RHD RH Donnelley New

Filed pursuant to rule 424(b)(3)

Registration Statement File No. 333-150128

 

PROSPECTUS

 

Offer to Exchange

All $1,235,260,000 aggregate principal amount outstanding 8.875% Series A-4 Senior Notes due 2017

For 8.875% Series A-4 Senior Notes due 2017

of

R.H. Donnelley Corporation

 

This Exchange Offer Will Expire at 8:00 a.m.,

New York City Time, on July 25, 2008

 

 

 

 

The Exchange Notes

 

 

Material Terms of the Exchange Offer

 

 

Each broker-dealer that receives exchange notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for outstanding notes where such outstanding notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. We have agreed that, starting on the expiration date of the exchange offer and ending on the close of business 180 days after the expiration date, we will make this prospectus available to any broker-dealer for use in connection with any such resale. See “Plan of distribution.”

 

 

 

 

  Please consider carefully the “Risk factors” beginning on page 13 of this prospectus.

 

 

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the exchange notes to be distributed in the exchange offer, nor have any of these authorities determined that this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

 

The date of this prospectus is June 26, 2008.

 

 

References to additional information

 

This prospectus incorporates or refers to important business and financial information about us that is not included in or delivered with this prospectus. You may obtain documents that are filed by us without charge upon your written or oral request.

 

Information contained on RHD’s website or the website of any other person is not incorporated by reference into this prospectus, and you should not consider information contained on those websites as part of this prospectus.

 

If you would like to request copies of these documents, please do so by July 18, 2008 in order to receive them before the expiration of the exchange offer. For additional information, see “Where you can find more information.”

 

RHD will provide you with copies of this information, without charge, if you request them in writing or by telephone from:

R.H. Donnelley Corporation

1001 Winstead Drive

Cary, North Carolina 27513

Attention: Investor Relations

Telephone: (800) 497-6329

 

You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus.

 

 

Table of contents

 

 

The following trademark referred to in this prospectus is a registered trademark of Embarq Corporation (the successor to Sprint Corporation’s (now known as Sprint Nextel Corporation, which we refer to as Sprint) local telecommunications business), which we refer to as Embarq, or its subsidiaries: “Embarq ^® .” Additionally, the following trademark referred to in this prospectus is a registered trademark of AT&T Inc. (successor to SBC Communications, Inc.), which we refer to as AT&T, or its subsidiaries: “AT&T ^® .” The following trademarks referred to in this prospectus are registered trademarks of Qwest Communications International Inc., which we refer to as Qwest, and are used by Dex Media under license: “QWEST DEX ^® ” and “QWEST DEX ADVANTAGE ^® .” The following trademark referred to in this prospectus is a registered trademark of Google Inc.: “Google ^® .” The following trademark referred to in this prospectus is a registered trademark of Yahoo! Inc.: “Yahoo! ^® .” The following trademark referred to in this prospectus is a registered trademark of Microsoft Corporation: “MSN ^® .” The following trademark referred to in this prospectus is a registered trademark of Amdocs Limited: “Amdocs ^® .”

 

The following trademarks referred to in this prospectus are registered trademarks of our subsidiary, Dex Media, Inc.: “Dex ^® ,” “DexOnline.com ^® ” and “DexKnows.com ^® .” The following trademark referred to in this prospectus is a registered trademark of our subsidiary, Local Launch, Inc.: “Local Launch! ^® .” The following trademark referred to in this prospectus is a registered trademark of our subsidiary, Business.com, Inc.: “Business.com ^® .”

 

 

Disclosure regarding forward-looking statements

 

You should carefully review the information included in this prospectus. In this prospectus, we state our expectations as to future events and our future financial performance. In some cases, you can identify those so-called “forward-looking statements” by words such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “outlook” or the negative of those words and other comparable words. You should be aware that those statements are only our predictions. Actual events or results may differ materially. In evaluating those statements, you should specifically consider various factors, including the risks included in this prospectus. Those factors may cause our actual results to differ materially from any of our forward-looking statements. All forward-looking statements attributable to us or a person acting on our behalf are expressly qualified in their entirety by this cautionary statement.

 

These risks, uncertainties and contingencies are described in detail in the section entitled “Risk factors” in this prospectus. In summary and without limitation these risks, uncertainties and contingencies include the following:

 

 

 

 

 

 

 

 

 

For additional information, see “Risk factors.”

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance. These forward-looking statements are made as of the date of this prospectus and, except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission, which we refer to as the SEC, we do not assume any obligation to update or revise them or to provide reasons why actual results may differ.

 

 

Industry and other data

 

The data included in this prospectus regarding industries and ranking, including the size of specific markets and our position and the position of our competitors within these markets, are based on independent industry publications, reports from government agencies or other published industry sources and estimates of management. These estimates are based on information obtained from customers, distributors, suppliers, trade and business organizations and other contacts in the markets in which we operate and management’s knowledge and experience. As indicated, various industry sources are cited throughout this prospectus, such as the Veronis Suhler Stevenson Communications Industry Forecast 2007-2011, PQ Media, Simba Information, CRM Associates 2006 Yellow Pages Trends and Opportunities and Association of Directory Publishers, 2006. We believe these estimates and sources to be accurate as of the date provided herein, although we have not independently verified the accuracy of any of these estimates or sources. We cannot assure you that the industry and other data are accurate.

 

Except as otherwise indicated, data on our market position are based on U.S. directory advertising sales.

 

Summary

	•	“RHD” refers to R.H. Donnelley Corporation, as issuer of the notes;
	•	“RHDI” refers to R.H. Donnelley Inc., a direct wholly owned subsidiary of RHD;
	•	“Dex Media” refers to Dex Media, Inc., a direct wholly owned subsidiary of RHD;
	•	“Dex Media East” refers to Dex Media East LLC, an indirect wholly owned subsidiary of Dex Media;
	•	“Dex Media West” refers to Dex Media West LLC, an indirect wholly owned subsidiary of Dex Media;
	•	“Qwest Dex” refers collectively to Qwest Dex, Inc. and its parent, Qwest Dex Holdings, Inc.;
	•	“Dex East” refers to the historical operations of Qwest Dex Holdings, Inc. and its subsidiary in Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota, or the Dex East states;
	•	“Dex West” refers to the historical operations of Qwest Dex Holdings, Inc. and its subsidiary in Arizona, Idaho, Montana, Oregon, Utah, Washington and Wyoming, or the Dex West states;
	•	“Dex Media states” refers to the Dex West states and Dex East states;
	•	“Qwest” refers to Qwest Communications International Inc. and its subsidiaries, including Qwest Corporation, the local exchange carrier subsidiary of Qwest;
	•	“Local Launch” refers to Local Launch, Inc., a direct wholly owned subsidiary of RHD;
	•	“Business.com” refers to Business.com, Inc., a direct wholly owned subsidiary of RHD;
	•	“Sprint” refers to Sprint Nextel Corporation;
	•	“SPA” refers to Sprint Publishing & Advertising, the directory business we acquired from Sprint in 2003, which we now refer to as the “Embarq Directory Business”;
	•	“Embarq” refers to Embarq Corporation, the successor to Sprint’s local communications business;
	•	“AT&T” refers to AT&T Inc., successor to SBC Communications, Inc.; and
	•	the terms “we,” “us” and “our” refer to RHD and all of its direct and indirect wholly owned subsidiaries.

The exchange offer		We are offering to exchange approximately $1,235.3 million aggregate principal amount of our 8.875% series A-4 senior notes due 2017, which have been registered under the federal securities laws, for approximately $1,235.3 million aggregate principal amount of our outstanding unregistered 8.875% series A-4 senior notes due 2017, which were issued on October 2, 2007 and October 17, 2007, in private offerings.

		You have the right to exchange your outstanding notes for exchange notes with substantially identical terms. In order for your outstanding notes to be exchanged, you must properly tender them before the expiration of the exchange offer. All outstanding notes that are validly tendered and not validly withdrawn will be exchanged. We will issue the exchange notes on or promptly after the expiration of the exchange offer.

Registration rights agreement		The outstanding notes were sold on October 2, 2007 and October 17, 2007, respectively, to a limited number of initial purchasers. At those times, we signed registration rights agreements with the representative of those initial purchasers that require us to conduct this exchange offer. This exchange offer is intended to satisfy our obligations set forth in the registration rights agreements. After the exchange offer is complete, you will not have any further rights under the registration rights agreements, including any right to require us to register any outstanding notes that you do not exchange or to pay you additional interest.

If you fail to exchange your outstanding notes		If you do not exchange your outstanding notes for exchange notes in the exchange offer, you will continue to be subject to the restrictions on transfer provided in the outstanding notes and the indenture governing the notes. In general, you may not offer or sell your outstanding notes unless they are registered under the federal securities laws or are sold in a transaction exempt from or not subject to the registration requirements of the federal securities laws and applicable state securities laws.

Expiration date		The exchange offer will expire at 8:00 a.m., New York City time, on July 25, 2008, unless we decide to extend the expiration date. For additional information, see “The exchange offer — Expiration date; extensions; amendments.”

Conditions to the exchange offer		The exchange offer is not conditioned upon any minimum amount of outstanding notes being tendered for exchange. For additional information, see “The exchange offer — Conditions.”
		We reserve the right, subject to applicable law, at any time and from time to time, but before the expiration of the exchange offer:
		• to extend the expiration date of the exchange offer and retain all tendered outstanding notes subject to the right of tendering holders to withdraw their tender of outstanding notes;
		• to terminate the exchange offer if specified conditions have not been satisfied; and

		• to waive any condition or otherwise amend the terms of the exchange offer in any respect.
		For additional information, see “The exchange offer — Expiration date; extensions; amendments.”
Procedure for tendering notes		If you wish to tender your outstanding notes for exchange, you must:
		• complete and sign the enclosed letter of transmittal by following the related instructions; and
		• send the letter of transmittal, as directed in the instructions, together with any other required documents, to the exchange agent, either (1) with the outstanding notes to be tendered or (2) in compliance with the specified procedures for guaranteed delivery of the outstanding notes.
		Brokers, dealers, commercial banks, trust companies and other nominees may also effect tenders by book-entry transfer.
		Please do not send your letter of transmittal or certificates representing your outstanding notes to us. Those documents should be sent only to the exchange agent. Questions regarding how to tender and requests for information should be directed to the exchange agent. For additional information, see “The exchange offer — Exchange agent.”
Special procedures for beneficial owners		If your outstanding notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, we urge you to contact that person promptly if you wish to tender your outstanding notes pursuant to the exchange offer. For additional information, see “The exchange offer — Procedure for tendering.”
Withdrawal rights		You may withdraw the tender of your outstanding notes at any time before the expiration date of the exchange offer by delivering a written notice of your withdrawal to the exchange agent. You must also follow the withdrawal procedures as described under the heading “The exchange offer — Withdrawal of tenders.”
Federal income tax considerations		The exchange of outstanding notes for the exchange notes in the exchange offer will not constitute a taxable event for U.S. federal income tax purposes. For additional information, see “Material U.S. federal income tax considerations.”
Resale of exchange notes		We believe that you will be able to offer for resale, resell or otherwise transfer exchange notes issued in the exchange offer without compliance with the registration and prospectus delivery provisions of the federal securities laws, provided that:
		• you are acquiring the exchange notes in the ordinary course of business;
		• you are not engaged in, and do not intend to engage in, a distribution of the exchange notes;
		• you do not have any arrangement or understanding with any person to participate in the distribution of the exchange notes;

		• you are not a broker-dealer tendering outstanding notes acquired directly from us for your own account;
		• you are not one of our affiliates, as defined in Rule 405 of the Securities Act of 1933, or the Securities Act; and
		• you are not prohibited by law or any policy of the SEC from participating in the exchange offer.
		Our belief is based on interpretations by the Staff of the SEC, as set forth in no-action letters issued to third parties unrelated to us. The Staff has not considered this exchange offer in the context of a no-action letter, and we cannot assure you that the Staff would make a similar determination with respect to this exchange offer.
		If our belief is not accurate and you transfer an exchange note without delivering a prospectus meeting the requirements of the federal securities laws or without an exemption from these laws, you may incur liability under the federal securities laws.
		We do not and will not assume or indemnify you against this liability.
		Each broker-dealer that receives exchange notes for its own account in exchange for outstanding notes, where such notes were acquired by such broker-dealer as a result of market-making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. For additional information, see “Plan of distribution” and “The exchange offer — Resale of the exchange notes.”
Exchange agent		The exchange agent for the exchange offer is The Bank of New York. The address, telephone number and facsimile number of the exchange agent are set forth in “The exchange offer — Exchange agent” and in the letter of transmittal.
		See “The exchange offer” for more detailed information concerning the exchange offer.

Obligor		R.H. Donnelley Corporation.

Exchange notes		Approximately $1,235.3 million aggregate principal amount of 8.875% series A-4 senior notes due 2017.

Maturity		The exchange notes mature on October 15, 2017.
Interest payment dates		The interest payment dates are April 15 and October 15 of each year, commencing on April 15, 2008. Interest will accrue from October 2, 2007, the date of the issuance of the initial notes.
Guarantees		The exchange notes will not be guaranteed.
Ranking		The exchange notes will be RHD’s senior unsecured obligations and will rank senior in right of payment to any of RHD’s future unsecured senior subordinated indebtedness and future subordinated

		indebtedness and equally in right of payment to RHD’s existing and future senior unsecured indebtedness, including the 6.875% senior notes, the series A-1 senior discount notes, the series A-2 senior discount notes and the series A-3 senior notes. The exchange notes will be effectively subordinated in right of payment to all of RHD’s existing and future secured debt to the extent of the value of the assets securing such debt, and will be structurally subordinated to all existing and future liabilities (including trade payables) of each of RHD’s existing and future subsidiaries.

		After giving effect to the RHDI exchange offers, the amendment of the RHDI credit facility and the refinancing of the Dex Media West credit facility, as of March 31, 2008 we would have had total debt on a consolidated basis of approximately $10.0 billion.

		As of March 31, 2008, without giving effect to the RHDI exchange offers, the amendment of the RHDI credit facility and the refinancing of the Dex Media West credit facility, RHD had approximately $10,080.8 million of indebtedness on a consolidated basis, of which $1,500.0 million consisted of the outstanding notes, $300.0 million consisted of the outstanding 6.875% senior notes, $340.2 million consisted of the accreted value of the outstanding series A-1 senior discount notes, $615.4 million consisted of the accreted value of the outstanding series A-2 senior discount notes, $1,210.0 million consisted of the series A-3 senior notes, and a secured guarantee of $1,507.6 million of borrowings by RHDI under the RHDI credit facility. This amount does not include the secured guarantee by RHD of the remaining $174.7 million of additional commitments under the revolving portion of the RHDI credit facility, which we refer to as the RHDI revolving credit facility. The guarantees by RHD of borrowings under RHDI’s credit facility are secured by a pledge of all the stock RHD owns in RHDI and thus are effectively senior to the notes to the extent of the value of the assets securing such guarantees. As of March 31, 2008, RHD had no subordinated indebtedness. In addition, as of March 31, 2008, RHD, through Dex Media, had $4,607.5 million of indebtedness, of which $2,133.0 million was secured, and $190.0 million of additional availability under the Dex Media credit facilities. All of the indebtedness of RHDI, Dex Media and their subsidiaries is structurally senior to the exchange notes issued in this offering. On June 6, 2008, the RHDI credit facility was amended and the Dex Media West credit facility was refinanced. See “— Recent developments — Recent refinancing activities” for further information.

