailments |
|
|
(3,754 |
) |
|
|
(4,162 |
) |
|
|
|
|
|
|
(46,704 |
) |
Benefits paid |
|
|
(19,910 |
) |
|
|
(9,559 |
) |
|
|
(1,867 |
) |
|
|
(4,122 |
) |
Plan settlements |
|
|
(1,327 |
) |
|
|
(42,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of year |
|
$ |
257,245 |
|
|
$ |
249,604 |
|
|
$ |
1,040 |
|
|
$ |
3,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, February 1, 2010 |
|
$ |
170,859 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
Fair value of plan assets, January 1, 2009 |
|
|
|
|
|
$ |
148,115 |
|
|
|
|
|
|
$ |
|
|
Return on plan assets |
|
|
21,664 |
|
|
|
27,362 |
|
|
|
|
|
|
|
|
|
Employer contributions |
|
|
9,770 |
|
|
|
49,984 |
|
|
|
1,867 |
|
|
|
4,122 |
|
Benefits paid |
|
|
(14,966 |
) |
|
|
(8,955 |
) |
|
|
(1,867 |
) |
|
|
(4,122 |
) |
Plan settlements |
|
|
|
|
|
|
(42,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of year |
|
$ |
187,327 |
|
|
$ |
174,235 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
Funded status at end of year |
|
$ |
(69,918 |
) |
|
$ |
(75,369 |
) |
|
$ |
(1,040 |
) |
|
$ |
(3,458 |
) |
|
|
|
|
|
Net amounts recognized in the Companys consolidated balance sheet at December 31, 2010 and the
Predecessor Companys consolidated balance sheet at December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans |
|
|
Postretirement Plans |
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
|
Current liabilities |
|
$ |
(357 |
) |
|
$ |
(275 |
) |
|
$ |
(1,040 |
) |
|
$ |
(2,848 |
) |
Non-current liabilities |
|
|
(69,561 |
) |
|
|
(75,094 |
) |
|
|
|
|
|
|
(610 |
) |
|
|
|
Net amount recognized |
|
$ |
(69,918 |
) |
|
$ |
(75,369 |
) |
|
$ |
(1,040 |
) |
|
$ |
(3,458 |
) |
|
|
|
The accumulated benefit obligation for all qualified defined benefit pension plans of the Company
was $257.2 million at December 31, 2010. The accumulated benefit obligation for all qualified
defined benefit pension plans of the Predecessor Company was $249.6 million at December 31, 2009.
F-66
The Companys and the Predecessor Companys projected benefit obligation and accumulated benefit
obligation for the unfunded PBEP at December 31, 2010 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
|
Projected benefit obligation |
|
$ |
3,427 |
|
|
$ |
4,988 |
|
Accumulated benefit obligation |
|
$ |
3,427 |
|
|
$ |
4,988 |
|
Components of Net Periodic Benefit (Income) Expense
The net periodic benefit (income) expense of the Companys pension plans for the eleven months
ended December 31, 2010 and the Predecessor Companys pension plans for the one month ended January
31, 2010 and years ended December 31, 2009 and 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
Eleven Months Ended |
|
|
One Month Ended |
|
|
|
|
|
|
|
|
|
December 31, |
|
|
January 31, |
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
4,394 |
|
|
$ |
12,736 |
|
Interest cost |
|
|
12,432 |
|
|
|
1,124 |
|
|
|
14,481 |
|
|
|
18,416 |
|
Expected return on
plan assets |
|
|
(12,201 |
) |
|
|
(1,385 |
) |
|
|
(17,899 |
) |
|
|
(19,719 |
) |
Amortization of
unrecognized prior
service cost |
|
|
|
|
|
|
81 |
|
|
|
975 |
|
|
|
163 |
|
Settlement loss |
|
|
17 |
|
|
|
|
|
|
|
6,083 |
|
|
|
3,504 |
|
Curtailment (gain) loss |
|
|
(3,754 |
) |
|
|
|
|
|
|
|
|
|
|
1,590 |
|
Amortization of
unrecognized net loss
(gain) |
|
|
|
|
|
|
122 |
|
|
|
(190 |
) |
|
|
373 |
|
|
|
|
Net periodic benefit
(income) expense |
|
$ |
(3,506 |
) |
|
$ |
(58 |
) |
|
$ |
7,844 |
|
|
$ |
17,063 |
|
|
|
|
The net periodic benefit (income) expense of the Companys postretirement plans for the eleven
months ended December 31, 2010 and the Predecessor Companys postretirement plans for the one month
ended January 31, 2010 and years ended December 31, 2009 and 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
Eleven Months Ended |
|
|
One Month Ended |
|
|
|
|
|
|
|
|
|
December 31, |
|
|
January 31, |
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
647 |
|
|
$ |
1,621 |
|
Interest cost |
|
|
107 |
|
|
|
10 |
|
|
|
2,608 |
|
|
|
5,632 |
|
Amortization of
unrecognized prior
service (credit) |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
(6 |
) |
Curtailment gain |
|
|
|
|
|
|
|
|
|
|
(52,019 |
) |
|
|
(39,588 |
) |
Amortization of
unrecognized net
(gain) loss |
|
|
(291 |
) |
|
|
(21 |
) |
|
|
(608 |
) |
|
|
524 |
|
|
|
|
Net periodic
benefit (income) |
|
$ |
(184 |
) |
|
$ |
(11 |
) |
|
$ |
(49,378 |
) |
|
$ |
(31,817 |
) |
|
|
|
In accordance with fresh start accounting and reporting, unamortized amounts previously charged to
accumulated other comprehensive loss were eliminated on the Fresh Start Reporting Date. See Note 3,
Fresh Start Accounting for additional information.
As of December 31, 2010, there are no previously unrecognized actuarial gains and losses or prior
service cost in accumulated other comprehensive loss expected to be recognized as net periodic
benefit expense in 2011.
F-67
Amounts recognized in accumulated other comprehensive loss for the Company at December 31, 2010 and
the Predecessor Company at December 31, 2009 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
|
Postretirement |
|
|
|
Plans |
|
|
Plans |
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
|
Net actuarial loss (gain) |
|
$ |
9,653 |
|
|
$ |
(11,422 |
) |
|
$ |
(384 |
) |
|
$ |
(5,885 |
) |
Prior service (credit) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(45 |
) |
Assumptions
In conjunction with our emergence from Chapter 11, the Predecessor Company performed a
remeasurement of its pension and postretirement obligations as of January 31, 2010. The following
assumptions were used in determining the benefit obligations for the Companys pension plans and
postretirement plans for the eleven months ended December 31, 2010 and the Predecessor Companys
pension plans and postretirement plans for the one month ended January 31, 2010 and year ended
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
Eleven Months Ended |
|
|
One Month Ended |
|
|
|
|
|
|
December 31, |
|
|
January 31, |
|
|
Year Ended December |
|
|
|
2010 |
|
|
2010 |
|
|
31, 2009 |
|
|
Weighted average discount rates: |
|
|
|
|
|
|
|
|
|
|
|
|
Dex One Retirement Plan |
|
|
5.30 |
% |
|
|
5.70 |
% |
|
|
5.72 |
% |
Dex Media Pension Plan |
|
|
5.06 |
% |
|
|
5.70 |
% |
|
|
5.72 |
% |
The discount rate reflects the current rate at which the pension and postretirement obligations
could effectively be settled at the end of the year. For the eleven months ended December 31, 2010,
the Company utilized an outsource providers yield curve to determine the appropriate discount rate
for each of the defined benefit pension plans based on the individual plans expected future cash
flows. During January 2010 and the year ended December 31, 2009, the Predecessor Company utilized
an outsource providers yield curve to determine the appropriate discount rate for the defined
benefit pension plans. During the year ended December 31, 2008, the Predecessor Company utilized
the Citigroup Pension Liability Index as the appropriate discount rate for its defined benefit
pension plans. The Predecessor Company changed to an outsource providers yield curve during 2009
to better reflect the specific cash flows of these plans in determining the discount rate. Since
the pension plans have been frozen, no rate of increase in future compensation was utilized to
calculate the benefit obligations of the Company at December 31, 2010 or the Predecessor Company at
December 31, 2009.
