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
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The terms of the
series A-4
senior notes to be issued, which we refer to as the exchange
notes, are substantially identical to the outstanding
series A-4
senior notes, which we refer to as the outstanding notes, that
were issued on October 2, 2007 and October 17, 2007 by
R.H. Donnelley Corporation, or RHD, except for transfer
restrictions and registration rights provisions relating to the
outstanding notes that will not apply to the exchange notes.
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Interest on the exchange notes accrues at the rate of 8.875% per
year, payable on April 15 and October 15 of each year, with the
first payment on April 15, 2008.
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The exchange notes will not be guaranteed by any of our
subsidiaries.
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The exchange notes will be our senior unsecured obligations and
will rank senior in right of payment to all of our future senior
subordinated debt and future subordinated obligations and
equally with any of our existing and future senior unsecured
debt, including our existing 6.875% senior notes due 2013,
which we refer to as the 6.875% senior notes, our existing
6.875%
series A-1
senior discount notes due 2013, which we refer to as the
series A-1
senior discount notes, our existing 6.875%
series A-2
senior discount notes due 2013, which we refer to as the
series A-2
senior discount notes, and our existing 8.875%
series A-3
senior notes due 2016, which we refer to as the
series A-3
senior notes. The exchange notes will be effectively
subordinated in right of payment to all of our existing and
future secured debt, including our guarantee of borrowings under
the amended and restated credit facility of R.H. Donnelley
Inc., which we refer to as RHDI, to the extent of the value of
the assets securing such debt, and will be structurally
subordinated to any existing and future liabilities (including
trade payables) of RHDs subsidiaries, including, without
limitation, RHDI and Dex Media, Inc., or Dex Media, and their
direct and indirect existing and future subsidiaries.
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Material Terms of the Exchange Offer
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Expires at 8:00 a.m., New York City time, on July 25, 2008,
unless extended.
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All outstanding notes that are validly tendered and not validly
withdrawn will be exchanged for an equal principal amount at
maturity of exchange notes which are registered under the
Securities Act of 1933, which we refer to as the Securities Act.
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Tenders of outstanding notes may be withdrawn at any time prior
to the expiration of the exchange offer.
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We will not receive any cash proceeds from the exchange offer.
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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 RHDs 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
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1
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13
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30
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30
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32
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37
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97
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100
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119
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159
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162
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181
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190
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234
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237
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242
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244
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244
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244
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245
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F-1
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i
The following trademark referred to in this prospectus is a
registered trademark of Embarq Corporation (the successor to
Sprint Corporations (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:
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our ability to meet our substantial debt service obligations;
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risks and uncertainties caused by the restrictive covenants
under the terms of our and our subsidiaries debt
agreements;
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declines in the usage of print Yellow Pages directories,
declines in advertising sales and changes in technology;
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competition in the directory advertising industry and other
competitive media, including the Internet;
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recognition of impairment charges for our intangible assets or
goodwill;
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uncertainties in upgrading and modernizing our information
technology, or IT, systems;
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risk of bankruptcy proceedings against Qwest, Embarq and
AT&T and their respective affiliates with whom we have
contracted during the term of our commercial contracts with them;
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the loss of, or our inability to enforce, key agreements with
Sprint, Embarq, AT&T and Qwest;
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increase of our costs due to future changes in directory
publishing obligations in Qwest and AT&T markets and other
regulatory matters;
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risks arising from our reliance on and extensions of credit to
small- and medium-sized businesses;
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our dependence on third-party providers of printing,
distribution, delivery and IT services;
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fluctuations in the price and availability of paper;
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risks associated with our sales of advertising to national
accounts coordinated by third parties;
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general economic conditions and consumer sentiment in our
markets;
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increased operating costs from potential work stoppages at Dex
Media or if a greater percentage of our aggregate workforce
becomes unionized;
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risks arising from turnover among our account executives or loss
of key personnel;
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loss of important intellectual property rights;
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litigation risks; and
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the risk that no active public trading market develops for the
notes.
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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 managements 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.
iii
Summary
This summary may not contain all of the information that may
be important to you. You should read the entire prospectus,
including the financial statements and related notes included
herein, before making an investment decision. In this
prospectus, unless otherwise indicated or the context indicates
otherwise:
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RHD refers to R.H. Donnelley Corporation, as issuer
of the notes;
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RHDI refers to R.H. Donnelley Inc., a direct wholly
owned subsidiary of RHD;
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Dex Media refers to Dex Media, Inc., a direct wholly
owned subsidiary of RHD;
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Dex Media East refers to Dex Media East LLC, an
indirect wholly owned subsidiary of Dex Media;
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Dex Media West refers to Dex Media West LLC, an
indirect wholly owned subsidiary of Dex Media;
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Qwest Dex refers collectively to Qwest Dex, Inc. and
its parent, Qwest Dex Holdings, Inc.;
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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;
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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;
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Dex Media states refers to the Dex West states and
Dex East states;
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Qwest refers to Qwest Communications International
Inc. and its subsidiaries, including Qwest Corporation, the
local exchange carrier subsidiary of Qwest;
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Local Launch refers to Local Launch, Inc., a direct
wholly owned subsidiary of RHD;
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Business.com refers to Business.com, Inc., a direct
wholly owned subsidiary of RHD;
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Sprint refers to Sprint Nextel Corporation;
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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;
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Embarq refers to Embarq Corporation, the successor
to Sprints local communications business;
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AT&T refers to AT&T Inc., successor to SBC
Communications, Inc.; and
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the terms we, us and our
refer to RHD and all of its direct and indirect wholly owned
subsidiaries.