Optional redemption		We may redeem some or all of the exchange notes at any time prior to October 15, 2012 at a price equal to 100% of the principal amount of the exchange notes plus accrued and unpaid interest plus a “make-whole” premium. Thereafter, we may redeem the exchange notes in whole or in part. In addition, subject to certain conditions, we may also redeem up to 40% of the principal amount of the exchange notes at any time before October 15, 2010 with the proceeds of qualified equity offerings. However, we may only make such redemptions if, after the redemption of such amount, at least 60% of the aggregate principal amount of the notes issued

		remains outstanding. The redemption prices are discussed under the caption “Description of notes — Optional redemption.”
Mandatory offers to purchase		If we experience specific kinds of changes in control, holders of the exchange notes will have the right to require us to purchase their exchange notes, in whole or in part, at a price equal to 101% of the aggregate principal amount together with any accrued and unpaid interest to the date of purchase.
		Certain asset dispositions will be triggering events which may require us to use the proceeds from those asset dispositions to make an offer to purchase the exchange notes at 100% of their principal amount, together with accrued and unpaid interest, if any, to the date of purchase if such proceeds are not otherwise used within 365 days to repay indebtedness (with a corresponding permanent reduction in commitment, if applicable) or to invest in capital assets related to our business or capital stock of a restricted subsidiary (as defined under the heading “Description of notes”).
Certain covenants		The indenture governing the exchange notes, among other things, restricts our ability and the ability of our restricted subsidiaries to:
		• incur additional debt;
		• pay dividends on, redeem or repurchase capital stock;
		• make certain investments;
		• enter into certain types of transactions with affiliates;
		• expand into unrelated businesses;
		• create liens;
		• sell certain assets or merge with or into other companies; and
		• designate subsidiaries as unrestricted subsidiaries.
		The covenants contained in the indenture are subject to a number of important exceptions, limitations and qualifications. In addition, many of the covenants will be suspended if the exchange notes receive investment grade ratings from either the Standard & Poor’s Rating Group, a division of McGraw-Hill, Inc., or Moody’s Investor’s Service, Inc., and no default or event of default has occurred or is continuing under the indenture governing the exchange notes. See “Description of notes — Certain covenants.”
Use of proceeds		We will not receive any cash proceeds from the issuance of the exchange notes.

		Three Months Ended March 31, 2007
		As Previously
		Reported				Reclass				As Reclassified
		(Dollars in thousands)
Net revenues		$	662,804			$	(1,508	)		$	661,296
Production, publication and distribution expenses		$	294,170			$	(179,549	)		$	114,621
Selling and support expenses		$	—			$	178,236			$	178,236
General and administrative expenses		$	37,626			$	(195	)		$	37,431

		Year Ended December 31, 2006
		As Previously
		Reported				Reclass				As Reclassified
		(Dollars in thousands)
Net revenue		$	1,895,921			$	3,376			$	1,899,297
Cost of revenue			987,056				(645,004	)			342,052
Selling and support expenses			—				656,014				656,014
General and administrative expenses			142,418				(7,634	)			134,784

														Three Months Ended
		Year Ended December 31,												March 31,
		2005(1)				2006(2)				2007(3)				2007(3)				2008(3)
		(Dollars in thousands)												(Unaudited)
Statement of operations data:
Net revenue		$	956,631			$	1,899,297			$	2,680,299			$	661,296			$	674,654
Goodwill impairment(4)			—				—				—				—				2,463,615
Operating income (loss)(5)			375,241				442,826				904,966				227,978				(2,237,606	)
Net income (loss)			67,533				(237,704	)			46,859				15,951				(1,623,111	)
Income (loss) available to common shareholders		$	(288,876	)		$	(208,483	)		$	46,859			$	15,951			$	(1,623,111	)

		As of December 31,												As of March 31,
		2005(1)				2006(2)				2007(3)				2007				2008
		(Dollars in thousands)												(Unaudited)
Balance sheet data:
Total assets		$	3,873,918			$	16,147,468			$	16,089,093			$	15,978,274			$	13,518,895
Long-term debt, including current maturities(6)(7)			3,078,849				10,403,152				10,175,649				10,199,404				10,080,846
Total shareholders’ (deficit) equity			(291,415	)			1,820,756				1,822,736				1,859,536				183,004

		Year Ended December 31,												Three Months Ended March 31,
		2005(1)				2006(2)				2007(3)				2007				2008
		(Dollars in thousands)												(Unaudited)
Statement of cash flow data:
Net cash provided by (used in):
Operating activities		$	392,052			$	768,309			$	691,809			$	143,752			$	99,936
Investing activities			(38,055	)			(1,980,009	)			(409,072	)			(15,620	)			(5,800	)
Financing activities			(356,959	)			1,360,156				(392,910	)			(209,720	)			(110,311	)
Other financial data:
Capital expenditures		$	31,605			$	78,543			$	77,470			$	13,120			$	10,118
EBITDA(8)			460,387				766,447				1,368,072				331,008				344,272
Interest expense, net(9)			264,532				765,055				830,892				201,615				195,874
Ratio of earnings to fixed charges(10)			1.4	x			—				1.1	x			1.1	x			—

(1)		Financial data includes the results of the directory publishing business of AT&T in Illinois and northwest Indiana, which we refer to as the AT&T Directory Business, which was acquired on September 1, 2004. For the year ended December 31, 2005, net revenue, net income and (loss) income available to common shareholders reflect purchase accounting adjustments that precluded the recognition of revenue and certain expenses associated with directories published by the acquired AT&T Directory Business prior to the acquisition. See “Management’s discussion and analysis of financial condition and results of operations” for further discussion of these items.
(2)		Financial data for the year ended December 31, 2006 includes the results of Dex Media commencing February 1, 2006. Net revenue, 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 the Dex Media merger. See “Management’s discussion and analysis of financial condition and results of operations” for further discussion of these items.

(3)		On August 23, 2007, we acquired Business.com, Inc., a leading business search engine and directory and performance based advertising network. Business.com now operates as a direct, wholly-owned subsidiary of RHD, and the results of Business.com have been included in RHD’s consolidated results commencing August 23, 2007. Therefore, our consolidated results for the year ended December 31, 2007 and three months ended March 31, 2008 include the results of Business.com from its date of acquisition, with no comparable results for the three months ended March 31, 2007.

(4)		As a result of the decline in the trading value of our debt and equity securities during the three months ended March 31, 2008 and continuing negative industry and economic trends that have directly affected our business, we performed impairment tests as of March 31, 2008 of our goodwill and definite-lived intangible assets in accordance with Statement of Financial Accounting Standards, or SFAS, No. 142 Goodwill and Other Intangible Assets and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , respectively. We used certain estimates and assumptions in our impairment evaluations, including, but not limited to, projected future cash flows, revenue growth and customer attrition levels.

		The impairment test of our definite-lived intangible assets was performed by comparing the carrying amount of our intangible assets to the sum of their undiscounted expected future cash flows. In accordance with SFAS No. 144, impairment exists if the sum of the undiscounted expected future cash flows is less than the carrying amount of the intangible asset, or its related group of assets. Our testing results of our definite-lived intangible assets indicated no impairment as of March 31, 2008. No impairment losses were recorded related to our definite-lived intangible assets during the three months ended March 31, 2008 and 2007.

		Our impairment test for goodwill involved a two step process. The first step involved comparing our fair value with the carrying amount of our assets and liabilities, including goodwill. Our fair value was determined using a market-based approach, which reflects the market value of our debt and equity securities as of March 31, 2008. As a result of our testing, we determined that our fair value was less than the carrying amount of our 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 is determined by comparing the implied fair value of our goodwill to the recorded amount of goodwill. The implied fair value of goodwill is derived from a discounted cash flow analysis using a discount rate that results in the present value of assets and liabilities equal to the current fair value of our debt and equity securities. Based upon this analysis, we recognized a non-cash impairment charge of $2.5 billion during the three months ended March 31, 2008.

		No such impairment losses were recorded related to our goodwill during the three months ended March 31, 2007.

		If the trading value of our debt and equity securities further declines, we will be required to again assess the fair values of our assets and liabilities and could conclude that goodwill and other long-lived assets are further impaired, which would result in additional impairment charges. In addition, if economic

		conditions in certain markets do not improve, we will be required to assess the recoverability of long-lived and intangible assets, which could result in additional impairment charges.

(5)		On January 1, 2006, we adopted the provisions of SFAS No. 123 (R), Share-Based Payment , and recorded non-cash stock-based compensation totaling $43.3 million and $39.0 million for the years ended December 31, 2006 and 2007, respectively.

(6)		In connection with the Dex Media merger on January 31, 2006, we incurred a significant amount of debt. Therefore, our debt balances at the end of 2006 were higher than in prior periods.

(7)		Long-term debt, including current maturities, increased due to fair value adjustments required by GAAP as a result of the Dex Media merger, commencing on January 31, 2006. See “Management’s discussion and analysis of financial condition and results of operations” for further discussion of adjustments required by GAAP as a result of the Dex Media merger.
(8)		EBITDA represents earnings before interest, taxes and depreciation and amortization. EBITDA is not a measurement of operating performance computed in accordance with GAAP and should not be considered as a substitute for operating income or net income prepared in conformity with GAAP. EBITDA may not be comparable to similarly titled measures of other companies. EBITDA is a common measure presented by many public companies as a means to evaluate underlying operating performance and to assess their respective debt service capabilities. Management believes that EBITDA more accurately reflects the underlying results of operations and thus presents more useful profitability and debt service capacity information for investors. The most comparable GAAP measure for EBITDA is net income. The reconciliation of net income (loss) to EBITDA is presented below.

		Years Ended December 31,												Three Months Ended March 31,
		2005				2006				2007				2007				2008
		(Dollars in thousands)												(unaudited)
Statement of operations data:
Net income (loss)		$	67,533			$	(237,704	)		$	46,859			$	15,951			$	(1,623,111	)
Plus goodwill impairment			—				—				—				—				2,463,615
Plus interest expense, net			264,532				765,055				830,892				201,615				195,874
Plus tax provision (benefit)			43,176				(84,525	)			29,033				10,412				(810,369	)
Plus depreciation and amortization			85,146				323,621				463,106				103,030				118,263
Less non-operating income			—				—				(1,818	)			—				—
Total EBITDA		$	460,387			$	766,447			$	1,368,072			$	331,008			$	344,272

		Years Ended December 31,
		2005				2006
		(Dollars in thousands)
Effect of purchase accounting on:
Net revenue		$	84,974			$	789,208
Expenses (other than depreciation and amortization)			(49,851	)			108,865
Total effect on EBITDA		$	134,825			$	680,343

(9)		Interest expense, net increased for the year ended December 31, 2007 primarily due to call premium payments of $71.7 million and write-off of unamortized deferred financing costs of $16.8 million associated with the refinancing transactions conducted during the fourth quarter of 2007. The increase in net interest expense is also attributable to recognizing a full period of interest expense related to the outstanding debt incurred in connection with the Dex Media merger and the repurchase of the remaining 100,301 shares of our outstanding preferred stock from investment partnerships affiliated with The Goldman Sachs Group, Inc., or the GS Funds, for $336.1 million in cash, including accrued cash dividends and interest, which we refer to the GS Repurchase, as well as debt assumed in the Dex Media merger. The decrease in net interest expense for the three months ended March 31, 2008 compared to the three months ended March 31, 2007 was primarily due to a decrease in outstanding debt and lower interest rates associated with our refinancing transactions conducted during the fourth quarter of 2007, as well as lower interest rates on our variable rate debt during the period.

(10)		The ratio of earnings to fixed charges has been computed by dividing earnings by fixed charges. For purposes of computing the ratio of earnings to fixed charges:

	•	earnings consist of (a) income from continuing operations before income from equity investments in partnerships and income taxes, (b) fixed charges and (c) cash distributions from partnership investments; and
	•	fixed charges consist of (a) interest on debt, (b) amortization of debt issuance costs and (c) one-third of operating rental expense, which management believes is representative of the interest component of rent expense.

 

In considering whether to exchange any outstanding notes for exchange notes, you should carefully consider all the information included in this prospectus. In particular, you should carefully consider the risk factors described below, which include risk factors applicable to our business as well as risks related to the notes.

 

Risks relating to our business

 

Our substantial debt could adversely affect our financial condition and prevent us from fulfilling our obligations under the notes.

 

We have a substantial amount of debt and significant debt service obligations due in large part to the financings related to the Dex Media merger, the acquisition of the Embarq Directory Business, which we refer to as the Embarq Directory Acquisition, and the acquisition of the AT&T Directory Business, including AT&T’s interest in The DonTech II Partnership, or DonTech, which we collectively refer to as the AT&T Directory Acquisition. After giving effect to the RHDI exchange offers, the amendment of the RHDI credit facility and the refinancing of the Dex Media West credit facility, as of March 31, 2008, we would have had total outstanding debt of approximately $10.0 billion (including fair value adjustments required by GAAP as a result of the Dex Media merger) and had $364.7 million available under the revolving portion of various credit facilities of our subsidiaries.

 

As a result of our significant amount of debt and debt service obligations, we face increased risks regarding, among other things, the following:

 

 

Our ability to pay principal and interest on our debt obligations will depend upon our future operating performance and our ability to refinance debt. If we are unable to service our debt and fund our business, we may be forced to reduce or delay capital expenditures, defer or refuse to pursue certain strategic initiatives, defer or forgo potential dividends or share repurchases, seek additional debt financing or equity capital, restructure or refinance our debt or sell assets. We may not be able to obtain additional financing, refinance existing debt or sell assets on satisfactory terms or at all. Furthermore, the debt under our subsidiaries’ credit facilities bear interest at variable rates. If these rates were to increase significantly, our ability to borrow additional funds may be reduced and the risks related to our substantial debt would intensify.

The terms of our existing debt may adversely affect our operations and our ability to fulfill our obligations under the notes.