The ratification of the freeze on the Predecessor Companys defined benefit plans on November 6,
2009 and June 12, 2009 (Ratification Dates) and October 21, 2008 (Notification Date), resulted
in curtailments. These curtailments required re-measurement of the plans liabilities and net
periodic benefit expense at December 31, 2009, July 1, 2009 and November 1, 2008.
On December 31, 2010 and May 31, 2009, settlements of Dex Ones PBEP occurred. At that time, lump
sum payments to participants exceeded the sum of the service cost plus interest cost components of
the net periodic benefit expense for the year. These settlements resulted in recognition of an
actuarial loss of less than $0.1 million for the eleven months ended December 31, 2010 and an
actuarial gain of less than $0.1 million for the year ended December 31, 2009. Pension expense for
Dex Ones PBEP was recomputed based on assumptions as of June 1, 2009 and December 31, 2009,
resulting in an increase in the discount rate from 5.87% to 6.87%.
F-68
On December 31, 2009, June 1, 2009, April 1, 2009, December 31, 2008, October 31, 2008 and July 1,
2008 and thereafter, settlements of Dex Medias pension plan occurred. At that time, lump sum
payments to participants exceeded the sum of the service cost plus interest cost components of the
net periodic benefit expense for the year. These settlements resulted in the recognition of
actuarial losses of $6.1 million and $3.5 million for the years ended December 31, 2009 and 2008,
respectively. Pension expense for the one month ended January 31, 2010 was recomputed based on
assumptions as of January 31, 2010, resulting in a decrease in the discount rate from 5.72% to
5.70%. Pension expense in 2009 was recomputed based on assumptions as of June 1, 2009 and December
31, 2009, resulting in an increase in the discount rate from 5.87% to 6.87%. Pension expense in
2008 was recomputed based on assumptions as of the July 1, 2008 and November 1, 2008 settlement
dates, resulting in an increase in the discount rate from 6.48% to 6.82% and finally to 8.01%.
The following assumptions were used in determining the Companys net periodic benefit expense for
the Dex One Retirement Plan and Dex Media Pension Plan during the eleven months ended December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
Dex One Retirement Plan |
|
|
Dex Media Pension Plan |
|
|
|
|
Weighted average discount rate |
|
|
5.70 |
% |
|
|
5.70 |
% |
Expected return on plan assets |
|
|
8.00 |
% |
|
|
8.00 |
% |
The following assumptions were used in determining the Predecessor Companys net periodic benefit
expense for the Dex One Retirement Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2008 |
|
|
January 1, 2008 |
|
|
|
One Month Ended |
|
|
|
|
|
|
through |
|
|
through |
|
|
|
January 31, 2010 |
|
|
2009 |
|
|
December 31, 2008 |
|
|
October 31, 2008 |
|
|
|
|
Weighted average discount rate |
|
|
5.70 |
% |
|
|
5.87 |
% |
|
|
8.01 |
% |
|
|
6.48 |
% |
Rate of increase in future compensation |
|
|
|
|
|
|
|
|
|
|
3.66 |
% |
|
|
3.66 |
% |
Expected return on plan assets |
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
The following assumptions were used in determining the Predecessor Companys net periodic benefit
expense for the Dex Media Pension Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 1, 2009 |
|
|
January 1, 2009 |
|
|
November 1, 2008 |
|
|
July 1, |
|
|
January 1, 2008 |
|
|
|
One Month Ended |
|
|
through December |
|
|
through May 31, |
|
|
through December |
|
|
2008 through |
|
|
through June 30, |
|
|
|
January 31, 2010 |
|
|
31, 2009 |
|
|
2009 |
|
|
31, 2008 |
|
|
October 31, 2008 |
|
|
2008 |
|
|
|
|
Weighted average
discount rate |
|
|
5.70 |
% |
|
|
6.87 |
% |
|
|
5.87 |
% |
|
|
8.01 |
% |
|
|
6.82 |
% |
|
|
6.48 |
% |
Rate of increase in
future
compensation |
|
|
|
|
|
|
3.66 |
% |
|
|
3.66 |
% |
|
|
3.66 |
% |
|
|
3.66 |
% |
|
|
3.66 |
% |
Expected return on
plan assets |
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
The weighted average discount rate used by the Company to determine the net periodic benefit
expense for both the Dex One postretirement plan and the Dex Media postretirement plan was 5.70%
for the eleven months ended December 31, 2010. The elimination of the retiree health care and life
insurance benefits on the Ratification Dates and the Notification Date resulted in curtailments.
These curtailments required re-measurement of the plans liabilities and net periodic benefit
expense at June 1, 2009, December 31, 2009 and November 1, 2008. The weighted average discount rate
used by the Predecessor Company to determine the net periodic benefit expense for the Dex One
postretirement plan was 5.70% for the one month ended January 31, 2010, 5.87% for 2009, 8.01% for
the period of November 1, 2008 through December 31, 2008 and 6.48% from January 1, 2008 through
October 31, 2008, respectively. The weighted average discount rate used by the Predecessor Company
to determine the net periodic benefit expense for the Dex Media postretirement plan was 5.70% for
the one month ended January 31, 2010, 6.87% for the period of June 1, 2009 through December 31,
2009, 5.87% for the period of January 1, 2009 through May 31, 2009, 8.01% for the period of
November 1, 2008 through December 31, 2008, 6.82% from July 1, 2008 through October 31, 2008 and
6.48% from January 1, 2008 through June 30, 2008, respectively.