 

The indentures governing our existing notes and the notes of our subsidiaries and the agreements governing our subsidiaries’ credit facilities include a number of significant restrictive covenants. These covenants could adversely affect us by limiting our ability to obtain funds from our subsidiaries, to plan for or react to market conditions or to otherwise meet our capital needs. These covenants, among other things, restrict our ability and the ability of our subsidiaries to:

 

 

 

 

 

 

In addition, our subsidiaries’ credit facilities include other and more restrictive covenants and limit our ability to prepay our notes while borrowings under the credit facilities are outstanding.

 

Our failure to comply with these covenants could result in an event of default, which, if not cured or waived, could require us to repay these borrowings before their scheduled due dates. If we were unable to make this repayment or otherwise refinance these borrowings, the lenders under the RHDI credit facility could foreclose on the stock of RHDI and substantially all of RHDI’s and its subsidiaries’ assets, and the lenders under the Dex Media credit facilities could foreclose on the stock of Dex Media East and Dex Media West and on substantially all of the assets of Dex Media East and Dex Media West and their respective subsidiaries. RHD has pledged the stock of RHDI, and RHDI and RHDI’s direct and indirect existing and future subsidiaries have pledged substantially all of their assets as collateral under the RHDI credit facility. The Dex Media credit facilities are secured by Dex Media’s pledge of the stock of Dex Media East and Dex Media West as well as substantially all of the assets of Dex Media East and Dex Media West and their direct and indirect existing and future subsidiaries. In addition, these lenders could elect in the event of default to declare all amounts borrowed under our subsidiaries’ credit facilities, together with accrued interest, to be due and payable, which, in some instances, would be an event of default under the indentures governing our and our subsidiaries’ notes. If we were unable to refinance these borrowings on favorable terms, our results of operations and financial condition could be adversely impacted by increased costs and less favorable terms, including higher interest rates and more restrictive covenants. The instruments governing the terms of any future refinancing of any borrowings are likely to contain similar restrictive covenants.

 

Servicing our debt obligations requires a significant amount of cash, and our ability to generate cash depends on many factors beyond our control.

 

Our ability to satisfy our debt service obligations depends, among other things, upon our future operating performance and our ability to refinance debt when necessary. Each of these factors largely depends on economic, financial, competitive and other factors beyond our control. If, in the future, we cannot generate sufficient cash from our operations to meet our debt service obligations, we may need to reduce or delay capital expenditures or curtail anticipated revenue growth and operating improvements. In addition, we may need to refinance our debt, obtain additional financing or sell assets, which we may not be able to do on commercially reasonable terms, if at all. Our business may not generate sufficient cash flow to satisfy our debt service obligations, and we may not be able to obtain funding sufficient to do so. In addition, any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.

 

We face significant competition that may reduce our market share and harm our financial performance.

 

The U.S. directory advertising industry is highly competitive and we operate in our markets with significant competition. In nearly all markets, we compete with one or more Yellow Pages directory publishers, which are predominantly independent publishers, such as Yellow Book, the U.S. business of Yell Group Ltd., and White Directory Publishing Inc. In the past, many of these independent publishers were small, undercapitalized companies that had minimal impact on our business. However, over the past five years, Yellow Book and several other regional competitors have become far more aggressive and have grown their businesses dramatically, both through acquisition and expansion into new markets. We compete with Yellow Book in the majority of our markets. In some markets, we also compete with other incumbent publishers, such as Idearc Inc., the directory business formerly affiliated with Verizon Communications Inc., and AT&T, including the former Bell South Publishing and Advertising business recently acquired by AT&T, in overlapping and adjacent markets.

 

Virtually all independent publishers compete aggressively on price to increase market share. This may affect our pricing or revenues in the future. Due to the recent economic environment and trends in our industry, we experienced a decline in advertising sales in the first quarter of 2008, and we expect this trend to continue throughout 2008.

 

Some of the incumbent and independent publishers with which we compete are larger than we are and have greater financial resources than we have. Although we may have limited market overlap with incumbent publishers relative to the size of our overall footprint, we may not be able to compete effectively with these publishers for advertising sales in these limited markets. In addition, incumbent and independent publishers may commit more resources to certain markets than we are able to commit, thus limiting our ability to compete effectively with these publishers in these areas for advertising sales. Similarly, we may face increased competition from these companies or others (including private equity firms) for acquisitions in the future.

 

We also compete for advertising sales with other traditional media, including newspapers, magazines, radio, direct mail, telemarketing, billboards and television. Many of these other traditional media competitors are larger than we are and have greater financial resources than we have. We may not be able to compete effectively with these companies for advertising sales or acquisitions in the future.

 

The Internet has also emerged as an attractive medium for advertisers. Advances in technology have brought and likely will continue to bring new competitors, new products and new channels to the industry, including increasing use of electronic delivery of traditional directory information and electronic search engines/services. The Yellow Pages directory advertising business is subject to changes arising from developments in technology, including information distribution methods and users’ preferences. The use of the Internet and wireless devices by consumers as a means to transact commerce results in new technologies being developed and services being provided that compete with our traditional products and services. National search companies such as Google and Yahoo! are focusing and placing a high priority on local commercial search initiatives. Our growth and future financial performance may depend on our ability to develop and market new products and services 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 respond successfully to any such developments.

 

Directory publishers, including us, have increasingly bundled online advertising with their traditional print offerings in an attempt to increase advertiser value, increase customer retention and enhance total usage. We compete through our IYP sites with the Internet Yellow Pages directories of independent and other incumbent directory publishers, and with other Internet sites, including those available through wireless applications, that provide classified directory information, such as YellowPages.com, Switchboard.com, Superpages.com and Citysearch.com, and with search engines and portals, such as Yahoo!, Google, MSN and others. 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 ability to provide Internet marketing solutions to our advertisers is dependent upon relationships with major Internet search companies. Loss of key relationships or changes in the level of service provided by these search companies could impact performance of our Internet marketing solutions. The success of our relationships with Internet search companies also depends on the compatibility of our technologies, and we have in the past, and may in the future, experience difficulties in this regard. Many of these Internet search companies are larger than we are and have greater financial resources than we have. We may not be able to compete effectively with these companies for advertising sales or acquisitions in the future, particularly should Internet-based advertising sales become increasingly accessible to small- and medium-sized businesses, or SMEs. In addition, Internet marketing services are provided by many other competitors within the territory we service and our advertisers could choose to work with other, sometimes larger providers of these services, or with search engines directly.

 

Competition from other Yellow Pages publishers, other forms of traditional media and the Internet may affect our ability to attract and retain advertisers and to increase advertising rates.

 

In addition, the market position of telephone utilities, including those with which we have relationships, may be adversely impacted by the Telecommunications Act of 1996, which we refer to as the Telecommunications Act and which effectively opened local telephone markets to increased competition. In addition, Federal Communication Commission rules regarding local number portability, advances in communications technology (such as wireless devices and voice over Internet protocol) and demographic factors (such as potential shifts in younger generations away from wire line telephone communications towards wireless or other communications technologies) may further erode the market position of telephone utilities, including Qwest, Embarq and AT&T. As a result, it is possible that Qwest, Embarq and AT&T will not remain the primary local telephone service provider in their local service areas. If Qwest, Embarq or AT&T 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 and to use the incumbent local exchange carrier, or ILEC, brand name on our directories in that market may not be as valuable as we presently anticipate, and we may not realize some of the existing benefits under our commercial arrangements with Qwest, Embarq or AT&T.

 

We could be materially adversely affected by declining usage of printed Yellow Pages directories and changes in technology.

 

Overall references to print Yellow Pages directories in the United States have gradually declined from 15.1 billion in 2002 to 13.4 billion in 2006 according to the YPA Industry Usage Study. We believe this decline was primarily a result of increased usage of Internet-based directory products, particularly in business-to-business and retail categories, as well as the proliferation of very large retail stores for which consumers and businesses may not reference the Yellow Pages. We believe this decline was also a result of demographic shifts among consumers, particularly the increase of households in which English was not the primary language spoken. We believe that over the next several years, references to print Yellow Pages directories may continue to decline as users may increasingly turn to digital and interactive media delivery devices for local

commercial search information. Recently the usage of Internet-based directory products has increased more rapidly. These trends have, in part, resulted in organic advertising sales declining in recent years, and we expect these trends to continue in 2008.

 

Any decline in usage could:

 

 

Although we believe that, over time, declines in the usage of our printed directories will be offset in part by an increase in usage of our Internet-based directories, we cannot assure you that such increase in usage will result in equivalent revenue or profits as revenues and margins currently associated with Internet-based directories tend to be lower than print directories. For example, the margins that Business.com has realized tend to be lower than our print directories. Any of the factors that may contribute to a decline in usage of our print directories, or a combination of them, could impair our revenues and have a material adverse effect on 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 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 provide services over the Internet successfully or compete successfully with other Internet-based directory services. 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, our results of operations or financial condition could be materially adversely affected.

 

We have been required to recognize impairment charges against our goodwill, and we may be required to recognize additional impairment charges against goodwill or intangible assets in the future.

 

At March 31, 2008, the net carrying value of our intangible assets and goodwill totaled approximately $11.1 billion and $660.2 million, respectively. Our intangible assets are subject to impairment testing in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets , and our goodwill is subject to impairment tests in accordance with SFAS No. 142, Goodwill and Other Intangible Assets . We review the carrying value of our intangible assets and goodwill for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable. Significant negative industry or economic trends, including the market price of our common stock or the fair value of our debt, disruptions to our business, unexpected significant changes or planned changes in the use of the intangible assets, and mergers and acquisitions could result in an impairment charge for any of our intangible assets, goodwill or other long-lived assets.

 

During the year ended December 31, 2007, we recognized an impairment charge of $20.0 million associated with the tradenames acquired in the Embarq Directory Acquisition. This impairment charge resulted from a change in our branding strategy to utilize a new Dex market brand for all of our print and online products across our entire footprint and discontinued use of the tradenames acquired in the Embarq Directory Acquisition. This impairment charge was determined using the relief from royalty valuation method and is included within depreciation and amortization expense on the consolidated statement of operations for the year ended December 31, 2007.

 

As a result of the decline in the trading value of our debt and equity securities during the three months ended March 31, 2008 and continuing negative industry and economic trends that have directly affected our business, we performed impairment tests as of March 31, 2008 of our goodwill and definite-lived intangible assets in accordance with SFAS No. 142 and SFAS No. 144, respectively. We used certain estimates and assumptions in our impairment evaluations, including, but not limited to, projected future cash flows, revenue growth and customer attrition levels. As a result of this testing, we recorded a $2.5 billion non-cash, pre-tax charge associated with goodwill impairment in the first quarter of 2008.

 

If the trading value of our debt and equity securities continues to decline, we will be required to assess the fair values of the assets and liabilities of RHD and could conclude that goodwill is impaired, which would result in additional impairment charges in 2008. In addition, if economic conditions in certain of our markets do not improve, we will be required to assess the recoverability of long-lived and intangible assets, which could result in additional impairment charges. Any additional impairment charge related to our intangible assets, other long-lived assets or goodwill could have a significant effect on our financial position and results of operations in the periods recognized.

 

We are in the process of upgrading and modernizing our information technology systems and we may not be able to realize the expected benefits as we planned.

 

We are in the process of upgrading and modernizing our legacy Amdocs process management infrastructure to the Amdocs’ iGen platform, an integrated, Web-based, fully scalable set of business applications. While we expect this modernization effort to permit the advancement of our digital local commercial search and integrated media strategy by more effectively and efficiently capturing and organizing our local market content, the modernization effort is complicated and dependent upon certain integration activities associated with the Dex Media merger being successfully accomplished in a timely manner. The modernization effort is not expected to be fully implemented until the second half of 2008. During the modernization effort we may experience a disruption to our business. We cannot assure you that any disruption caused by the modernization effort will not materially adversely affect our business. In addition, we expect to incur capital expenditures in connection with this modernization effort, which are relatively higher than our historical levels of capital expenditures, and which represent funds that would otherwise have been available to repay debt or for other strategic or general corporate purposes. For example, we incurred greater than expected costs in connection with our recently completed upgrade of our Embarq brand to the Amdocs’ iGen platform and expect to incur similar costs in connection with the upgrade of our remaining brands in 2008.

 

Achieving certain of the cost savings and other benefits we expect from the Dex Media merger will depend in large part on the successful implementation of the new iGen platform and related modernization improvements. Failure to realize these benefits could have an adverse effect on our business, results of operations or financial condition.

 

Most of our business activities rely to a significant degree on the efficient and uninterrupted operation of our computer and communications systems and those of third parties. Any failure of current or, in the future, new systems could impair our collection, processing or storage of data and the day-to-day management of our business. This could have a material adverse effect on our business, financial condition and results of operations. Our computer and communications systems are vulnerable to damage or interruption from a variety of sources. Despite precautions taken by us, a natural disaster or other unanticipated problems that lead to the corruption or loss of data at our facilities could have a material adverse effect on our business, financial condition and results of operations.

 

Adverse outcomes resulting from bankruptcy proceedings against Qwest, Embarq or AT&T during the term of the commercial arrangements could adversely affect our financial results.

 

Qwest is currently highly leveraged and has a significant amount of debt service obligations over the near term and thereafter. In addition, Qwest has faced and may continue to face significant liquidity issues as well as issues relating to its compliance with certain covenants contained in the agreements governing its indebtedness. Based on Qwest’s public filings and announcements, Qwest has taken measures to improve its

near-term liquidity and covenant compliance. However, Qwest still has a substantial amount of indebtedness outstanding and substantial debt service requirements. Consequently, it may be unable to meet its debt service obligations without obtaining additional financing or improving operating cash flow. Embarq is a relatively new public company with a significant amount of debt that could suffer some of these same liquidity and debt service issues. While AT&T is presently a stronger company financially than either Qwest or Embarq, due to the long term nature of our agreements with them, it is possible that they could suffer similar financial issues during the term of our agreements with them.

 

Accordingly, we cannot assure you that any of our telecommunications partners will not ultimately seek protection under U.S. bankruptcy laws. In any such proceeding, our agreements with Qwest, Embarq and AT&T, and our respective rights and the respective ability to provide the services under those agreements, could be materially adversely impacted.

 

For example:

 

 

If one or more of these agreements were rejected, the applicable agreement may not be specifically enforceable, in which case we would have only an unsecured claim for damages against Qwest, Embarq or AT&T, as the case may be, for the breach of contract resulting from the rejection. If the applicable directory services license or publishing agreement were rejected, we would, among other things, no longer be entitled to be the exclusive official publisher of telephone directories in the affected markets. We could also lose our right to use the applicable telephone company’s name and logo, and to enforce the provisions of the applicable agreements under which we have the right to license trademarks of successor local exchange carriers in our local markets. If the applicable non-competition agreement were rejected and specific enforcement were not available, Qwest, Embarq or AT&T, as the case may be, would, among other things, no longer be precluded from publishing print telephone directories or selling certain advertising in the affected markets. The loss of any rights under any of these arrangements with Qwest, Embarq or AT&T may have a material adverse effect on our financial condition or results of operations.

 

The loss of any of our key agreements with Sprint, Embarq, AT&T or Qwest could have a material adverse effect on us.

 

In connection with our acquisitions, we entered into non-competition agreements with each of Sprint, Embarq and AT&T, and in connection with the Dex Media merger, we assumed a non-competition agreement from Qwest. The Qwest non-competition agreement prohibits Qwest from selling directory products consisting principally of listings and classified advertisements for subscribers in the geographic areas in the Dex Media

states in which Qwest provided local telephone service as of November 8, 2002 that are directed primarily at customers in those geographic areas. The Sprint non-competition agreement prohibits Sprint in the markets where Sprint provided local telephone service at the time of the Embarq Directory Acquisition from selling local directory advertising or producing, publishing and distributing print directories, with certain limited exceptions. This non-compete agreement survived Sprint’s spin-off of the Embarq business. The Embarq non-competition agreement prohibits Embarq in the markets where Sprint provided local telephone service at the time of the Embarq Directory Acquisition from selling local directory advertising or producing, publishing and distributing print directories, with certain limited exceptions. The AT&T non-competition agreement prohibits AT&T from producing, publishing and distributing print directories in Illinois and Northwest Indiana, from selling local or national directory advertising in such directories and from selling local Internet Yellow Pages advertising for certain Internet Yellow Pages directories (or from licensing certain AT&T marks to a third party for that purpose), subject to limited exceptions.

 

However, under state and federal law, a covenant not to compete is only enforceable:

 

 

Enforceability of a non-competition covenant is determined by a court based on all of the facts and circumstances of the specific case at the time enforcement is sought. For this reason, it is not possible for us to predict whether, or to what extent, a court would enforce either the Qwest, Sprint, Embarq or AT&T’s covenants not to compete against us during the term of the respective non-competition agreement. If a court were to determine that the non-competition agreement is unenforceable, Qwest, Sprint, Embarq or AT&T, as the case may be, could compete directly against us in the previously restricted markets. Our inability to enforce the non-competition agreement with Qwest, Sprint, Embarq or AT&T could have a material adverse effect on our financial condition or results of operations.

 

Our commercial arrangements with each of Qwest, Embarq 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, Embarq 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.

 

Future changes in directory publishing obligations in Qwest and AT&T markets and other regulatory changes may increase our costs.

 

Pursuant to our publishing agreement with Qwest, we are required to discharge Qwest’s regulatory obligation to publish White Pages directories covering each service territory in the 14 Dex Media states where it provided local telephone service as the incumbent service provider as of November 8, 2002. If the staff of a state public utility commission in a Dex Media state were to impose additional or changed legal requirements in any of Qwest’s service territories with respect to this obligation, we would be obligated to comply with these requirements on behalf of Qwest, even if such compliance were to increase our publishing costs. Pursuant to the publishing agreement, Qwest will only be obligated to reimburse us for one half of any material net increase in our costs of publishing directories that satisfy Qwest’s publishing obligations (less the amount of any previous reimbursements) resulting from new governmental legal requirements, and this obligation will expire on November 7, 2009. Our competitive position relative to competing directory publishers could be adversely affected if we are not able to recover from Qwest that portion of our increased costs that Qwest has agreed to reimburse and, moreover, we cannot assure you that we would be able to increase our revenue to cover any unreimbursed compliance costs.

Pursuant to the directory services license agreement with AT&T, we are required to discharge AT&T’s regulatory obligation to publish White Pages directories covering each service territory in the Illinois and Northwest Indiana markets for which we acquired the AT&T Directory Business. If the staff of a state public utility commission in Illinois or Indiana were to impose additional or change legal requirements in any of these service territories with respect to this obligation, we would be obligated to comply with these requirements on behalf of AT&T, even if such compliance were to increase our publishing costs. Pursuant to the directory services agreement, AT&T will generally not be obligated to reimburse us for any increase in our costs of publishing directories that satisfy AT&T’s publishing obligations. Our results of operations relative to competing directory publishers could be adversely affected if we are not able to increase our revenues to cover any such compliance costs.

 

Our directory services license agreement with Embarq generally provides that Embarq will reimburse us for material increases in our costs relating to our complying with Embarq’s directory publishing obligations in our Embarq markets.

 

As the Internet Yellow Pages 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, our profitability could decrease.

 

Our operations, as well as the properties that we own and lease for our business, are subject to stringent laws and regulations relating to environmental protection. Our 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.

 

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 us to suffer declines in revenues. For example, “opt out” legislation has been proposed in certain states where we operate that would allow consumers to opt out of the delivery of print yellow pages. 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 usage of our products and, ultimately, our revenues. Depending on the consistency of the legislation if adopted in multiple jurisdictions, it could 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. 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 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.

 

Our business may be adversely affected by our reliance on, and our extension of credit to, small- and medium-sized businesses.

 

Approximately 85% of our directory advertising revenue is derived from selling advertising to SMEs. In the ordinary course of our Yellow Pages publishing business, we extend credit to these advertisers for advertising purchases. SMEs, 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 harm SMEs. We believe these limitations are significant contributing factors to having

advertisers in any given year not renew their advertising in the following year. 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 SMEs. For the year ended December 31, 2007, our bad debt expense represented approximately 3.0% of our net revenue.

 

Our dependence on third-party providers of printing, distribution, delivery and IT services could materially adversely affect us.

 

We depend on third parties for the printing and distribution of our respective directories. We also rely on the services of Amdocs contractors 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.

 

Our directories are printed through our long-standing relationship with printing vendor R.R. Donnelley & Sons Company, or R. R. Donnelley, as well as with Quebecor, Inc., or Quebecor. In general, R.R. Donnelley prints all AT&T and Embarq directories and larger, higher-circulation Qwest directories, whereas Quebecor prints Qwest directories that are smaller and have a more limited circulation. Our agreements with R.R. Donnelley and Quebecor for the printing of all our directories extend through 2014.

 

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 R.R. Donnelley or Quebecor, 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. No common ownership or other business affiliation presently exists between R.R. Donnelley and us.

 

We have contracts with three companies for the distribution of our directories. Although these contracts are scheduled to expire at various times from May 2009 through May 2010, 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 Amdocs’ contractors, 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 unlikely that we would be able to perform them on a cost-effective basis. There are a limited number of alternative third-party service providers, if any.

 

Fluctuations in the price and availability of paper could adversely affect our business.

 

Our principal raw material is paper. It is one of our largest cost items, representing approximately 3.9% of our net revenue for the year ended December 31, 2007. Paper used is supplied by five paper suppliers: CellMark Paper, Inc., or CellMark; Kruger, Inc., or Kruger; AbitibiBowater, Inc., or Abitibi; Nippon Paper Industries USA, Co., Ltd, or Nippon; and Catalyst Paper Corporation, or Catalyst. Our agreements with CellMark, Kruger, Catalyst and Abitibi expire on December 31, 2008 and our agreement with Nippon expires on December 31, 2009. Pursuant to the contracts with CellMark, Abitibi and Kruger, the price of the paper was set at inception of the contract and increases at various dates during the term of the agreement. Should the market price of the paper drop below the set prices under that contract, both parties are obligated to negotiate in good faith a lower paper price. Prices under the contracts with Nippon and Catalyst are negotiated each year based on prevailing market rates. Furthermore, we purchase paper used for the covers of our directories from Tembec Enterprises, Inc., formerly known as Spruce Falls, Inc. and which we refer to as Tembec. Pursuant to an agreement between Tembec and us, Tembec is obligated to provide 100% of our annual cover stock paper requirements at a pre-negotiated price by weight. This agreement expires on

December 31, 2009. We cannot assure you that we will enter into new agreements with satisfactory terms or at all.

 

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.

 

Our sales of advertising to national accounts is coordinated by third parties that we do not control.

 

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 certified marketing representatives, or 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 advertisers depends significantly on the performance 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 materially adversely affect 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. It is possible that status could adversely impact our relationships with CMRs or expose us to possible legal claims from CMRs. We are also subject to credit risk with CMRs from which we accept orders.

 

General economic factors could adversely affect our results of operations and financial condition.

 

Our business results could be adversely affected by a prolonged national or regional economic recession. We derive substantially all of our net revenue from the sale of advertising in directories. Historically, our advertising revenues, as well as those of Yellow Pages publishers in general, have not fluctuated widely with economic cycles. However, a prolonged national or regional economic recession could have a material adverse effect on our business, operating results or financial condition. In addition, a downturn in the real estate and home improvement markets, such as was recently experienced in Las Vegas and parts of Florida, may have a larger adverse effect on the types of businesses that tend to advertise with us. As a result, we may experience lower than expected revenues for our business in the future. Lastly, rising fuel prices may have an adverse affect on our business, particularly with respect to the costs of distributing our print directories.

 

In addition, any residual economic effects of, and uncertainties regarding the following could adversely affect our business:

 

 

We may be subject to work stoppages or increased unionization, which could increase operating costs and disrupt operations.

 

Approximately 1,500 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. Dex Media’s collective bargaining agreement with the International Brotherhood of Electrical Workers of America, or IBEW, which covers approximately 500 of Dex Media’s unionized

workforce, expires in May 2009, and Dex Media’s collective bargaining agreement with the Communication Workers of America, or CWA, which covers approximately 1,000 of Dex Media’s unionized workforce, expires in October 2009. 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. We cannot assure you that the collective bargaining agreements with IBEW and CWA will be renewed in 2009 on satisfactory terms or at all or that a strike or other work stoppage may not ensue in or prior to 2009. In addition, if a greater percentage of our workforce becomes unionized, the business and financial results of our business could be materially adversely affected.

 

Turnover among sales representatives or loss of key personnel 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 local marketing consultants and/or sales managers could adversely affect our results of operations, financial condition and liquidity, as well as our ability to service our debt. 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, as well as our ability to service our debt could be adversely affected.

 

The loss of important intellectual property rights could adversely affect our competitiveness.

 

Some trademarks such as the “Qwest,” “Embarq,” “AT&T,” “Dex,” “DexKnows,” “Donnelley,” “Business.com,” “Work.com,” “Local Launch!,” “Triple Play,” “DexKnows.com” and “Dex Search Marketing” brand names and other intellectual property rights are important to our business. We rely upon a combination of copyright and trademark laws as well as contractual arrangements, including licensing agreements, particularly with respect to Qwest, Embarq 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 trade names, including DexKnows.com, DexOnline.com, Local Launch.com and Business.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.

 

We are subject to litigation.

 

We are exposed to defamation, breach of privacy claims and other litigation matters relating to our business, as well as methods of collection, processing and use of personal data. The subjects of our data and users of data collected and processed by us could also have claims against us if our data were found to be inaccurate, or if personal data stored by us were improperly accessed and disseminated by unauthorized persons. These claims could have a material adverse effect on our business, financial condition or results of operations or otherwise distract our management.

Risks relating to the notes

 

RHD is a holding company with no material assets other than the stock of its subsidiaries, and will not be able to service the notes unless it is able to receive distributions from these subsidiaries, which distributions may be subject to restrictions under the agreements governing the indebtedness of these subsidiaries.

 

RHD is a holding company with no material assets other than the stock of its subsidiaries, which subsidiaries have not guaranteed the obligations of RHD under the notes. RHD has no independent operations and owns substantially all of its assets at the subsidiary level. As a result, RHD will need to receive distributions from its subsidiaries in order to service its obligations under the notes, including making principal and interest payments. Some of the agreements governing the indebtedness of RHD’s subsidiaries, including the credit facilities and indentures governing our subsidiaries’ notes, include restrictive covenants that limit or in some cases prohibit these subsidiaries from making distributions to RHD. In addition, RHD’s subsidiaries will be permitted under the terms of their credit facilities and RHD’s and their other indebtedness to incur additional indebtedness that may severely restrict or prohibit the making of distributions, the payment of dividends or the making of loans by such subsidiaries to RHD. In addition, RHD’s subsidiaries may incur liabilities that are not considered debt under the indentures governing RHD’s and the subsidiaries’ outstanding notes. It is possible that these subsidiaries will not be able to make sufficient distributions to RHD during the terms of the notes to fund payments of the notes when due.

 

The notes will be effectively subordinated to RHD’s secured debt and the notes will be structurally subordinated to RHD’s subsidiaries’ debt.

 

After giving effect to the RHDI exchange offers, the amendment of the RHDI credit facility and the refinancing of the Dex Media West credit facility, as of March 31, 2008, RHD would have had $10.0 billion of indebtedness, of which $3,689.6 million was secured. Specifically, the RHDI credit facility is secured by the stock of RHDI and by liens on substantially all of RHDI’s and RHDI’s direct and indirect existing and future subsidiaries’ assets. All of this debt, both secured and unsecured, other than the notes, the 6.875% senior notes, the series A-1 senior discount notes, the series A-2 senior discount notes and the series A-3 senior notes, has been issued by RHD’s subsidiaries. In addition, the Dex Media credit facilities are secured by the stock of Dex Media East and Dex Media West and by liens on substantially all of the assets of Dex Media’s direct and indirect existing and future subsidiaries. Holders of our secured debt will have claims that are prior to your claims as holders of the notes to the extent of the value of the assets securing that other debt. The notes will be effectively subordinated to all such secured debt to the extent of the value of its collateral. In the event of any distribution or payment of our assets in any foreclosure, dissolution, winding-up, liquidation, reorganization or other bankruptcy proceeding, holders of secured debt will have a prior claim to the assets that constitute their collateral. Holders of the notes will participate ratably with all holders of the unsecured debt of RHD that is deemed to be of the same class as the notes, and potentially with all of our other general creditors, but after holders of debt or other creditors of RHD’s subsidiaries, based upon the respective amounts owed to each holder or creditor, in our remaining assets.

 

In addition, the notes are structurally subordinated to the debt of our current and future subsidiaries. The indenture governing the notes does not require that the notes be guaranteed by subsidiaries that guarantee any other debt of RHD. In addition, holders of the debt of RHD’s subsidiaries may have claims that are prior to your claim as holder of our notes. There may not be sufficient assets to pay amounts due on the notes. As a result, holders of notes may receive less, ratably, than holders of RHD’s secured debt, if any, or holders of the debt of RHD’s subsidiaries. In addition, the rights of RHD to participate in any distribution of assets of any of its subsidiaries upon its liquidation or reorganization or otherwise would be subject to the prior claims of the subsidiary’s creditors, except to the extent that claims of RHD itself as a creditor of the subsidiary may be recognized. After the payment of the subsidiary’s liabilities, the subsidiary may not have enough assets remaining to pay to RHD to permit RHD’s creditors, including the holders of the notes, to be paid.

The notes will not be obligations of RHD’s subsidiaries.