F-69
Healthcare cost trend rate assumptions are no longer required since the Company has terminated its
post-retirement plans. The following table reflects assumed healthcare cost trend rates used in
determining the net periodic benefit expense and benefit obligations for the Predecessor Companys
postretirement plans prior to termination:
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, 2009 |
|
Healthcare cost trend rate assumed for
next year: |
|
|
|
|
Under 65 |
|
|
9.4 |
% |
65 and older |
|
|
9.4 |
% |
Rate to which the cost trend rate is
assumed to decline: |
|
|
|
|
Under 65 |
|
|
5.0 |
% |
65 and older |
|
|
5.0 |
% |
Year ultimate trend rate is reached |
|
|
2015 |
|
Plan Assets
The fair value of the assets held in the Master Trust at December 31, 2010 and 2009, by asset
category, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2010 |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Using |
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
Cash |
|
$ |
460 |
|
|
$ |
460 |
|
|
$ |
|
|
U.S. Government securities (a) |
|
|
23,210 |
|
|
|
|
|
|
|
23,210 |
|
Common/collective trusts (b) |
|
|
67,375 |
|
|
|
|
|
|
|
67,375 |
|
Corporate debt (c) |
|
|
19,736 |
|
|
|
|
|
|
|
19,736 |
|
Corporate stock (d) |
|
|
19,720 |
|
|
|
19,720 |
|
|
|
|
|
Registered investment companies (e) |
|
|
29,860 |
|
|
|
29,860 |
|
|
|
|
|
Real estate investment trust (f) |
|
|
338 |
|
|
|
338 |
|
|
|
|
|
Credit default swaps and futures (g) |
|
|
1,149 |
|
|
|
|
|
|
|
1,149 |
|
Collective Fund Group Trust (h) |
|
|
25,479 |
|
|
|
|
|
|
|
25,479 |
|
|
|
|
Total |
|
$ |
187,327 |
|
|
$ |
50,378 |
|
|
$ |
136,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2009 |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Using |
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
Cash |
|
$ |
1,860 |
|
|
$ |
1,860 |
|
|
$ |
|
|
U.S. Government securities (a) |
|
|
14,755 |
|
|
|
|
|
|
|
14,755 |
|
Common/collective trusts (b) |
|
|
80,062 |
|
|
|
|
|
|
|
80,062 |
|
Corporate debt (c) |
|
|
20,879 |
|
|
|
|
|
|
|
20,879 |
|
Corporate stock (d) |
|
|
22,051 |
|
|
|
22,051 |
|
|
|
|
|
Registered investment companies (e) |
|
|
34,036 |
|
|
|
34,036 |
|
|
|
|
|
Real estate investment trust (f) |
|
|
198 |
|
|
|
198 |
|
|
|
|
|
Credit default swaps and futures (g) |
|
|
394 |
|
|
|
|
|
|
|
394 |
|
|
|
|
Total |
|
$ |
174,235 |
|
|
$ |
58,145 |
|
|
$ |
116,090 |
|
|
|
|
|
|
|
(a) |
|
This category includes investments in U.S. Government bonds, government mortgage-backed
securities, index-linked government bonds, guaranteed commercial paper, short-term treasury
bills and notes. Fair value for these assets is determined using a bid evaluation process
of observable, market based inputs effective as of the last business day of the plan year. |
F-70
|
|
|
(b) |
|
This category includes investments in two common/collective funds of which 89% is
invested in stocks comprising the Russell 1000 equity index and the remaining 11% is
comprised of short-term investments at December 31, 2010. Fair value for these assets is
determined based on the contract value, which is based on the provisions of the underlying
guaranteed investment contracts. |
|
(c) |
|
This category includes investments in corporate bonds, commercial mortgage-backed and
asset-backed securities, collateralized mortgage obligations and commercial paper. Fair
value for these assets is determined using a bid evaluation process of observable, market
based inputs effective as of the last business day of the plan year. |
|
(d) |
|
This category includes investments in small cap stocks of U. S. issuers across diverse
industries. Fair value for these assets is determined using quoted market prices on a
recognized securities exchange at the last reported trading price on the last business day
of the plan year. |
|
(e) |
|
This category is comprised of two mutual funds, one fund that invests in value-oriented
international stocks across diverse industries and one that invests in intermediate term
fixed income instruments such as treasuries and high grade corporate bonds. Fair value for
these assets is determined using quoted market prices on a recognized securities exchange
at the last reported trading price on the last business day of the plan year. |
|
(f) |
|
This category is comprised of a healthcare real estate investment trust. Fair value for
these assets is determined based on traded market prices. |
|
(g) |
|
This category includes investments in a combination of 5, 10 and 30 year U.S. Treasury
notes and bond futures and credit default swaps. Fair value for these assets is determined
based on either settlement prices, prices on a recognized securities exchange or a mid/bid
evaluation process using observable, market based inputs. |
|
(h) |
|
This category includes investments in passively managed funds composed of
international stocks across diverse industries. Fair value for these assets is calculated
based upon a compilation of observable market information. |
The Companys pension plan weighted-average asset allocation at December 31, 2010, by asset
category on a weighted average basis, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Master Trust |
|
|
|
Plan Assets at |
|
|
Asset Allocation |
|
|
|
December 31, 2010 |
|
|
Target |
|
|
Equity securities |
|
|
62 |
% |
|
|
65 |
% |
Debt securities |
|
|
38 |
% |
|
|
35 |
% |
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
The Predecessor Companys pension plan weighted-average asset allocation at December 31, 2009, by
asset category on a weighted average basis, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Master Trust |
|
|
|
Plan Assets at |
|
|
Asset Allocation |
|
|
|
December 31, 2009 |
|
|
Target |
|
|
Equity securities |
|
|
60 |
% |
|
|
65 |
% |
Debt securities |
|
|
40 |
% |
|
|
35 |
% |
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
F-71
The Asset Management Committee (AMC) as appointed by the Compensation and Benefits Committee of
the Companys Board of Directors is a named fiduciary of the plan in matters relating to plan
investments and asset management. The AMC has the authority to appoint, retain, monitor and remove
any custodian or investment manager and is responsible for establishing and maintaining a funding
and investment policy for the Master Trust.
The plans assets are invested in accordance with investment practices that emphasize long-term
investment fundamentals. The plans investment objective is to achieve a positive rate of return
over the long term from capital appreciation and a growing stream of current income that would
significantly contribute to meeting the plans current and future obligations. These objectives can
be obtained through a well-diversified portfolio structure in a manner consistent with each plans
investment policy statement.
The plans assets are invested in marketable equity and fixed income securities managed by
professional investment managers. Plan assets are invested using a combination of active and
passive (indexed) investment strategies. The plans assets are to be broadly diversified by asset
class, investment style, number of issues, issue type and other factors consistent with the
investment objectives outlined in each plans investment policy statement. The plans assets are to
be invested with prudent levels of risk and with the expectation that long-term returns will
maintain and contribute to increasing purchasing power of the plans assets, net of all
disbursements, over the long term.
The plans assets in separately managed accounts may not be used for the following purposes: short
sales, purchases of letter stock, private placements, leveraged transactions, commodities
transactions, option strategies, investments in some limited partnerships, investments by the
managers in their own securities, their affiliates or subsidiaries, investment in futures, use of
margin or investments in any derivative not explicitly permitted in each plans investment policy
statement.
The plans fixed income manager uses derivative financial instruments in the normal course of its
investing activities to hedge against adverse changes in the fixed income market and to achieve
overall investment portfolio objectives. These financial instruments include U.S. Treasury futures
contracts and credit default swaps. The futures held are a combination of 5, 10 and 30 year futures
and are being used to manage the duration exposure of the portfolio. The credit default swaps are
held as a hedge against declines in certain bond markets and as a vehicle to take advantage of
opportunities in certain segments of the fixed income market. The plans investment policy
statements do not allow the use of derivatives to leverage the portfolio or for speculative
purposes. The use of derivatives is not believed to materially increase the credit or market risk
of the plans investments.
For the eleven months ended December 31, 2010, the Company used a rate of 8.00% as the expected
long-term rate of return assumption on the plan assets for the Dex One Retirement Plan and Dex
Media Pension Plan. For the one month ended January 31, 2010 and years ended December 31, 2009 and
2008, the Predecessor Company used a rate of 8.00%, 8.00% and 8.50%, respectively, as the expected
long-term rate of return assumption on the plan assets for the Dex One Retirement Plan and Dex
Media Pension Plan. The basis used for determining these rates was the long-term capital market
return forecasts for an asset mix similar to the plans asset allocation target of 65% equity
securities and 35% debt securities at the beginning of each such year. The basis used for
determining these rates also included an opportunity for active management of the assets to add
value over the long term. The active management expectation was supported by calculating
historical returns for the investment managers who actively managed the plans assets.
Although we review our expected long-term rate of return assumption annually, our performance in
any one particular year does not, by itself, significantly influence our evaluation. Our
assumption is generally not revised unless there is a fundamental change in one of the factors upon
which it is based, such as the target asset allocation or long-term capital market return
forecasts.
F-72
Estimated Future Benefit Payments
The Companys pension plans benefits and postretirement plans benefits expected to be paid in each
of the next five fiscal years and in the aggregate for the five fiscal years thereafter are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Pension Plans |
|
|
Postretirement Plans |
|
2011 |
|
$ |
26,048 |
|
|
$ |
1,066 |
|
2012 |
|
|
18,219 |
|
|
|
|
|
2013 |
|
|
18,382 |
|
|
|
|
|
2014 |
|
|
18,094 |
|
|
|
|
|
2015 |
|
|
17,981 |
|
|
|
|
|
Years 2016-2020 |
|
|
91,812 |
|
|
|
|
|
We expect to make contributions of approximately $16.0 million and $1.1 million to our pension
plans and postretirement plans, respectively, in 2011.
Subsequent Events
In January 2011, the Business.com, Inc. 401(k) Plan was merged with and into the Dex One 401(k)
Savings Plan. Effective January 1, 2011, the Dex One 401(k) Restoration Plan was amended to
eliminate matching credits.
11. Commitments
We lease office facilities and equipment under operating leases with non-cancelable lease terms
expiring at various dates through 2016. Rent and lease expense of the Company for the eleven
months ended December 31, 2010 was $22.1 million. Rent and lease expense of the Predecessor Company
for the one month ended January 31, 2010 and years ended December 31, 2009 and 2008 was $1.6
million, $27.7 million and $26.8 million, respectively. The future non-cancelable minimum rental
payments applicable to operating leases at December 31, 2010 are:
|
|
|
|
|
2011 |
|
$ |
20,007 |
|
2012 |
|
|
15,194 |
|
2013 |
|
|
8,918 |
|
2014 |
|
|
8,540 |
|
2015 |
|
|
3,461 |
|
Thereafter |
|
|
109 |
|
|
|
|
|
Total |
|
$ |
56,229 |
|
|
|
|
|
In connection with our software system modernization and on-going support services, we are
obligated to pay an IT outsource service provider approximately $45.0 million over the years 2011
through 2012. Effective January 1, 2010, an Internet Yellow Pages reseller agreement was amended
and restated whereby we are obligated to pay to AT&T $21.8 million over the years 2011 through
2012. We have entered into a Directory Advertisement agreement with a CMR to cover advertising
placed with the Company by the CMR on behalf of Qwest. Under this agreement, we are obligated to
pay the CMR approximately $5.2 million for commissions over the years 2011 through 2014.
F-73
12. 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, including the two cases described below, will not have a
material adverse effect on our results of operations, cash flows or financial position.
Beginning on October 23, 2009, a series of putative securities class action lawsuits were commenced
in the United States District Court for the District of Delaware on behalf of all persons who
purchased or otherwise acquired our publicly traded securities between July 26, 2007 and the time
we filed for bankruptcy on May 28, 2009, alleging that certain of our officers issued false and
misleading statements regarding our business and financial condition and seeking damages and
equitable relief. On August 19, 2010, an amended consolidated class action complaint was filed as
the operative securities class action complaint (the Securities Class Action Complaint). The
Securities Class Action Complaint extends the class to include all persons who purchased or
otherwise acquired our publicly traded securities between October 26, 2006 and May 28, 2009. On
December 7, 2009, a putative ERISA class action lawsuit was commenced in the United States District
Court for the Northern District of Illinois on behalf of certain participants in, or beneficiaries
of, the R.H. Donnelley 401(k) Savings Plan at any time between July 26, 2007 and the time the
lawsuit was filed and whose plan accounts included investments in R.H. Donnelley common stock. The
putative ERISA class action complaint contains allegations against certain current and former
directors, officers and employees similar to those set forth in the Securities Class Action
Complaint as well as allegations of breaches of fiduciary duties under ERISA and seeks damages and
equitable relief. We believe the allegations set forth in both of these lawsuits are without merit
and we are vigorously defending the suits.
13. Business Segments
Management reviews and analyzes its business of providing marketing solutions as one operating
segment.
14. Dex One Corporation (Parent Company) Financial Statements
The following condensed Parent Company financial statements should be read in conjunction with the
consolidated financial statements of the Company and the Predecessor Company. 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 Dex One Senior
Subordinated Notes. In addition, each of the 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. See Note 6,
Long-Term Debt, Credit Facilities and Notes for a further description of our debt instruments.
F-74
Condensed Parent Company Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
|
Company |
|
|
Company |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,134 |
|
|
$ |
5,007 |
|
Intercompany, net |
|
|
|
|
|
|
109,102 |
|
Intercompany loan receivable |
|
|
4,900 |
|
|
|
5,000 |
|
Prepaid and other current assets |
|
|
282 |
|
|
|
8,055 |
|
|
|
|
Total current assets |
|
|
7,316 |
|
|
|
127,164 |
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries |
|
|
900,409 |
|
|
|
|
|
Fixed assets and computer software, net |
|
|
|
|
|
|
5,990 |
|
Deferred income taxes, net |
|
|
|
|
|
|
71,878 |
|
Intercompany note receivable |
|
|
|
|
|
|
300,000 |
|
|
|
|
|
Total assets |
|
$ |
907,725 |
|
|
$ |
505,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity (Deficit) |
|
|
|
|
|
|
|
|
Accounts payable, accrued liabilities and other |
|
$ |
46 |
|
|
$ |
80,061 |
|
Accrued interest |
|
|
9,198 |
|
|
|
|
|
Intercompany, net |
|
|
15,460 |
|
|
|
|
|
Short-term deferred income taxes, net |
|
|
2,116 |
|
|
|
|
|
|
|
|
Total current liabilities not subject to compromise |
|
|
26,820 |
|
|
|
80,061 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
300,000 |
|
|
|
|
|
Deferred income taxes, net |
|
|
54,989 |
|
|
|
|
|
Deficit in subsidiaries |
|
|
|
|
|
|
3,950,031 |
|
Other non-current liabilities |
|
|
|
|
|
|
8,232 |
|
|
|
|
Total liabilities not subject to compromise |
|
|
381,809 |
|
|
|
4,038,324 |
|
|
|
|
|
|
|
|
|
|
Liabilities subject to compromise |
|
|
|
|
|
|
3,385,756 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity (deficit) |
|
|
525,916 |
|
|
|
(6,919,048 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity (deficit) |
|
$ |
907,725 |
|
|
$ |
505,032 |
|
|
|
|
F-75
Condensed Parent Company Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
Eleven Months Ended |
|
|
One Month Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, 2010 |
|
|
January 31, 2010 |
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
Expenses |
|
$ |
18,019 |
|
|
$ |
891 |
|
|
$ |
21,631 |
|
|
$ |
18,490 |
|
Partnership and equity income
(loss) |
|
|
(1,492,376 |
) |
|
|
643,971 |
|
|
|
(7,155,397 |
) |
|
|
(3,521,790 |
) |
|
|
|
Operating income (loss) |
|
|
(1,510,395 |
) |
|
|
643,080 |
|
|
|
(7,177,028 |
) |
|
|
(3,540,280 |
) |
Interest expense, net |
|
|
(33,312 |
) |
|
|
|
|
|
|
(106,034 |
) |
|
|
(297,119 |
) |
Gain on debt transactions, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
247,297 |
|
|
|
|
Income (loss) before reorganization
items, net and income taxes |
|
|
(1,543,707 |
) |
|
|
643,080 |
|
|
|
(7,283,062 |
) |
|
|
(3,590,102 |
) |
Reorganization items, net |
|
|
|
|
|
|
7,194,470 |
|
|
|
(98,751 |
) |
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(1,543,707 |
) |
|
|
7,837,550 |
|
|
|
(7,381,813 |
) |
|
|
(3,590,102 |
) |
(Provision) benefit for income
taxes |
|
|
620,115 |
|
|
|
(917,541 |
) |
|
|
928,520 |
|
|
|
1,291,775 |
|
|
|
|
Net income (loss) |
|
$ |
(923,592 |
) |
|
$ |
6,920,009 |
|
|
$ |
(6,453,293 |
) |
|
$ |
(2,298,327 |
) |
|
|
|
Condensed Parent Company Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
Eleven Months Ended |
|
|
One Month Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, 2010 |
|
|
January 31, 2010 |
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
Cash flow used in operating
activities |
|
$ |
(23,422 |
) |
|
$ |
(531 |
) |
|
$ |
(118,814 |
) |
|
$ |
(306,471 |
) |
Cash flow from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to fixed assets and
computer software, net |
|
|
|
|
|
|
(643 |
) |
|
|
(1,705 |
) |
|
|
(1,391 |
) |
Intercompany loan |
|
|
(4,900 |
) |
|
|
|
|
|
|
(5,000 |
) |
|
|
|
|
Equity investment disposition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,318 |
|
|
|
|
Net cash (used in) provided by
investing activities |
|
|
(4,900 |
) |
|
|
(643 |
) |
|
|
(6,705 |
) |
|
|
2,927 |
|
Cash flow from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note repurchases and related
costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(92,130 |
) |
Proceeds from employee stock option exercises |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95 |
|
Debt issuance and other
financing costs |
|
|
|
|
|
|
(370 |
) |
|
|
|
|
|
|
(433 |
) |
(Decrease) increase in checks not
yet presented for payment
|
|
|
(1,025 |
) |
|
|
(182 |
) |
|
|
(22 |
) |
|
|
1,131 |
|
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,112 |
) |
Excess tax benefits from the exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,059 |
) |
Dividends from subsidiaries |
|
|
28,200 |
|
|
|
|
|
|
|
129,600 |
|
|
|
384,100 |
|
|
|
|
Net cash provided by (used in)
financing activities |
|
|
27,175 |
|
|
|
(552 |
) |
|
|
129,578 |
|
|
|
285,592 |
|
|
|
|
Change in cash |
|
|
(1,147 |
) |
|
|
(1,726 |
) |
|
|
4,059 |
|
|
|
(17,952 |
) |
Cash at beginning of period |
|
|
3,281 |
|
|
|
5,007 |
|
|
|
948 |
|
|
|
18,900 |
|
|
|
|
Cash at end of period |
|
$ |
2,134 |
|
|
$ |
3,281 |
|
|
$ |
5,007 |
|
|
$ |
948 |
|
|
|
|
15. Capital Stock
The Company has authority to issue (i) 300,000,000 shares of common stock, $.001 par value per
share (Common Stock), and (ii) 10,000,000 shares of preferred stock, $.001 par value per share
(Preferred Stock). The powers, preferences and rights of holders of shares of our Common Stock
are subject to, and may be adversely affected by, the powers, preferences and rights of the holders
of shares of any series of Preferred Stock that we may designate and issue in the future without
stockholder approval. As of December 31, 2010, the Company had not issued any shares of Preferred
Stock.