 

RHD’s subsidiaries are separate and distinct legal entities. RHD’s subsidiaries are not the issuers of the notes and will not guarantee the obligations of RHD under the notes. RHD’s subsidiaries have no obligation to pay any amounts due on the notes or to provide RHD, which has and expects to have, no operations apart from those of its subsidiaries, with funds for its payment obligations under the notes and its other debt (which includes the 6.875% senior notes, the series A-1 senior discount notes, the series A-2 senior discount notes, the series A-3 senior notes and the guarantees of RHDI’s debt), whether by dividends, distributions, loans or otherwise. Payments to RHD by its subsidiaries are also contingent upon its subsidiaries’ earnings and business considerations. In addition, any payment of dividends, distributions, loans or advances by RHD’s subsidiaries to it are subject to contractual restrictions and could be subject to statutory restrictions.

 

RHD’s subsidiaries may not have or may not provide sufficient funds for RHD to make payments on the notes. RHD’s subsidiaries are subject to agreements that restrict their ability to make distributions and transfer assets to RHD, which would be deemed a restricted payment under the indentures governing the Dex Media and its subsidiaries’ notes.

 

There is no specific exception to this restriction in the indentures governing the Dex Media and its subsidiaries’ notes that would permit funds to be distributed to RHD to make interest payments on the notes. In addition, the indenture governing the notes permits our subsidiaries to enter into other agreements or incur additional indebtedness that may severely restrict or prohibit the making of distributions, the payments of dividends or the making of loans by our subsidiaries to RHD, including such restrictions in the RHDI credit facility and the Dex Media credit facilities. In addition to these contractual restrictions and prohibitions, the laws of our subsidiaries’ jurisdiction of organization may restrict or prohibit the making of distributions, the payment of dividends or the making of loans by our subsidiaries to RHD. Furthermore, pursuant to the terms of these agreements, our subsidiaries are and will be required to make payments on the RHDI credit facility, the RHDI notes, the Dex Media and its subsidiaries’ notes, the Dex Media credit facilities and other indebtedness incurred prior to making distributions or transferring assets to us. In addition to the limitations on distributions, dividends and loans to RHD by any of RHD’s subsidiaries, the agreements governing RHD’s other indebtedness, the RHDI notes, the Dex Media and its subsidiaries’ notes, the Dex Media credit facilities or any future agreements, may prohibit or limit RHD’s and its subsidiaries’ ability to, among other things, dispose of assets (including the stock of RHD’s subsidiaries), issue additional indebtedness, or issue equity securities, which transactions could provide funds to make payments on the notes if not prohibited or limited. In addition, the indentures governing the notes, the 6.875% senior notes, the series A-1 senior discount notes, the series A-2 senior discount notes and the series A-3 senior notes permit RHD to incur additional debt and make restricted payments in an amount significantly in excess of the amount Dex Media and its subsidiaries are permitted to incur or make, as the case may be, under the indentures governing the Dex Media and its subsidiaries’ notes. As a result, RHD may make restricted payments and incur debt which its subsidiaries may not be able to service.

 

RHD’s right to receive any assets of any of its subsidiaries upon their liquidation or reorganization, and therefore the right of the holders of the notes to participate in those assets, will be structurally subordinated to the claims of the applicable subsidiary’s creditors, lenders under the RHDI credit facility and trade creditors, holders of the RHDI notes, holders of the Dex Media and its subsidiaries’ notes, lenders under the Dex Media credit and trade creditors or any future agreements of our subsidiaries. This means that the holders of the debt would have a claim prior to that of the holders of the notes, with respect to the assets of that subsidiary. In addition, even if RHD were a creditor of any of its subsidiaries, its right as a creditor would be subordinate to any security interest in the assets of its subsidiaries and any debt of its subsidiaries senior to that held by it. We cannot assure you that in the event of a liquidation or dissolution of RHD that there will be sufficient assets available to pay amounts due to you as a holder of the notes.

We may not have the ability to raise the funds necessary to purchase the notes upon a change of control as required by the indenture governing the notes.

 

Upon the occurrence of certain change of control events, each holder of the notes may require us to repurchase all or a portion of its notes at a purchase price equal to 101% of the principal amount thereof, plus accrued interest. Our ability to repurchase the notes upon a change of control will be limited by the terms of our other debt, including the indentures governing the 6.875% senior notes, the series A-1 senior discount notes, the series A-2 senior discount notes, the series A-3 senior notes, the RHDI notes and the Dex Media and its subsidiaries’ notes, which also require a repurchase upon a change of control, and, moreover, we may not have adequate financial resources or may not be able to arrange for additional financing to repurchase the notes and our other debt, including the 6.875% senior notes, the series A-1 senior discount notes, the series A-2 senior discount notes, the series A-3 senior notes, the RHDI notes, and the Dex Media and its subsidiaries’ notes.

 

In addition, in the event of a change of control, we may be required immediately to repay the outstanding principal, any accrued interest and any other amounts owed by us under the RHDI credit facility, the RHDI notes, the 6.875% senior notes, the series A-1 senior discount notes, the series A-2 senior discount notes, the series A-3 senior notes, the Dex Media and its subsidiaries’ notes and the Dex Media credit facilities. We may not be able to repay amounts under instruments governing this indebtedness and then still have adequate available capital resources to repurchase the notes. Any requirement to offer to purchase any outstanding notes may result in our having to refinance our other outstanding debt, which we may not be able to do. In addition, even if we were able to refinance this debt, the refinancing may not be on terms that will allow us to repurchase the notes.

 

In addition, the change of control provisions in the indenture governing the notes may not protect you from certain important corporate events, such as a leveraged recapitalization (which would increase the level of our indebtedness), reorganization, restructuring, merger or other similar transaction. Such a transaction may not involve a change in voting power or beneficial ownership or, even if it does, may not involve a change that constitutes a “Change of Control” as defined in the indenture governing the notes that would trigger our obligation to repurchase the notes. If an event occurs that does not constitute a “Change of Control” as defined in the indenture governing the notes, we will not be required to make an offer to repurchase the notes and you may be required to continue to hold your notes despite the event. See “Description of other indebtedness” and “Description of notes — Repurchase at the option of holders upon a Change of Control.”

 

An active liquid trading market for the exchange notes may not develop.

 

There is currently no public market for the exchange notes. The exchange notes are a new class of securities which have never been traded. We cannot assure you that an active trading market for the exchange notes will develop, or if one does develop, that it will be sustained. Also, it is possible that the market for the exchange notes will be volatile. This volatility in price may affect your ability to resell your exchange notes or the timing of the sale. Future trading prices of the exchange notes will depend on many factors, including, among other things, prevailing interest rates, our results of operations and the market for similar securities.

 

The substantial majority of the net proceeds from the outstanding notes were used to repay or repurchase outstanding indebtedness of our subsidiaries, and it is possible that a court could therefore deem these transactions, or a portion thereof, to be a fraudulent conveyance, with potentially adverse consequences.

 

The substantial majority of the net proceeds from the outstanding notes were contributed or otherwise transferred to our subsidiaries to repay or repurchase some of their outstanding indebtedness. The incurrence of the indebtedness evidenced by the outstanding notes and the use of the proceeds for these refinancings could be subject to review under relevant federal and state fraudulent conveyance statutes in a bankruptcy or reorganization case and/or in a lawsuit by or on behalf of our creditors. Under federal bankruptcy laws, if a court were to find that (a) we completed those transactions with the actual intent to hinder, delay or defraud any present or future creditor; or (b) (i) that we did not receive reasonably equivalent value for those transactions and (ii) at the time we entered into the transactions contemplated therein, we were insolvent or

became insolvent as a result of issuing the outstanding notes, or were engaged or about to engage in a business or transaction for which our remaining assets constituted unreasonably small capital, or intended to incur, or believed that we would incur, debts beyond our ability to pay those debts as they matured or became due (as all of these terms are defined or interpreted under the relevant fraudulent transfer or conveyance statutes), the court could find that a fraudulent conveyance has occurred. State statutes regarding fraudulent conveyances pose similar risks that a court might find that a fraudulent conveyance has occurred.

 

The measure of insolvency for purposes of a fraudulent conveyance claim may vary depending upon the law of the applicable jurisdiction. Generally, however, a company will be considered insolvent at a particular time if the sum of its debts at that time is greater than the then fair value of its assets or if the fair saleable value of its assets at that time is less than the amount that would be required to pay its probable liability on its existing debts as they mature. We believe that, after giving effect to the offering of the outstanding notes, including the application of the proceeds , we were not insolvent or rendered insolvent as a result of issuance; that we are in possession of sufficient capital to run our business effectively and continued to be so after the issuance of the outstanding notes and the application of the proceeds; and that we have incurred debts within our ability to pay as the same mature or become due. It is possible, however, that a court could conclude that we were insolvent at the time of, or rendered insolvent upon, the completion of the transactions contemplated therein. Furthermore, although we believe that we are not undertaking to complete these transactions with the actual intent to hinder, delay or defraud any present or future creditor, a court could conclude otherwise.

 

In the event that a court were to find that the transactions contemplated therein, or some portion thereof, constitutes a fraudulent conveyance, it could impose any number of remedies, including ordering the rescission of the transactions contemplated therein, or a portion thereof, a subordination of the obligations evidenced by the outstanding exchange notes in favor of our other obligations or other remedies that could prove detrimental to the holders of the notes.

 

Key covenants of the notes will be suspended if the notes achieve investment grade ratings.

 

Most of the restrictive covenants in the indenture governing the notes will not apply during any period in which the notes have investment grade ratings from either Moody’s Investors Service, Inc. or Standard & Poor’s Rating Services and in which no default or event of default has occurred. At such time, we may take actions such as incur additional debt or make certain dividends or distributions that would otherwise be prohibited under the indenture governing the notes. Such actions will be permitted even if we later become subject again to the restrictive covenants. Ratings are given by these rating agencies based upon analyses that include many subjective factors. We cannot assure you that the notes will achieve or maintain investment grade ratings, nor can we assure you that investment grade ratings, if granted, will reflect all of the factors that would be important to holders of the notes.

 

If we default on our obligations to pay our indebtedness we may not be able to make payments on the notes.

 

Any default under the agreements governing our indebtedness, including a default under any of the RHDI credit facility and the Dex Media credit facilities that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness, could make us unable to pay principal, premium, if any, and interest on the notes and substantially decrease the market value of the notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the RHDI credit facility or the Dex Media credit facilities could elect to terminate their commitments thereunder and cease making further loans and institute foreclosure proceedings against our assets and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under the RHDI credit facility or the Dex Media credit facilities to avoid being in default. If we breach our covenants under any

of these credit facilities and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under one or more of these credit facilities, the lenders could exercise their rights under these credit facilities, and we could be forced into bankruptcy or liquidation. See “Description of other indebtedness” and “Description of notes.”

 

If you do not exchange your outstanding notes, you may have difficulty transferring them at a later time.

 

We will issue exchange notes in exchange for the outstanding notes after the exchange agent receives your outstanding notes, the letter of transmittal and all related documents. You should allow adequate time for delivery if you choose to tender your outstanding notes for exchange. Outstanding notes that are not exchanged will remain subject to restrictions on transfer and will not have rights to registration.

 

If you do participate in the exchange offer for the purpose of participating in the distribution of the exchange notes, you must comply with the registration and prospectus delivery requirements of the Securities Act for any resale transaction. Each broker-dealer who holds outstanding notes for its own account due to market-making or other trading activities and who receives exchange notes for its own account must acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. If any outstanding notes are not tendered in the exchange or are tendered but not accepted, the trading market for such outstanding notes could be negatively affected due to the limited amount expected to remain outstanding following the completion of the exchange offer.

 

We will not receive any cash proceeds from the issuance of the exchange notes. Because we are exchanging the exchange notes for the outstanding notes, which have substantially identical terms, the issuance of the exchange notes will not result in any increase in our debt.

Capitalization

 

The following information sets forth our consolidated capitalization as of March 31, 2008 on an actual basis and on an as adjusted basis to give effect to the RHDI exchange offers, the amendment of the RHDI credit facility and the refinancing of the Dex Media West credit facility. You should read this along with the consolidated financial statements and accompanying notes included elsewhere in this prospectus.

 

 

 

 

 

 

 

 

 

The following table shows selected historical consolidated financial data for RHD. The data as of and for each of the years in the five-year period ended December 31, 2007 were derived from our audited consolidated financial statements. The data as of and for the three months ended March 31, 2007 and 2008 were derived from RHD’s unaudited condensed consolidated financial statements. In the opinion of management, the unaudited financial information as of and for the three months ended March 31, 2007 and 2008 include all adjustments, consisting of normal and recurring adjustments, necessary to present fairly the data for such periods. Detailed historical financial information is included elsewhere in this prospectus in the audited consolidated balance sheets as of December 31, 2006 and 2007, and the related consolidated statements of operations and comprehensive income (loss), cash flows and changes in shareholders’ equity (deficit) for each of the years in the three-year period ended December 31, 2007, and the unaudited condensed consolidated balance sheet as of March 31, 2008 and the related unaudited condensed consolidated statements of operations and comprehensive (loss) income and cash flows for the three-month periods ended March 31, 2007 and 2008.

 

As a result of our acquisitions, the related financings and associated purchase accounting, our reported results in accordance with GAAP are not comparable year over year in the periods presented below. Under the deferral and amortization method of revenue recognition, the billable value of directories published is recognized as revenue in subsequent reporting periods. However, purchase accounting precluded us from recognizing directory revenue and certain expenses associated with directories that published prior to each of our acquisitions, including all directories published in the month the applicable acquisition was completed. Additionally, we commenced reporting the results of each acquired business upon the closing date of each acquisition. See the notes following the table below for a further description of these items.

 

Expenses previously presented as cost of revenues are presented as production, publication and distribution expenses (exclusive of depreciation and amortization) for the three months ended March 31, 2007 and 2008 to more appropriately reflect the nature of these costs. Certain prior period amounts included in our condensed consolidated statement of operations for the three months ended March 31, 2007 and consolidated statements of operations for the years ended December 31, 2005 and 2006 have been reclassified to conform to the current period’s presentation. Selling and support expenses are now presented as a separate expense category in the condensed consolidated statements of operations and consolidated statements of operations. In prior periods, certain selling and support expenses were included in production, publication and distribution expenses in the condensed consolidated statement of operations for the three months ended March 31, 2007 and in cost of revenues in the consolidated statements of operations for the years ended December 31, 2005 and 2006 and others were included in general and administrative expenses. Additionally, beginning in the fourth quarter of 2007, we began classifying adjustments for customer claims to sales allowance, which is deducted from gross revenues to determine net revenues. In prior periods, adjustments for customer claims were included in bad debt expense under general and administrative expenses. Bad debt expense is now included under selling and support expenses. Accordingly, we have reclassified adjustments for customer claims and bad debt expense for the three months ended March 31, 2007 and the years ended December 31, 2005 and 2006 to conform to the current period’s presentation. These reclassifications had no impact on operating income or net income (loss) for the three months ended March 31, 2007 or the years ended December 31, 2005 and 2006. The tables below summarize these reclassifications.