F-76
16. Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
Net Changes |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
to Other |
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Charged To |
|
|
Balance |
|
|
Write-offs |
|
|
Balance at |
|
|
|
Beginning |
|
|
Revenue |
|
|
Sheet |
|
|
and Other |
|
|
End of |
|
|
|
of Period |
|
|
And Expense |
|
|
Accounts |
|
|
Deductions |
|
|
Period |
|
|
|
|
Allowance for Doubtful
Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the eleven months ended
December 31, 2010 |
|
$ |
|
|
|
|
16,364 |
|
|
|
119,230 |
|
|
|
(59,703 |
) |
|
$ |
75,891 |
|
Predecessor Company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the one month ended
January 31, 2010 |
|
$ |
54,612 |
|
|
|
7,822 |
|
|
|
(54,591 |
) |
|
|
(7,843 |
) |
|
$ |
|
|
For the year ended
December 31, 2009 |
|
$ |
48,727 |
|
|
|
146,553 |
|
|
|
|
|
|
|
(140,668 |
) |
|
$ |
54,612 |
|
For the year ended
December 31, 2008 |
|
$ |
35,959 |
|
|
|
138,353 |
|
|
|
|
|
|
|
(125,585 |
) |
|
$ |
48,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Income Tax Asset
Valuation Allowance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the eleven months ended
December 31, 2010 |
|
$ |
7,876 |
|
|
|
89,766 |
|
|
|
|
|
|
|
|
|
|
$ |
97,642 |
|
Predecessor Company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the one month ended
January 31, 2010 |
|
$ |
1,531,905 |
|
|
|
|
|
|
|
|
|
|
|
(1,524,029 |
) |
|
$ |
7,876 |
|
For the year ended
December 31, 2009 |
|
$ |
9,252 |
|
|
|
1,522,653 |
|
|
|
|
|
|
|
|
|
|
$ |
1,531,905 |
|
For the year ended
December 31, 2008 |
|
$ |
13,726 |
|
|
|
|
|
|
|
|
|
|
|
(4,474 |
) |
|
$ |
9,252 |
|
17. Quarterly Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
|
|
|
Company |
|
|
Successor
Company |
|
|
|
(Audited) |
|
|
(Unaudited) |
|
|
|
One Month |
|
|
Two Months |
|
|
Three Months |
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
|
January 31, 2010 |
|
|
March 31, 2010 |
|
|
June 30, 2010 |
|
|
September 30, 2010 |
|
|
December 31, 2010 |
|
|
|
|
Net revenues |
|
$ |
160,372 |
|
|
$ |
53,145 |
|
|
$ |
160,891 |
|
|
$ |
259,231 |
|
|
$ |
357,620 |
|
Impairment charges (1) |
|
|
|
|
|
|
|
|
|
|
769,674 |
|
|
|
389,592 |
|
|
|
|
|
Operating income (loss) |
|
|
64,074 |
|
|
|
(95,370 |
) |
|
|
(853,544 |
) |
|
|
(391,348 |
) |
|
|
46,006 |
|
Reorganization items, net
(2) |
|
|
7,793,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision) benefit for income
taxes |
|
|
(917,541 |
) |
|
|
401,522 |
|
|
|
157,044 |
|
|
|
68,241 |
|
|
|
(6,692 |
) |
Net income (loss) |
|
$ |
6,920,009 |
|
|
$ |
257,218 |
|
|
$ |
(769,923 |
) |
|
$ |
(390,643 |
) |
|
$ |
(20,244 |
) |
Basic earnings (loss) per share |
|
$ |
100.3 |
|
|
$ |
5.14 |
|
|
$ |
(15.39 |
) |
|
$ |
(7.81 |
) |
|
$ |
(0.41 |
) |
Diluted earnings (loss) per share |
|
$ |
100.2 |
|
|
$ |
5.14 |
|
|
$ |
(15.39 |
) |
|
$ |
(7.81 |
) |
|
$ |
(0.41 |
) |
F- 77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company (Unaudited) |
|
|
|
Three Months Ended |
|
|
|
March 31 |
|
|
June 30 |
|
|
September 30 |
|
|
December 31 |
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
601,986 |
|
|
$ |
565,628 |
|
|
$ |
533,990 |
|
|
$ |
500,843 |
|
Impairment charges (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,337,775 |
) |
Operating income (loss) |
|
|
163,644 |
|
|
|
143,858 |
|
|
|
116,506 |
|
|
|
(7,221,511 |
) |
Reorganization items, net (2) |
|
|
|
|
|
|
(70,781 |
) |
|
|
(7,107 |
) |
|
|
(16,880 |
) |
(Provision) benefit for income taxes |
|
|
(366,019 |
) |
|
|
12,910 |
|
|
|
(21,925 |
) |
|
|
1,303,554 |
|
Net income (loss) |
|
$ |
(401,210 |
) |
|
$ |
(75,482 |
) |
|
$ |
23,930 |
|
|
$ |
(6,000,531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per share |
|
$ |
(5.83 |
) |
|
$ |
(1.10 |
) |
|
$ |
0.35 |
|
|
$ |
(87.05 |
) |
|
|
|
(1) |
|
We recognized goodwill impairment charges of $752.3 million and $385.3
million during the second and third quarters of 2010. Non-goodwill intangible asset impairment
charges of $17.3 million and $4.3 million were recognized during the second and third quarters
of 2010 associated with trade names and trademarks, technology, local customer relationships and
other from our former Business.com reporting unit. We recognized a non-goodwill intangible asset
impairment charge of $7.3 billion during the fourth quarter of 2009 associated with directory
services agreements, advertiser relationships, third party contracts and network platforms
acquired in prior acquisitions. See Note 2, Summary of Significant Accounting Policies
Identifiable Intangible Assets and Goodwill for further discussion. |
|
(2) |
|
Reorganization items, net represent charges that are directly associated
with the process of reorganizing the business under Chapter 11. See Note 3, Fresh Start
Accounting and Note 4, Reorganization Items, Net and Liabilities Subject to Compromise for
further discussion. |
F- 78
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no disagreements with the Companys and the Predecessor Companys principal
independent registered public accounting firm for the two-year period ended December 31, 2010.
ITEM 9A. 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 December 31, 2010. 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 Securities and
Exchanges Commissions 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) Managements Annual Report on Internal Control Over Financial Reporting
The management of Dex One Corporation (formerly R.H. Donnelley Corporation) is responsible for
establishing and maintaining adequate internal control over the Companys financial reporting
within the meaning of Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934. Because
of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements in the financial statements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Dex One Corporations internal control over financial
reporting as of December 31, 2010. In undertaking this assessment, management used the criteria
established by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission
contained in the Internal Control Integrated Framework.
Based on its assessment, management has concluded that as of December 31, 2010, the Companys
internal control over financial reporting is effective based on the COSO criteria.
The Companys internal control over financial reporting as of December 31, 2010 has been audited by
KPMG LLP, an independent registered public accounting firm, as stated in their report that appears
in page F-3. KPMG LLP has also audited the Consolidated Financial Statements of Dex One
Corporation and subsidiaries as of and for the eleven months ended December 31, 2010 and R.H.
Donnelley Corporation and subsidiaries as of and for the one month ended January 31, 2010, included
in this Annual Report on Form 10-K, as stated in their report that appears on page F-2.
(c) 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.
ITEM 9B. OTHER INFORMATION.
Not applicable.
78
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Information in response to this Item is incorporated herein by reference to the sections entitled
Election of Directors and Stock Ownership Information Section 16(a) Beneficial Ownership
Reporting Compliance in the Companys Proxy Statement to be filed on or prior to May 2, 2011 with
the Securities and Exchange Commission, except that Executive Officers of the Registrant in Item
1 of this Annual Report responds to Item 401(b), (d) and (e) of Regulation S-K with respect to
executive officers.
ITEM 11. EXECUTIVE COMPENSATION.
Information in response to this Item is incorporated herein by reference to the section entitled
Executive and Director Compensation in the Companys Proxy Statement to be filed on or prior to
May 2, 2011 with the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
Information in response to this Item is incorporated herein by reference to Item 5 of this Annual
Report under the heading Equity Compensation Plan Information and the section entitled Stock
Ownership Information Stock Ownership of Certain Beneficial Owners and Management in the
Companys Proxy Statement to be filed on or prior to May 2,
2011 with the Securities and Exchange
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Information in response to this Item is incorporated herein by reference to the sections entitled
Corporate Governance Director Independence and Related Person Transactions and
Executive and Director Compensation Compensation Committee Interlocks and Insider Participation
in the Companys Proxy Statement to be filed on or prior to May 2, 2011 with the Securities and
Exchange Commission.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information in response to this Item is incorporated herein by reference to the section entitled
Principal Accountant Fees and Services in the
Companys Proxy Statement to be filed on or prior to
May 2, 2011 with the Securities and Exchange Commission.
79
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) and (2) List of financial statements and financial statement schedules
The following consolidated financial statements of the Company and the Predecessor Company are
included under Item 8:
|
|
|
Reports of Independent Registered Public Accounting Firm |
|
|
|
|
Consolidated Balance Sheets as of December 31, 2010 (Successor Company) and
December 31, 2009 (Predecessor Company) |
|
|
|
|
Consolidated Statements of Operations and Comprehensive Income (Loss) for
the eleven months ended December 31, 2010 (Successor Company), the one month
ended January 31, 2010 and each of the years in the two year period ended
December 31, 2009 (Predecessor Company) |
|
|
|
|
Consolidated Statements of Cash Flows for the eleven months ended December 31, 2010
(Successor Company), the one month ended January 31, 2010 and each of the years in the
two year period ended December 31, 2009 (Predecessor Company) |
|
|
|
|
Consolidated Statements of Changes in Shareholders Equity (Deficit) for the eleven months
ended December 31, 2010 (Successor Company), the one month ended January 31, 2010
and each of the years in the two year period ended December 31, 2009 (Predecessor Company) |
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
|
|
Financial statement schedules for the Company and the Predecessor Company have not been
prepared because the required information has been included in the Companys and the
Predecessor Companys consolidated financial statements included in Item 8 of this Annual
Report. |
80
(b) Exhibits:
|
|
|
Exhibit No. |
|
Document |
2.1
|
|
Joint Plan of Reorganization, as confirmed by the Bankruptcy Court
on January 12, 2010. (incorporated by reference to Exhibit 2.1 to
the Companys Current Report on Form 8-K filed with the Securities
and Exchange Commission on January 15, 2010, Commission File No.
001-07155). |
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Companys Current
Report on Form 8-K filed with the Securities and Exchange
Commission on February 4, 2010, Commission File No. 001-07155). |
|
|
|
3.2
|
|
Sixth Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Companys Current Report on Form
8-K filed with the Securities and Exchange Commission on February
4, 2010, Commission File No. 001-07155). |
|
|
|
4.1
|
|
Indenture, dated as of January 29, 2010, between the Company and
The Bank of New York Mellon, as Trustee, with respect to the
Companys 12%/14% Senior Subordinated Notes due 2017 (incorporated
by reference to Exhibit 4.1 to the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on
February 4, 2010, Commission File No. 001-07155). |
|
|
|
4.2
|
|
Form of 12%/14% Senior Subordinated Notes due 2017 (attached as
Exhibit A to Exhibit 4.1). |
|
|
|
4.3
|
|
Registration Rights Agreement, dated as of January 29, 2010, among
the Company and Franklin Advisers, Inc. and certain of its
affiliates (incorporated by reference to Exhibit 4.3 to the
Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 4, 2010, Commission File No.
001-07155). |
|
|
|
10.1
|
|
Non-Competition Agreement, dated as of January 3, 2003, by and
among the Company, R.H. Donnelley Publishing & Advertising, Inc.
(f/k/a Sprint Publishing & Advertising, Inc.), CenDon, L.L.C.,
R.H. Donnelley Directory Company (f/k/a Centel Directory Company),
Sprint Corporation and the Sprint Local Telecommunications
Division (incorporated by reference to Exhibit 10.4 to the
Companys Current Report on Form 8-K, filed with the Securities
and Exchange Commission on January 17, 2003, Commission File No.
001-07155). |
|
|
|
10.2
|
|
Letter from Sprint Nextel Corporation, dated as of May 16, 2006,
acknowledging certain matters with respect to the Non-Competition
Agreement described above as Exhibit 10.1 (incorporated by
reference to Exhibit 10.12 to the Companys Current Report on Form
8-K, filed with the Securities and Exchange Commission on May 19,
2006, Commission File No. 001-07155). |
|
|
|
10.3
|
|
Directory Services License Agreement, dated as of May 16, 2006, by
and among R.H. Donnelley Publishing & Advertising, Inc., CenDon,
L.L.C., R.H. Donnelley Directory Company, Embarq Corporation,
Embarq Directory Trademark Company, LLC and certain subsidiaries
of Embarq Corporation formerly constituting Sprint Local
Telecommunications Division (incorporated by reference to Exhibit
10.6 to the Companys Current Report on Form 8-K, filed with the
Securities and Exchange Commission on May 19, 2006). |
|
|
|
10.4
|
|
Trademark License Agreement, dated as of May 16, 2006, by and
among R.H. Donnelley Publishing & Advertising, Inc., R.H.