 

 

 

You should read the following selected financial data together with the information contained under the caption “Management’s discussion and analysis of financial condition and results of operations” and RHD’s historical consolidated financial statements, including the related notes, and the other information included in this prospectus.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due to our losses in the three months ended March 31, 2008 and the years ended December 31, 2003 and 2006, the ratio was less than 1:1 for these periods. We would have had to generate additional earnings of $2,433.5 million, $80.3 million and $322.2 million to achieve a coverage ratio of 1:1 for the three months ended March 31, 2008 and the years ended December 31, 2003 and 2006, respectively.

 

The historical financial statements of RHD include the effects of purchase accounting associated with prior business combinations made by us, which decreased the amount of revenue and related costs recognized in the twelve-month periods subsequent to each of the acquisitions.

 

The following discussion should be read in conjunction with the risk factors included in this prospectus as well as our historical consolidated financial statements, including the notes related to those statements, and other financial information included elsewhere in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See “Disclosure regarding forward-looking statements” and “Risk factors.”

 

Corporate overview

 

We are one of the nation’s largest Yellow Pages and online local commercial search companies, based on revenue, with 2007 revenues of approximately $2.7 billion. We publish and distribute advertiser content utilizing our own Dex brand through Qwest, Embarq, and AT&T. In 2007, we extended our Dex brand into our AT&T and Embarq markets to create a unified identity for advertisers and consumers across all of our markets. Our Dex brand is considered a leader in local search in the Qwest markets, and we expect similar success in the AT&T and Embarq markets. In each market, we also co-brand our products with the applicable highly recognizable brands of AT&T, Embarq or Qwest, which further differentiates our search solutions from others.

 

Our Triple Play ^tm integrated marketing solutions suite encompasses an increasing number of tools that consumers use to find the businesses that sell the products and services they need to manage their lives and businesses: print Yellow Pages directories, our proprietary DexKnows.com ^tm online search site and the rest of the Internet via Dex Search Marketing ^® tools. During 2007, our print and online solutions helped more than 600,000 national and local businesses in 28 states reach consumers who were actively seeking to purchase products and services. Our approximately 1,900 person sales force work on a daily basis to help bring these local businesses and consumers together to satisfy their mutual objectives utilizing our Triple Play products and services.

 

During 2007, we published and distributed print directories in many of the country’s most attractive markets including Albuquerque, Chicago, Denver, Las Vegas, Orlando, and Phoenix. Our print directories provide comprehensive local information to consumers, facilitating their active search for products and services offered by local merchants.

 

Our online products and services provide merchants with additional methods to connect with consumers who are actively seeking to purchase products and services using the Internet. These powerful offerings not only distribute local advertisers’ content to our proprietary IYP sites, but extend to other major online search platforms, including Google ^® , Yahoo! ^® and MSN ^® , providing additional qualified leads for our advertisers. Our marketing consultants help local businesses create an advertising strategy and develop a customized media plan that takes full advantage of our traditional media products, our IYP local search site DexKnows.com, and our DexNet Internet marketing services which include online profile creation for local businesses and broad-based distribution across the Internet through a network of Internet partners and relationships which host our local business listings and content and through Internet marketing.

 

This compelling set of Triple Play products and services, in turn, generates strong returns for advertisers. This strong advertiser return positions RHD and its 1,900 person sales force as trusted advisors for marketing support and service in the local markets we serve.

 

Recent trends related to our business

 

We have experienced a significant decline in our stock price during the latter part of 2007 and into 2008. We believe the decline in the stock price primarily reflects the investment community’s evolving view of (1) local media companies generally and (2) companies with significant financial leverage, particularly as the national economic outlook has become increasingly uncertain. In that regard, we note that our stock price decline has coincided with a significant drop in the stock prices of many other local media companies, as well

as many companies with significant leverage, which have been adversely impacted by instability in the credit markets.

 

We also have been experiencing lower advertising sales primarily as a result of declines in recurring business (renewal and increase to existing advertisers, collectively), mainly driven by weaker housing trends, reduced consumer confidence and more cautious advertiser spending in our markets given their perception of the economic health of their respective markets. In addition, we have been experiencing adverse bad debt trends attributable to many of these same economic challenges in our markets. If these economic challenges in our markets continue, our advertising sales, bad debt experience and operating results would continue to be adversely impacted in future periods.

 

In response to these economic challenges facing us, we continue to actively manage expenses and are analyzing a host of initiatives to streamline operations and contain costs. At the same time, we are committing our sales force to focus on selling the value provided to local businesses through our Triple Play offering of print yellow pages, internet yellow pages and online search. In addition, we continue to invest in our future through initiatives such as systems modernization and consolidation, new print and digital product introductions and associated employee training. As economic conditions recover in our markets, we believe these investments will drive future revenue growth, thereby enhancing shareholder value.

 

As a result of the significant decline in the market value of the Company’s debt and equity securities, we recorded a non-cash goodwill impairment charge of $2.5 billion during the three months ended March 31, 2008. This charge was calculated in accordance with SFAS No. 142, Goodwill and Other Intangible Assets , as further described in “Results of Operations.” The charge had no impact on operating cash flow, compliance with debt covenants, tax attributes or management’s outlook for the business. We will continue to evaluate the value of our debt and equity securities in accordance with SFAS No. 142 and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets .

 

Significant business developments

 

2008 Debt refinancing

 

We have recently undertaken certain refinancing activities. These refinancing activities include the recently completed RHDI exchange offers of RHDI notes for a portion of our outstanding 6.875% senior notes, 6.875% series A-1 senior discount notes, 6.875% series A-2 senior discount notes, 8.875% series A-3 senior notes and 8.875% series A-4 senior notes. Upon settlement of the RHDI exchange offers, RHDI issued approximately $412.9 million of RHDI notes in exchange for approximately $47.7 million of 6.875% senior notes, approximately $31.2 million of series A-1 senior discount notes, approximately $99.5 million of series A-2 senior discount notes, approximately $151.2 million of series A-3 senior notes and approximately $264.7 million of series A-4 senior notes. The RHDI notes are guaranteed by RHD and by RHDI’s subsidiaries.

 

On June 6, 2008, we amended the RHDI credit facility to, among other things, amend the indebtedness and restricted payment covenants to allow for the issuance of the RHDI notes and related guarantees pursuant to the RHDI exchange offers, as well as modifications to pricing and financial covenants. In addition, RHDI extended, as part of the amendment, the maturity date of $100.0 million of its revolving credit facility to June 2011.

 

On June 6, 2008, the Dex Media West credit facility was refinanced. The new Dex Media West credit facility consists of a $130.0 million tranche A term loan maturing October 2013, a $950.0 million tranche B term loan maturing October 2014 and a $90.0 million revolving credit facility maturing October 2013; provided, however, that in each case, if $25.0 million of senior subordinated notes of Dex Media West are outstanding, then the term loans and revolving facility will be due three months prior to the maturity of such senior subordinated notes. In addition, the Dex Media West credit facility includes a $400.0 million uncommitted incremental facility under which borrowings may be incurred as additional revolving loans or additional term loans, provided that no more than $200.0 million of the proceeds of the incremental facility may be used for purposes other than refinancing certain outstanding debt of Dex Media West. The borrowings under the new Dex Media West credit facility were used to repay the existing borrowings under the Dex Media West credit facility and pay related fees and expenses incurred in connection therewith.

 

We will incur additional interest expense in connection with these refinancings.

 

2007 Debt refinancing

 

On October 2, 2007, we issued $1.0 billion aggregate principal amount of the notes. Proceeds from this issuance were (a) used to repay a $328.0 million RHD credit facility, which we refer to as the RHD Credit Facility, used to fund the Business.com Acquisition, (b) contributed to RHDI in order to provide funding for the tender offer and consent solicitation of RHDI’s $600.0 million aggregate principal amount 10.875% senior subordinated notes due 2012, which we refer to as the RHDI senior subordinated notes, and (c) used to pay related fees and expenses and for other general corporate purposes. On October 17, 2007, we issued an additional $500.0 million of the notes. Proceeds from this issuance were (a) transferred to Dex Media East in order to repay $86.4 million and $213.6 million of the Term Loan A and Term Loan B under the former Dex Media East credit facility, respectively, (b) contributed to RHDI in order to repay $91.8 million, $16.2 million and $83.0 million of Term Loans A-4, D-1, and D-2 under the RHDI credit facility, respectively, and (c) used to pay related fees and expenses.

 

In October 2007, under the terms and conditions of a tender offer and consent solicitation to purchase the RHDI senior subordinated notes commenced by RHDI on September 18, 2007, $599.9 million, or 99.9%, of the outstanding RHDI senior subordinated notes were repurchased. In December 2007, the remaining $0.1 million of RHDI senior subordinated notes were redeemed.

 

On October 24, 2007, we replaced the former Dex Media East credit facility with a new Dex Media East credit facility, consisting of a $700.0 million aggregate principal amount Term Loan A facility, a $400.0 million aggregate principal amount Term Loan B facility, a $100.0 million aggregate principal amount revolving loan facility and a $200.0 million aggregate principal amount uncommitted incremental facility, in which Dex Media East would have the right, subject to obtaining commitments for such incremental loans, on one or more occasions to increase the Term Loan A, Term Loan B or the revolving loan facility by such amount. Proceeds from the new Dex Media East credit facility were used on October 24, 2007 to repay the remaining $56.5 million and $139.7 million of Term Loan A and Term Loan B under the former Dex Media East credit facility, respectively, and $32.5 million under the former Dex Media East revolver. Proceeds from the new Dex Media East credit facility were also used on November 26, 2007 to fund the redemption of $449.7 million of Dex Media East’s outstanding 9.875% senior notes due 2009 and $341.3 million of Dex Media East’s outstanding 12.125% senior subordinated notes due 2012.

 

In December 2007, we redeemed RHDI’s remaining $7.9 million 8.875% senior notes due 2010, which we refer to as the RHDI senior notes.

 

See Note 5, “Long-Term Debt, Credit Facilities and Notes,” of the notes to the consolidated financial statements included herein for additional information regarding these refinancing transactions.

 

Share repurchases

 

In November 2007, our Board of Directors authorized a $100.0 million stock repurchase plan, which we refer to as the Repurchase Plan. This authorization permits us to purchase our shares of common stock in the open market pursuant to Rule 10b-18 of the Securities Exchange Act of 1934 or through block trades or otherwise over the following twelve months, based on market conditions and other factors, which purchases may be made or suspended at any time. In accordance with the Repurchase Plan, we repurchased 2.5 million shares at a cost of $95.7 million during December 2007.

 

Acquisitions

 

Beginning in 2003, we completed several acquisitions to be become one of the largest Yellow Pages and online local commercial search companies in the United States, based on revenue. These acquisitions are summarized below. The operating results from each acquisition have been included in our consolidated operating results commencing on the date each acquisition was completed. See Note 2, “Summary of Significant Accounting Policies — Identifiable Intangible Assets and Goodwill” and Note 3, “Acquisitions,” of

the notes to the consolidated financial statements included herein for additional information regarding these acquisitions.

 

On August 23, 2007, we acquired Business.com, a leading business search engine and directory and performance based advertising network, for a disclosed amount of $345.0 million, which we refer to as the Business.com Acquisition. The purchase price determined in accordance with GAAP was $334.4 million and excludes certain items such as the value of unvested equity awards, which will be recorded as compensation expense over their vesting period. The purpose of the Business.com Acquisition was to expand our existing interactive portfolio by adding leading Internet advertising talent and technology, to strengthen RHD’s position in the expanding local commercial search market and to develop an online performance based advertising network. Business.com also provides the established business-to-business online properties of Business.com, Work.com and the Business.com Advertising Network. We expect to adopt the Business.com technology platform to serve our existing advertiser base at our DexKnows.com Internet Yellow Pages site. Business.com now operates as a direct, wholly-owned subsidiary of RHD. The results of Business.com have been included in our consolidated results commencing August 23, 2007.

 

In connection with the Business.com Acquisition, we identified and recorded certain intangible assets at their estimated fair value, including (1) advertiser relationships, (2) third party contracts, (3) technology and network platforms and (4) trade names and trademarks. These intangible assets are being amortized over remaining useful lives ranging from 3 to 10 years under the straight-line method, with the exception of the advertiser relationships and network platform intangible assets, which are amortized under the income forecast method. At December 31, 2007, $258.8 million has been accounted for as goodwill resulting from the Business.com Acquisition.

 

On September 6, 2006, we acquired Local Launch, a local search products, platform and fulfillment provider, which we refer to as the Local Launch Acquisition. During the years ended December 31, 2007 and 2006, the Local Launch business operated as a direct wholly-owned subsidiary of RHD. Effective January 1, 2008, Local Launch was merged with and into Business.com. The products and services provided by Local Launch will continue to be offered to our advertisers through Business.com and the Local Launch brand and logo will continue to be utilized for our Internet marketing offerings.

 

On January 31, 2006, we acquired Dex Media, the exclusive publisher of the “official” yellow pages and white pages directories for Qwest where Qwest was the primary ILEC in November 2002. Dex Media is the indirect parent of Dex Media East and Dex Media West. Dex Media East operates our directory business in the following states: Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota. Dex Media West operates our directory business in the following states: Arizona, Idaho, Montana, Oregon, Utah, Washington and Wyoming. The acquired business of Dex Media and its subsidiaries, which we refer to as the Dex Media Business, now operates through Dex Media, one of RHD’s direct, wholly-owned subsidiaries. To finance the Dex Media merger, we issued $660 million of our 6.875% series A-2 senior discount notes for gross proceeds of $600.5 million and $1.21 billion of our 8.875% series A-3 senior notes to pay the cash portion of the purchase price to the Dex Media stockholders.

 

In connection with the Dex Media merger, we acquired directory services agreements, which we refer to collectively as the Dex Directory Services Agreements, that 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 Qwest’s telephone customers in the geographic areas in the Dex Media states in which Qwest (and its successors) provided local telephone services as of November 8, 2002, as well as having the exclusive right to use certain Qwest branding on directories in those markets and (2) a non-competition agreement with a term of 40 years commencing November 8, 2002, pursuant to which Qwest (on behalf of itself and its affiliates and successors) has agreed not to sell directory products consisting principally of listings and classified advertisements for subscribers in the geographic areas in the Dex Media states in which Qwest provided local telephone service as of November 8, 2002 that are directed primarily at consumers in those geographic areas.

On September 1, 2004, we completed the acquisition of the directory publishing business of AT&T, which we refer to as the AT&T Directory Business, in Illinois and Northwest Indiana, including AT&T’s interest in DonTech, a 50/50 general partnership between us and AT&T. As a result of the AT&T Directory Acquisition, we became the publisher of AT&T branded yellow pages in Illinois and Northwest Indiana. The acquired AT&T Directory Business now operates as R. H. Donnelley Publishing and Advertising of Illinois Partnership, one of our indirect, wholly-owned subsidiaries.