Donnelley Directory Company and Embarq Directory Trademark
Company, LLC (incorporated by reference to Exhibit 10.7 to the
Companys Current Report on Form 8-K, filed with the Securities
and Exchange Commission on May 19, 2006). |
81
|
|
|
Exhibit No. |
|
Document |
10.5
|
|
Publisher Trademark License Agreement, dated as of May 16, 2006,
by and among R.H. Donnelley Publishing & Advertising, Inc.,
CenDon, L.L.C., R.H. Donnelley Directory Company and Embarq
Corporation (incorporated by reference to Exhibit 10.8 to the
Companys Current Report on Form 8-K, filed with the Securities
and Exchange Commission on May 19, 2006). |
|
|
|
10.6
|
|
Non-Competition Agreement, dated as of May 16, 2006, by and among
the Company, R.H. Donnelley Publishing & Advertising, Inc.,
CenDon, L.L.C., R.H. Donnelley Directory Company, Embarq
Corporation and certain subsidiaries of Embarq Corporation
formerly constituting Sprint Local Telecommunications Division
(incorporated by reference to Exhibit 10.9 to the Companys
Current Report on Form 8-K, filed with the Securities and Exchange
Commission on May 19, 2006). |
|
|
|
10.7
|
|
Subscriber Listings Agreement, dated as of May 16, 2006, by and
among R.H. Donnelley Publishing & Advertising, Inc., CenDon,
L.L.C., R.H. Donnelley Directory Company, Embarq Corporation and
certain subsidiaries of Embarq Corporation formerly constituting
Sprint Local Telecommunications Division (incorporated by
reference to Exhibit 10.10 to the Companys Current Report on Form
8-K, filed with the Securities and Exchange Commission on May 19,
2006). |
|
|
|
10.8
|
|
Standstill Agreement, dated as of May 16, 2006, by and between
R.H. Donnelley Publishing & Advertising, Inc. and Embarq
Corporation (incorporated by reference to Exhibit 10.11 to the
Companys Current Report on Form 8-K, filed with the Securities
and Exchange Commission on May 19, 2006). |
|
|
|
10.9
|
|
Directory Services License Agreement, dated as of September 1,
2004, among the Company, R.H. Donnelley Publishing & Advertising
of Illinois Partnership (f/k/a The APIL Partners Partnership),
DonTech II Partnership, Ameritech Corporation, SBC Directory
Operations, Inc. and SBC Knowledge Ventures, L.P. (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form
8-K, filed with the Securities and Exchange Commission on
September 3, 2004, Commission File No. 001-07155). |
|
|
|
10.10
|
|
Non-Competition Agreement, dated as of September 1, 2004, by and
between the Company and SBC Communications Inc. (incorporated by
reference to Exhibit 10.2 to the Companys Current Report on Form
8-K, filed with the Securities and Exchange Commission on
September 3, 2004, Commission File No. 001-07155). |
|
|
|
10.11
|
|
Ameritech Directory Publishing Listing License Agreement, dated as
of September 1, 2004, among R.H. Donnelley Publishing &
Advertising of Illinois Partnership (f/k/a The APIL Partners
Partnership), DonTech II Partnership and Ameritech Services Inc.
(incorporated by reference to Exhibit 10.4 to the Companys
Current Report on Form 8-K, filed with the Securities and Exchange
Commission on September 3, 2004, Commission File No. 001-07155). |
|
|
|
10.12
|
|
Publishing Agreement, dated November 8, 2002, as amended, by and
among Dex Holding LLC., Dex Media East LLC (f/k/a SGN LLC), Dex
Media West LLC (f/k/a/ GPP LLC) and Qwest Corporation
(incorporated by reference to Exhibit 10.19 to Dex Media, Inc.s
Registration Statement on Form S-4, filed with the Securities and
Exchange Commission on April 14, 2004, Commission File No.
333-114472). |
82
|
|
|
Exhibit No. |
|
Document |
10.13
|
|
Non-Competition and Non-Solicitation Agreement, dated November 8,
2002, by and between Dex Media East LLC (f/k/a SGN LLC), Dex Media
West LLC (f/k/a GPP LLC), Dex Holdings LLC and Qwest Corporation,
Qwest Communications International Inc. and Qwest Dex, Inc.
(incorporated by reference to Exhibit 10.10 to Dex Media, Inc.s
Registration Statement on Form S-4, filed with the Securities and
Exchange Commission on April 14, 2004, Commission File No.
333-114472). |
|
|
|
10.14
|
|
Third Amended and Restated Credit Agreement, dated as of January
29, 2010, by and among the Company, R.H. Donnelley Inc., as
borrower, the lenders parties thereto and Deutsche Bank Trust
Company Americas, as administrative agent and as collateral agent
(incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 4, 2010, Commission File No. 001-07155). |
|
|
|
10.15
|
|
Credit Agreement, dated as of June 6, 2008, as amended and
restated as of January 29, 2010, by and among the Company, Dex
Media, Inc., Dex Media West, Inc., Dex Media West LLC, as
borrower, the lenders parties thereto and JPMorgan Chase Bank,
N.A., as administrative agent and as collateral agent
(incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 4, 2010, Commission File No. 001-07155). |
|
|
|
10.16
|
|
Credit Agreement, dated as of October 24, 2007, as amended and
restated as of January 29, 2010, by and among the Company, Dex
Media, Inc., Dex Media East, Inc., Dex Media East LLC, as
borrower, the lenders parties thereto and JPMorgan Chase Bank,
N.A., as administrative agent and as collateral agent
(incorporated by reference to Exhibit 10.3 to the Companys
Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 4, 2010, Commission File No. 001-07155). |
|
|
|
10.17^*
|
|
Board of Director Compensation Program (as modified and in effect
as of June 24, 2010). |
|
|
|
10.18^*
|
|
Dex One Pension Benefit Equalization Plan, as Amended and Restated
as of January 1, 2011. |
|
|
|
10.19 ^*
|
|
Dex One Corporation Restoration Plan, as Amended and Restated as
of January 1, 2011. |
|
|
|
10.20^
|
|
R.H. Donnelley Corporation 2005 Stock Award and Incentive Plan, as Amended and Restated as of December 31, 2008 (incorporated by
reference to Exhibit 10.3 to the Companys Current Report on Form
8-K, filed with the Securities and Exchange Commission on January
7, 2009, Commission File No. 001-07155). |
|
|
|
10.21^
|
|
Dex One Corporation 2009 Long-Term Incentive Program for Executive
Officers (as adopted and effective as of March 9, 2009
(incorporated by reference to Exhibit 10.3 to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2009
filed with the Securities and Exchange Commission on May 8, 2009,
Commission File No. 001-07155). |
|
|
|
10.22^
|
|
Dex One Corporation Equity Incentive Plan adopted and effective as
of January 29, 2010 (incorporated by reference to Exhibit 10.4 to
the Companys Current Report on Form 8-K filed with the Securities
and Exchange Commission on February 4, 2010, Commission File No.
001-07155). |
|
|
|
10.23^
|
|
Form of Stock Appreciation Rights Agreement for Executive Officers
who are Senior Vice Presidents and Above for the March 2010 SAR
Awards (incorporated by reference to Exhibit 10.25 to the
Companys Annual Report on Form 10-K for the year ended December
31, 2009 filed with the Securities and Exchange Commission on
March 12, 2010, Commission File No. 001-07155). |
83
|
|
|
Exhibit No. |
|
Document |
10.24^
|
|
Form of Stock Appreciation Right Agreement for Employees other
than Executive Officers who are Senior Vice Presidents and Above
for the March 2010 SAR Awards (incorporated by reference to
Exhibit 10.26 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2009 filed with the Securities and
Exchange Commission on March 12, 2010, Commission File No.
001-07155). |
|
|
|
10.25^
|
|
Employment Agreement, dated as of September 6, 2010, by and
between the Company and Alfred T. Mockett (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form
8-K, filed with the Securities and Exchange Commission on
September 8, 2010, Commission File No. 001-07155). |
|
|
|
10.26^
|
|
Stand-Alone Nonqualified Stock Option Agreement, dated as of
September 6, 2010, by and between the Company and Alfred T.