 

Directory services agreements between AT&T and us include a directory services license agreement, a non-competition agreement, an Internet Yellow Pages reseller agreement and a directory publishing listing agreement, which we collectively refer to as the 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, which we refer to as 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&T’s 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 has a term of 5 years, commencing in September 2004.

 

On January 3, 2003, we completed the acquisition of the Embarq Directory Business by acquiring all the outstanding capital stock of the various entities comprising Sprint Publishing and Advertising. As a result, we are the publisher of Embarq branded yellow pages directories in 18 states including Nevada and Florida. The Embarq Directory Business now operates as R.H. Donnelley Publishing and Advertising, Inc., one of our indirect, wholly-owned subsidiaries.

 

Directory services agreements between Embarq and us, which were executed in May 2006 in conjunction with Sprint’s 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 Embarq, as well as a non-competition agreement with Sprint entered into in January 2003, which we collectively refer to as the Embarq Directory Services Agreements. The Embarq 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 Embarq (and its successors) in 18 states where Embarq 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 Embarq trademarks in those markets, and the non-competition agreements prohibit Embarq 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 Embarq Directory Services Agreements have initial terms of 50 years, commencing in January 2003, subject to automatic renewal and early termination under specified circumstances.

The purposes of our acquisitions included the following:

 

 

These acquisitions were accounted for as purchase business combinations and the purchase price for each acquisition was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values on each acquisition date.

 

Segment reporting

 

Management reviews and analyzes its business of providing local commercial search products and solutions, including publishing yellow pages directories, as one operating segment.

 

Critical accounting estimates

 

The preparation of financial statements in accordance with 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 our 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 our financial condition, changes in financial condition or results of operations. Our significant accounting polices as of December 31, 2007 are discussed in Note 2 of the notes to the consolidated financial statements included herein. The critical estimates inherent in these accounting polices as of December 31, 2007 are discussed below. Management believes the current assumptions and other considerations used to estimate these amounts in our consolidated financial statements are appropriate.

 

Intangible assets and goodwill valuation and amortization

 

Our intangible assets consist of directory services agreements between us and each of Qwest, AT&T and Embarq, respectively, a non-competition agreement between us and Sprint, established customer relationships and a third party contract, trademarks and trade names, an advertising commitment and technology and network platforms, all resulting from the Dex Media merger, AT&T Directory Acquisition, Embarq Directory Acquisition, Business.com Acquisition or Local Launch Acquisition. The intangible assets are being amortized over the period the assets are expected to contribute to our cash flow, which reflect the expected pattern of benefit. Our recorded goodwill resulted from the Dex Media merger, AT&T Directory Acquisition, Embarq Directory Acquisition, Business.com Acquisition and Local Launch Acquisition and is not subject to amortization, however is subject to annual impairment testing.

 

The intangible assets are subject to impairment testing in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , which we refer to as SFAS No. 144. We review the carrying value of its intangible assets for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable. The impairment test for the intangible assets is performed by comparing the carrying amount of the intangible assets to the sum of the undiscounted expected future cash flows relating to these assets. In accordance with SFAS No. 144, impairment exists if the sum of the future undiscounted cash flows is less than the carrying amount of the intangible asset, or its related group of assets. Impairment would result in a write-down of the intangible asset to its estimated fair value based on discounted future cash flows.

 

Goodwill is subject to impairment testing in accordance with SFAS No. 142, Goodwill and Other Intangible Assets , which we refer to as SFAS No. 142. Goodwill is tested for impairment by comparing the carrying amount of the reporting unit to the estimated fair value of the reporting unit. In accordance with

SFAS No. 142, impairment may exist if the carrying amount of the reporting unit is less than its estimated fair value. Impairment would result in a write-down equal to the difference between the carrying amount and the estimated fair value of the reporting unit goodwill.

 

We used certain estimates and assumptions in our impairment evaluations, including, but not limited to, projected future cash flows, revenue growth, customer attrition levels, and estimated write-offs. During the year ended December 31, 2007, we recognized an impairment charge of $20.0 million associated with the tradenames acquired in the Embarq Directory Acquisition. This impairment charge resulted from a change in our branding strategy to utilize a new Dex market brand for all of our print and online products across our entire footprint and discontinued use of the tradenames acquired in the Embarq Directory Acquisition. This impairment charge was determined using the relief from royalty valuation method and is included within depreciation and amortization expense on the consolidated statement of operations for the year ended December 31, 2007.

 

As a result of the decline in the trading value of our debt and equity securities during the three months ended March 31, 2008 and the continuing negative industry and economic trends that have directly affected our business, we performed impairment tests as of March 31, 2008 of our goodwill and definite-lived intangible assets in accordance with SFAS 142 and SFAS 144, respectively. Based on our testing results as of March 31, 2008, we recognized a non-cash impairment charge to our goodwill of $2.5 billion. There were no indications of impairment to our definite-lived intangible assets.

 

Had the aggregate net book value of the intangible assets and goodwill at March 31, 2008 been impaired by 1%, net income for the three months ended March 31, 2008 would have been adversely impacted by approximately $71.6 million.

 

Additionally, management must assess whether the remaining useful lives of the intangible assets represent the period that the intangible assets are expected to contribute to our cash flow. In our assessment process, we used certain estimates and assumptions, including projected future cash flows, customer attrition levels and industry and economic conditions. In accordance with SFAS No. 144, we evaluate the remaining useful lives of the intangible 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 asset would be amortized prospectively over that revised remaining useful life. For the year ended December 31, 2007, amortization of intangible assets was $408.3 million. Had the remaining useful lives of the intangible assets been shortened by 10%, net income in 2007 would have been adversely impacted by approximately $32.2 million.

 

Income taxes

 

We account for income taxes under the asset and liability method in accordance with SFAS No. 109, Accounting for Income Taxes , which we refer to as SFAS No. 109. Deferred tax liabilities or 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 tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

 

We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes: An Interpretation of FASB Statement No. 109 , which we refer to as FIN No. 48, on January 1, 2007. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109. FIN No. 48 prescribes a recognition threshold and measurement principles for the financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. Under FIN No. 48, the impact of an uncertain income tax position on an income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN No. 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transition requirements.

See Note 9, “Income Taxes,” of the notes to the consolidated financial statements included herein for more information regarding our provision (benefit) for income taxes as well as the impact of adopting FIN No. 48.

 

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. We 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 we 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 our financial reporting process, we must assess the likelihood that our deferred 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 tax assets that are estimated not to be ultimately recoverable. In this process, certain relevant criteria are evaluated including the existence of deferred tax liabilities that can be used to absorb deferred tax assets and taxable income in future years. Our 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 tax assets and an accompanying reduction or increase in net income in the period when such determinations are made.

 

In addition, we 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. We 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

 

We record our revenue net of an allowance for sales claims. In addition, we record a provision for bad debts. The provision for bad debts and allowance for sales claims are estimated based on historical experience. We also evaluate the current condition of our customer balances, bankruptcy filings, any change in credit policy, historical charge-off patterns, recovery rates and other data when determining our allowance for doubtful accounts reserve. We 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. We 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 these allowance percentages would have impacted 2007 net income by approximately $16.5 million.

 

Pension benefits

 

Our pension plan obligations and related assets of our defined benefit pension plans are presented in Note 10 to our consolidated financial statements included herein. 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, the rate of future salary increases and the long-term expected return on plan assets. During 2007 and 2006, we utilized the Citigroup Pension Liability Index as the appropriate discount rate for our defined benefit pension plans. This index is widely used by companies throughout the United States and is considered to be one of the preferred standards for establishing a discount rate. In 2005, the discount rate was determined using a methodology that discounts the projected plan cash flows to the measurement date using the spot rates provided in the Citigroup Pension Discount Curve. A single discount rate was then computed so that the present value of the benefit plans’ cash flows using this single rate equaled the present value computed using the Citigroup Pension Discount Curve. Salary increase assumptions are based upon historical experience and anticipated future management actions. Asset returns are based upon the anticipated average rate of earnings expected on invested funds of the plan over the long-run.

At December 31, 2007, the weighted-average actuarial assumptions were: discount rate of 5.90%; long-term rate of return on plan assets of 8.25% for RHD plans and 8.50% for Dex Media plans; and assumed salary increases of 3.66%. Net periodic pension costs recognized in 2007 were $12.8 million. A 1% increase in the discount rate would affect 2007 net income by approximately $3.5 million and a 1% decrease in the discount rate would affect 2007 net income by approximately $3.1 million; a 1% increase in assumed salary increases would affect 2007 net income by approximately $1.2 million and a 1% decrease in assumed salary increases would affect 2007 net income by approximately $1.1 million; and a 1% change in the long-term rate of return on plan assets would affect 2007 net income by approximately $2.3 million.

 

Stock-based compensation

 

On January 1, 2006, we adopted SFAS No. 123 (R), Share-Based Payment , which we refer to as SFAS No. 123 (R), using the Modified Prospective Method. Under this method, we are required to record compensation expense in the consolidated statement of operations for all employee stock-based awards granted, modified or settled after the date of adoption and for the unvested portion of previously granted stock awards that remain outstanding as of the beginning of the period of adoption based on their grant date fair values. Under SFAS No. 123 (R), the fair value of our stock-based awards is calculated using the Black-Scholes model at the time these stock-based awards are granted. SFAS No. 123 (R) and the use of the Black-Scholes model requires 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 and forfeiture rates to recognize stock-based compensation. The following assumptions were used in valuing stock-based awards and for recognition of stock-based compensation for the years ended December 31, 2007 and 2006:

 

 

We estimate expected volatility based on the historical volatility of the price of our common stock over the expected life of our stock-based awards. The expected life represents the period of time that stock-based awards granted are expected to be outstanding, which is estimated consistent with the simplified method identified in the SEC’s Staff Accounting Bulletin No. 107, which we refer to as SAB No. 107. The simplified method calculates the expected life as the average of the vesting and contractual terms of the award. The risk-free interest rate is based on applicable U.S. Treasury yields that approximate the expected life of stock-based awards granted. We also use historical data to estimate a forfeiture rate. Estimated forfeitures are adjusted to the extent actual forfeitures differ, or are expected to materially differ, from such estimates.

 

These assumptions reflect our best estimates, but they involve inherent uncertainties based on certain conditions generally outside our control. As a result, if other assumptions had been used, total stock-based compensation, as determined in accordance with SFAS No. 123 (R) could have been materially impacted. Furthermore, if we use different assumptions for future grants, stock-based compensation could be materially impacted in future periods.

 

New accounting pronouncements

 

In March 2008, the Financial Accounting Standards Board, or FASB, issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133, which we refer to as SFAS No. 161. SFAS No. 161 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and requires enhanced disclosures of derivative instruments and hedging activities such as the fair value of derivative instruments and presentation of their gains or losses in tabular format, as well as disclosures regarding credit risks and strategies and objectives for using derivative instruments. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. We are currently

evaluating the potential impact the adoption of SFAS No. 161 will have on our consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations , which we refer to as SFAS No. 141 (R). SFAS No. 141 (R) replaces SFAS No. 141, Business Combinations , which we refer to as SFAS No. 141, and establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141 (R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and earlier adoption is prohibited.

 

In December 2007, the SEC issued Staff Accounting Bulletin No. 110, “Use of a Simplified Method in Developing Expected Term of Share Options,” which we refer to as SAB No. 110. SAB No. 110 amends and replaces SAB No. 107, which expressed the views of the staff regarding the use of the “simplified” method in developing an estimate of the expected life of “plain vanilla” share options and allowed usage of the “simplified” method for share option grants prior to December 31, 2007. SAB No. 110 will continue to permit, under certain circumstances, the use of the simplified method beyond December 31, 2007. SAB No. 110 is effective January 1, 2008 and we do not expect the adoption of SAB No. 110 to have a material impact on our consolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115 , which we refer to as SFAS No. 159. SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective of SFAS No. 159 is to provide opportunities to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply hedge accounting provisions. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We adopted SFAS No. 159 effective January 1, 2008. The adoption of SFAS No. 159 did not have a material impact on our consolidated financial position and results of operations.

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements , which we refer to as SFAS No. 157, which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We adopted SFAS No. 157 effective January 1, 2008. The adoption of SFAS No. 157 did not have a material impact on our consolidated financial position and results of operations.

 

We have reviewed other new accounting standards not identified above and do not believe any other new standards will have a material impact on our financial position or operating results.

 

Results of operations

 

Three months ended March 31, 2008 compared to three months ended March 31, 2007

 

Factors affecting comparability

 

Reclassifications

 

Expenses presented as cost of revenues in our previous filings are now presented as production, publication and distribution expenses to more appropriately reflect the nature of these costs. Certain prior period amounts included in the condensed consolidated statement of operations have been reclassified to conform to the current period’s presentation. Selling and support expenses are now presented as a separate

expense category in the condensed consolidated statements of operations. In prior periods, certain selling and support expenses were included in production, publication and distribution expenses and others were included in general and administrative expenses. Additionally, beginning in the fourth quarter of 2007, we began classifying adjustments for customer claims to sales allowance, which is deducted from gross revenues to determine net revenues. In prior periods, adjustments for customer claims were included in bad debt expense under general and administrative expenses. Bad debt expense is now included under selling and support expenses. Accordingly, we have reclassified adjustments for customer claims and bad debt expense for the three months ended March 31, 2007 to conform to the current period’s presentation. These reclassifications had no impact on operating income or net income for the three months ended March 31, 2007. The table below summarizes these reclassifications.

 

 

Acquisitions

 

On August 23, 2007, we acquired Business.com, a leading business search engine and directory and performance based advertising network. Business.com now operates as a direct, wholly-owned subsidiary of RHD and the results of Business.com have been included in our consolidated results commencing August 23, 2007. Therefore, our consolidated results for the three months ended March 31, 2008 include the results of Business.com, with no comparable results for the three months ended March 31, 2007.

 

Impact of purchase accounting

 

As a result of the Dex Media merger and associated purchase accounting required by GAAP, we recorded deferred directory costs, such as print, paper, delivery and commissions, related to directories that were scheduled to publish subsequent to the Dex Media merger at their fair value, determined as (a) the estimated billable value of the published directory less (b) the expected costs to complete the directories, plus (c) a normal profit margin. We refer to this purchase accounting entry as “cost uplift.” Cost uplift associated with print, paper and delivery costs was amortized over the terms of the applicable directories to production, publication and distribution expenses, whereas cost uplift associated with commissions was amortized over the terms of the applicable directories to selling and support expenses. Cost uplift amortized to production, publication and distribution expenses and selling and support expenses totaled $8.9 million and $8.1 million, respectively, for the three months ended March 31, 2007, with no comparable expense for the three months ended March 31, 2008.

 

Net revenues

 

The components of our net revenues for the three months ended March 31, 2008 and 2007 were as follows:

 

 

Our directory advertising revenues are earned primarily from the sale of advertising in yellow pages directories we publish, net of sales claims and allowances. Directory advertising revenues also include revenues for Internet-based advertising products including online directories such as DexKnows.com and Business.com, and Internet Marketing services. Directory advertising revenues are affected by several factors, including changes in the quantity and size of advertisements, acquisition of new customers, renewal rates of existing customers, premium advertisements sold, changes in the advertisement pricing and the introduction of new products. 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, whereby revenues are initially deferred when a directory is published and recognized ratably over the directory’s life, which is typically 12 months. Revenues with respect to Internet-based services that are not sold with print advertising, such as Internet Marketing services, are recognized as delivered or fulfilled.

 

Gross directory advertising revenues for the three months ended March 31, 2008 increased $8.2 million, or 1.2%, from the three months ended March 31, 2007. The increase in gross directory advertising revenues for the three months ended March 31, 2008 is primarily due to revenues from Business.com, with no comparable revenues for the three months ended March 31, 2007. The increase in gross directory advertising revenues is also attributable to increased revenues from our online products and services in all of our markets. These increases are partially offset by declines in print revenues primarily as a result of declines in recurring business, mainly driven by weaker housing trends, reduced consumer confidence and more cautious advertiser spending in our markets given their perception of the economic health of their respective markets.

 

Sales claims and allowances for the three months ended March 31, 2008 decreased $6.4 million, or 35.2%, from the three months ended March 31, 2007. The decrease in sales claims and allowances for the three months ended March 31, 2008 is primarily due to improved quality and lower claims experience in our Qwest markets of $7.2 million.

 

Other revenues for the three months ended March 31, 2008 decreased $1.2 million, or 11.0%, from the three months ended March 31, 2007. 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. The decrease in other revenues for the three months ended March 31, 2008 is primarily a result of declines in barter revenues and certain other advertising-related products in our Qwest markets of $1.0 million.

 

Advertising sales is a 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 for the three months ended March 31, 2008 were $717.6 million, compared to $754.0 million for the three months ended March 31, 2007. Advertising sales for the three months ended March 31, 2007 include $13.3 million of advertising sales assuming the Business.com Acquisition occurred on January 1, 2007. The $36.4 million, or 4.8%, decrease in advertising sales for the three months ended March 31, 2008 is a result of declines in

recurring business, mainly driven by weaker housing trends, reduced consumer confidence and more cautious advertiser spending in our markets given their perception of the economic health of their respective markets. These declines are partially offset by increases in our new online products and services and Business.com advertising sales.

 

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, whereby revenues are initially deferred when a directory is published and recognized ratably over the directory’s life, which is typically 12 months. Revenues with respect to Internet-based services that are not sold with print advertising, such as Internet Marketing services, are recognized as delivered or fulfilled.

 

Expenses

 

The components of our total expenses for the three months ended March 31, 2008 and 2007 were as follows:

 

 

Our expenses during the three months ended March 31, 2008 and 2007 include costs associated with our Triple Play strategy, with focus on our online products and services, and our directory publishing business with new product introductions in our Qwest, Embarq and AT&T markets. These costs relate to the continued launch of our new Dex market brand and our new uniform resource locator, or URL, DexKnows.com, across our entire footprint, the continued introduction of plus companion directories in our Embarq and AT&T markets, as well as associated marketing and advertising campaigns, employee training associated with new product introductions and modernization and consolidation of our IT platform. We expect that these expenses will drive future advertising sales and revenue improvements.

 

Certain costs directly related to the selling and production of directories are initially deferred and recognized ratably over the life of the directory under the deferral and amortization method of accounting, 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 advertisers and to CMRs, which act as our channel to national advertisers. 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. 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, publication and distribution expenses

 

Total production, publication and distribution expenses for the three months ended March 31, 2008 were $109.2 million compared to $114.6 million for the three months ended March 31, 2007. The primary components of the $5.4 million, or 4.7%, decrease in production, publication and distribution expenses were as follows:

 

 

During the three months ended March 31, 2008, we incurred $8.6 million of additional expenses related to internet production and distribution due to additional expenses from Business.com, with no comparable expenses for the three months ended March 31, 2007, and increased operations, distribution and clicks costs associated with increased revenues from our online products and services.

 

Amortization of cost uplift during the three months ended March 31, 2007 totaled $8.9 million, with no comparable expense for the three months ended March 31, 2008.

 

During the three months ended March 31, 2008, IT expenses declined $3.6 million, compared to the three months ended March 31, 2007, primarily due to cost savings resulting from lower rates associated with an IT contract that became effective in July 2007. This decline is partially offset by additional spending associated with our IT infrastructure to support our Triple Play products and services, and enhancements and technical support of multiple production systems as we continue to integrate to a consolidated IT platform.

 

During the three months ended March 31, 2008, print, paper and distribution costs declined $2.9 million, compared to the three months ended March 31, 2007. This decline is primarily due to our print product optimization program and negotiated price reductions in our print expenses.

 

Selling and support expenses

 

Total selling and support expenses for the three months ended March 31, 2008 were $186.3 million, compared to $178.2 million reported for the three months ended March 31, 2007. The primary components of the $8.1 million, or 4.5%, increase in selling and support expenses were as follows:

 

 

During the three months ended March 31, 2008, we incurred $9.1 million of additional advertising and branding expenses as compared to the three months ended March 31, 2007. Advertising expense for the three months ended March 31, 2008 includes $8.0 million of costs associated with traffic purchased and distributed to multiple advertiser landing pages, with no comparable expense for the prior corresponding period. The

remaining increase in advertising and branding expenses relates to costs incurred to promote our Triple Play strategy, our Dex brand name for all of our print and online products, as well as the use of DexKnows.com as our new URL across our entire footprint.

 

During the three months ended March 31, 2008, bad debt expense increased $8.8 million, compared to the three months ended March 31, 2007, primarily due to higher provision rates, deterioration in accounts receivable aging categories and write-offs, which have been driven by weaker housing trends, reduced consumer confidence and more cautious advertiser spending in our markets given their perception of the economic health of their respective markets.

 

Amortization of cost uplift during the three months ended March 31, 2007 totaled $8.1 million, with no comparable expense for the three months ended March 31, 2008.

 

General and administrative expenses

 

General and administrative, or G&A, expenses for the three months ended March 31, 2008 were $34.9 million compared to $37.5 million for the three months ended March 31, 2007. The primary components of the $2.6 million, or 6.9%, decrease in G&A expenses were as follows:

 

 

During the three months ended March 31, 2008, non-cash stock-based compensation expense under SFAS No. 123 (R) declined $3.7 million, compared to the three months ended March 31, 2007, primarily due to additional expense related to vesting of awards granted to retirement or early retirement eligible employees during the three months ended March 31, 2007.

 

During the three months ended March 31, 2008, IT expenses declined $1.3 million, compared to the three months ended March 31, 2007, primarily due to cost savings resulting from lower rates associated with an IT contract that became effective in July 2007. This decline is partially offset by additional spending associated with our IT infrastructure to support our Triple Play products and services, and enhancements and technical support of multiple production systems as we continue to integrate to a consolidated IT platform.

 

Depreciation and amortization

 

Depreciation and amortization expense for the three months ended March 31, 2008 was $118.3 million compared to $103.0 million for the three months ended March 31, 2007. Amortization of intangible assets was $104.0 million for the three months ended March 31, 2008 compared to $89.8 million for the three months ended March 31, 2007. The increase in amortization expense for the three months ended March 31, 2008 is primarily due to recognizing a full period of amortization expense related to the local customer relationships intangible asset acquired in the Dex Media merger of $7.5 million, which commenced in February 2007, and amortization of intangible assets acquired in the Business.com Acquisition of $4.9 million.

 

Depreciation of fixed assets and amortization of computer software was $14.3 million for the three months ended March 31, 2008 compared to $13.2 million for the three months ended March 31, 2007. The increase in depreciation expense for the three months ended March 31, 2008 was primarily due to recognizing depreciation expense related to capital projects placed in service during 2007.

 

Goodwill impairment

 

As a result of the decline in the trading value of our debt and equity securities during the three months ended March 31, 2008 and continuing negative industry and economic trends that have directly affected our

business, we performed impairment tests as of March 31, 2008 of our goodwill and definite-lived intangible assets in accordance with SFAS No. 142 and SFAS No. 144, respectively. We used certain estimates and assumptions in our impairment evaluations, including, but not limited to, projected future cash flows, revenue growth and customer attrition levels.

 

The impairment test of our definite-lived intangible assets was performed by comparing the carrying amount of our intangible assets to the sum of their undiscounted expected future cash flows. In accordance with SFAS No. 144, impairment exists if the sum of the undiscounted expected future cash flows is less than the carrying amount of the intangible asset, or its related group of assets. Our testing results of our definite-lived intangible assets indicated no impairment as of March 31, 2008. No impairment losses were recorded related to our definite-lived intangible assets during the three months ended March 31, 2008 and 2007.

 

The impairment test for our goodwill involved a two step process. The first step involved comparing our fair value with the carrying amount of our assets and liabilities, including goodwill. Our fair value was determined using a market based approach, which reflects the market value of its debt and equity securities as of March 31, 2008. As a result of our testing, we determined that our 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 is determined by comparing the implied fair value of our goodwill to the recorded amount of goodwill. The implied fair value of goodwill is derived from a discounted cash flow analysis using a discount rate that results in the present value of assets and liabilities equal to the current fair value of our debt and equity securities. Based upon this analysis, we recognized a non-cash impairment charge of $2.5 billion during the three months ended March 31, 2008.

 

No impairment losses were recorded related to our goodwill during the three months ended March 31, 2007.

 

If the trading value of our debt and equity securities further declines, we will be required to again assess the fair values of our assets and liabilities and could conclude that goodwill and other long-lived assets are further impaired, which would result in additional impairment charges. In addition, if economic conditions in certain of our markets do not improve, we will be required to assess the recoverability of other intangible assets, which could result in additional impairment charges.

 

Operating (loss) income

 

Operating (loss) income for the three months ended March 31, 2008 and 2007 was as follows:

 

 

Operating loss for the three months ended March 31, 2008 of $2.2 billion compares to operating income of $228.0 million for the three months ended March 31, 2007. The change to operating loss for the three months ended March 31, 2008 from operating income for the three months ended March 31, 2007 is primarily due to the non-cash goodwill impairment charge noted above as well as the revenue and expense trends described above.

 

Interest expense, net

 

Net interest expense for the three months ended March 31, 2008 was $195.9 million compared to $201.6 million for the three months ended March 31, 2007, and includes $5.4 million and $6.8 million, respectively, of non-cash amortization of deferred financing costs. The decrease in net interest expense of $5.7 million, or 2.8%, for the three months ended March 31, 2008 is primarily due to lower interest rates associated with our refinancing transactions conducted during the fourth quarter of 2007, as well as lower interest rates on our variable rate debt during the period. See “Liquidity and capital resources” for further detail regarding our debt obligations.

 

In conjunction with the Dex Media merger and as a result of purchase accounting required under GAAP, we recorded Dex Media’s debt at its fair value on January 31, 2006. We recognize an offset to interest expense each period for the amortization of the corresponding fair value adjustment over the life of the respective debt. The offset to interest expense was $4.3 million and $7.6 million for the three months ended March 31, 2008 and 2007, respectively. The decline in the amortization of the fair value adjustment for the three months ended March 31, 2008 is directly attributable to our refinancing transactions conducted during the fourth quarter of 2007.

 

Income taxes

 

The effective tax rate on loss before income taxes of 33.3% for the three months ended March 31, 2008 compares to an effective tax rate of 39.5% on income before income taxes for the three months ended March 31, 2007. As a result of the non-cash goodwill impairment charge of $2.5 billion recorded during the three months ended March 31, 2008, we recognized a decrease in our deferred tax liability of $825.1 million, which directly impacted our deferred tax benefit. The change in the effective tax rate for the three months ended March 31, 2008 is primarily due to the tax consequences of the non-cash goodwill impairment charge. The change in the effective tax rate is also attributable to the refinancing transactions conducted during the fourth quarter of 2007, which shifted interest expense to our subsidiaries with lower state income tax rates, and an increase in our valuation allowance related to certain 2008 state tax losses.

 

Net (loss) income and (loss) earnings per share

 

Net loss for the three months ended March 31, 2008 of $1.6 billion compares to net income of $16.0 million for the three months ended March 31, 2007. The change to net loss for the three months ended March 31, 2008 from net income for the three months ended March 31, 2007 is primarily due to the non-cash goodwill impairment charge noted above as well as the revenue and expense trends described above.

 

We account for (loss) earnings per share, or EPS, in accordance with SFAS No. 128, Earnings Per Share , or SFAS No. 128. Under the guidance of SFAS No. 128, diluted EPS is calculated by dividing net (loss) income by the weighted average common shares outstanding plus dilutive potential common stock. Potential common stock includes stock options, stock appreciation rights, or SARs, and restricted stock, the dilutive effect of which is calculated using the treasury stock method.

 

See Note 2, “Summary of Significant Accounting Policies,” in the notes to our unaudited financial statements included in this prospectus for further details and computations of the basic and diluted EPS amounts. For the three months ended March 31, 2008, basic EPS was $(23.60), compared to basic EPS of $0.23 for the three months ended March 31, 2007. For the three months ended March 31, 2008, diluted EPS was $(23.60), compared to diluted EPS of $0.22 for the three months ended March 31, 2007. Due to the fact that there was a reported net loss for the three months ended March 31, 2008, the calculation of diluted EPS was anti-dilutive compared to basic EPS. Diluted EPS cannot be greater (or less of a loss) than basic EPS. Therefore, reported basic EPS and diluted EPS were the same for the three months ended March 31, 2008.

 

Year ended December 31, 2007 compared to year ended December 31, 2006

 

Factors affecting comparability

 

Reclassifications

 

Certain prior period amounts included in the consolidated statements of operations have been reclassified to conform to the current period’s presentation. Selling and support expenses are now presented as a separate expense category in the consolidated statements of operations. In prior periods, certain selling and support expenses were included in cost of revenue and others were included in general and administrative expenses. Additionally, beginning in 2007, we began classifying adjustments for customer claims to sales allowance, which is deducted from gross revenue to determine net revenue. In prior periods, adjustments for customer claims were included in bad debt expense under general and administrative expenses. Bad debt expense is now included under selling and support expenses. Accordingly, we have reclassified adjustments for customer

claims and bad debt expense in 2006 to conform to the current period’s presentation. These reclassifications had no impact on operating income or net income for the years ended December 31, 2007 and 2006. The table below summarizes these reclassifications.

 

 

Acquisitions