Mockett (attached as Exhibit A to Exhibit 10.25). |
|
|
|
10.27^
|
|
Form of Stand-Alone Restricted Stock Award Agreement by and
between the Company and Alfred T. Mockett (attached as Exhibit B
to Exhibit 10.25). |
|
|
|
10.28^
|
|
Stand-Alone Premium Nonqualified Stock Option Agreement ($15 Exercise Price),
dated as of September 6, 2010, by and between the Company and Alfred T. Mockett (attached as Exhibit C to Exhibit
10.25). |
|
|
|
10.29^
|
|
Stand-Alone Premium Nonqualified Stock Option Agreement ($23
Exercise Price), dated as of September 6, 2010, by and between the
Company and Alfred T. Mockett (attached as Exhibit D to Exhibit
10.25). |
|
|
|
10.30^
|
|
Stand-Alone Premium Nonqualified Stock Option Agreement ($32
Exercise Price), dated as of September 6, 2010, by and between the
Company and Alfred T. Mockett (attached as Exhibit E to Exhibit
10.25). |
|
|
|
10.31^
|
|
Amended and Restated Employment Agreement, dated as of December
31, 2008, by and between the Company and Steven M. Blondy
(incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K, filed with the Securities and Exchange
Commission on January 7, 2009, Commission File No. 001-07155). |
|
|
|
10.32^
|
|
Amendment No. 1 to Employment Agreement, dated as of March 9,
2009, between the Company and Steven M. Blondy (incorporated by
reference to Exhibit 10.2 to the Companys Quarterly Report on
Form 10-Q for the quarter ended March 31, 2009 filed with the
Securities and Exchange Commission on May 5, 2009, Commission File
No. 001-07155). |
|
|
|
10.33^
|
|
Amendment, dated as of January 29, 2010 to Amended and Restated
Employment Agreement, effective as of December 31, 2008, between
the Company and Steven M. Blondy (incorporated by reference to
Exhibit 10.6 to the Companys Current Report on Form 8-K filed
with the Securities and Exchange Commission on February 4, 2010,
Commission File No. 001-07155). |
|
|
|
10.34^*
|
|
Stand-Alone Restricted Stock Award Agreement, dated as of January
18, 2011, between the Company and Atish Banerjea. |
|
|
|
10.35^*
|
|
Stand-Alone Nonqualified Stock Option Agreement, dated as of
January 18, 2011, between the Company and Atish Banerjea. |
|
|
|
10.36^*
|
|
Dex One Corporation Severance Plan Senior Vice President,
effective as amended October 14, 2010. |
84
|
|
|
Exhibit No. |
|
Document |
10.37^
|
|
Separation Agreement, dated as of May 20, 2010, by and between the
Company, R.H. Donnelley Inc., Dex Media West, Inc. Dex media East,
Inc. and David C. Swanson (incorporated by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 21, 2010, Commission
File No. 001-07155). |
|
|
|
10.38^
|
|
Form of Indemnification Agreement for Directors of the Company
(incorporated by reference to Exhibit 10.9 to the Companys
Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 4, 2010, Commission File No. 001-07155). |
|
|
|
21.1*
|
|
Subsidiaries of the Registrant. |
|
|
|
23.1*
|
|
Consent of KPMG LLP, Independent Registered Public Accounting Firm. |
|
|
|
31.1*
|
|
Certification of Annual Report on Form 10-K for the period ended
December 31, 2010 by Alfred T. Mockett, Chief Executive Officer
and President of the Company under Section 302 of the
Sarbanes-Oxley Act. |
|
|
|
31.2*
|
|
Certification of Annual Report on Form 10-K for the period ended
December 31, 2010 by Steven M. Blondy, Executive Vice President
and Chief Financial Officer of the Company under Section 302 of
the Sarbanes-Oxley Act. |
|
|
|
32.1*
|
|
Certification of Annual Report on Form 10-K for the period ended
December 31, 2010 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 the Company. |
|
|
|
99.1
|
|
Order Confirming Joint Plan of Reorganization, as entered by the
Bankruptcy Court on January 12, 2010 (incorporated by reference to
Exhibit 99.1 to the Companys Current Report on Form 8-K filed
with the Securities and Exchange Commission on January 15, 2010,
Commission File No. 001-07155). |
|
|
|
* |
|
Filed herewith. |
|
^ |
|
Management contract or compensatory plan. |
85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 4th day of March 2011.
|
|
|
|
|
|
Dex One Corporation
|
|
|
By: |
/s/ Alfred T. Mockett
|
|
|
|
Alfred T. Mockett, Chief Executive Officer
And President |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed by the following persons on behalf of the Registrant and in the capacities and on the date
indicated.
|
|
|
|
|
/s/ Alfred T. Mockett
|
|
Chief Executive Officer and President
(Principal Executive Officer)
|
|
March 4, 2011 |
|
|
|
|
|
(Alfred T. Mockett)
|
|
|
|
|
|
|
|
|
|
/s/ Steven M. Blondy
|
|
Executive Vice President and
|
|
March 4, 2011 |
|
|
|
|
|
(Steven M. Blondy)
|
|
Chief Financial Officer
(Principal Financial Officer) |
|
|
|
|
|
|
|
/s/ Sylvester J. Johnson
|
|
Vice President Corporate
|
|
March 4, 2011 |
|
|
|
|
|
(Sylvester J. Johnson)
|
|
Controller and Chief
Accounting Officer
(Principal Accounting Officer) |
|
|
|
|
|
|
|
/s/ Jonathan B. Bulkeley
|
|
Director
|
|
March 4, 2011 |
|
|
|
|
|
(Jonathan B. Bulkeley) |
|
|
|
|
|
|
|
|
|
/s/ Eugene I Davis
|
|
Director
|
|
March 4, 2011 |
|
|
|
|
|
(Eugene I. Davis) |
|
|
|
|
|
|
|
|
|
/s/ W. Kirk Liddell
|
|
Director
|
|
March 4, 2011 |
|
|
|
|
|
(W. Kirk Liddell) |
|
|
|
|
|
|
|
|
|
/s/ Richard L. Kuersteiner
|
|
Director
|
|
March 4, 2011 |
|
|
|
|
|
(Richard L. Kuersteiner) |
|
|
|
|
|
|
|
|
|
/s/ Mark A. McEachen
|
|
Director
|
|
March 4, 2011 |
|
|
|
|
|
(Mark A. McEachen) |
|
|
|
|
|
|
|
|
|
/s/ Alan F. Schultz
|
|
Director
|
|
March 4, 2011 |
|
|
|
|
|
(Alan F. Schultz) |
|
|
|
|
86
Exhibit Index
|
|
|
Exhibit No. |
|
Document |
10.17^*
|
|
Board of Director Compensation Program (as modified and
in effect as of June 24, 2010). |
|
|
|
10.18^*
|
|
Dex One Pension Benefit Equalization Plan, as Amended and Restated
as of January 1, 2011. |
|
|
|
10.19 ^*
|
|
Dex One Corporation Restoration Plan, as Amended and Restated as
of January 1, 2011. |
|
|
|
10.34^*
|
|
Stand-Alone Restricted Stock Award Agreement, dated as of January
18, 2011, between the Company and Atish Banerjea. |
|
|
|
10.35^*
|
|
Stand-Alone Nonqualified Stock Option Agreement, dated as of
January 18, 2011, between the Company and Atish Banerjea. |
|
|
|
10.36^*
|
|
Dex One Corporation Severance Plan Senior Vice President,
effective as amended October 14, 2010. |
|
|
|
21.1*
|
|
Subsidiaries of the Registrant. |
|
|
|
23.1*
|
|
Consent of KPMG LLP, Independent Registered Public Accounting Firm. |
|
|
|
31.1*
|
|
Certification of Annual Report on Form 10-K for the period ended
December 31, 2010 by Alfred T. Mockett, Chief Executive Officer
and President of the Company under Section 302 of the
Sarbanes-Oxley Act. |
|
|
|
31.2*
|
|
Certification of Annual Report on Form 10-K for the period ended
December 31, 2010 by Steven M. Blondy, Executive Vice President
and Chief Financial Officer of the Company under Section 302 of
the Sarbanes-Oxley Act. |
|
|
|
32.1*
|
|
Certification of Annual Report on Form 10-K for the period ended
December 31, 2010 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 the Company. |
|
|
|
* |
|
Filed herewith. |
|
^ |
|
Management contract or compensatory plan. |
87