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R.H.
Donnelley Corporation
Corporate
overview
We are one of the nations 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 and
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 countrys most attractive markets including
Albuquerque, Chicago, Denver, Las Vegas, Orlando, and Phoenix.
Our print directories
1
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
affordable 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 Internet Yellow
Pages, or 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
search engine 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 that host our local business listings and content
and through search engine marketing, or SEM, and search engine
optimization, or SEO, services, which we collectively refer to
as Internet marketing.
This compelling set of Triple Play products and services, in
turn, generates among the strongest returns for advertisers of
any advertising media available today. 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.
Information
about RHD
Our principal executive offices are located at 1001 Winstead
Drive, Cary, North Carolina 27513, and our telephone number at
that location is
(919) 297-1600.
RHDs common stock is listed on The New York Stock Exchange
under the symbol RHD. RHDs predecessor
corporation, The Dun & Bradstreet Corporation, or
D&B, was incorporated in 1973 under Delaware law.
RHDs website is located at www.rhd.com. Information
contained on RHDs website is not part of this prospectus.
Recent
developments
Recent
refinancing activities
We have recently undertaken certain refinancing activities.
These refinancing activities include the recently completed
exchange offers of new 11.75% senior notes due 2015 of RHDI,
which we refer to as the 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. We collectively refer to these exchange offers as
the RHDI exchange offers. 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
RHDIs 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 revolver 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 credit
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.
2
The
exchange offer
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The exchange offer
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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.
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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.
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Registration rights agreement
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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.
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If you fail to exchange your outstanding notes
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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.
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Expiration date
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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.
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Conditions to the exchange offer
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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.
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We reserve the right, subject to applicable law, at any time and
from time to time, but before the expiration of the exchange
offer:
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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;
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to terminate the exchange offer if specified
conditions have not been satisfied; and
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to waive any condition or otherwise amend the terms
of the exchange offer in any respect.
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For additional information, see The exchange
offer Expiration date; extensions; amendments.
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Procedure for tendering notes
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If you wish to tender your outstanding notes for exchange, you
must:
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complete and sign the enclosed letter of transmittal
by following the related instructions; and
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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.
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Brokers, dealers, commercial banks, trust companies and other
nominees may also effect tenders by book-entry transfer.
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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.
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Special procedures for beneficial owners
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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.
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Withdrawal rights
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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.
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Federal income tax considerations
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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.
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Resale of exchange notes
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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:
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you are acquiring the exchange notes in the ordinary
course of business;
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you are not engaged in, and do not intend to engage
in, a distribution of the exchange notes;
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you do not have any arrangement or understanding
with any person to participate in the distribution of the
exchange notes;
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you are not a broker-dealer tendering outstanding
notes acquired directly from us for your own account;
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you are not one of our affiliates, as defined in
Rule 405 of the Securities Act of 1933, or the Securities
Act; and
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you are not prohibited by law or any policy of the
SEC from participating in the exchange offer.
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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.
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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.
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We do not and will not assume or indemnify you against this
liability.
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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.
|
The
exchange notes
The following summary contains basic information about the
exchange notes and is not intended to be complete. For a more
complete description of the terms of the notes, see
Description of notes.
|
|
|
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 RHDs senior unsecured
obligations and will rank senior in right of payment to any of
RHDs future unsecured senior subordinated indebtedness and
future subordinated
|
5
|
|
|
|
|
indebtedness and equally in right of payment to RHDs
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 RHDs 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 RHDs 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 RHDIs 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
|
6
|
|
|
|
|
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 & Poors Rating Group, a division of
McGraw-Hill, Inc., or Moodys Investors 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.
|
Risk
factors
You should read and consider carefully all the information set
forth in this prospectus and, in particular, should evaluate the
specific factors under the section Risk factors
beginning on page 13 in deciding whether to exchange any
outstanding notes for exchange notes.
7
Summary
consolidated financial data
The following table shows summary consolidated financial data
for RHD. The data as of and for each of the years in the
three-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 RHDs 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 generally accepted accounting principles, or
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 periods
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 periods 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
You should read the following summary financial data together
with the information contained under the caption
Managements discussion and analysis of financial
condition and results of operations and RHDs
consolidated financial statements, including the related notes,
and the other information included in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
9
|
|
|
(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 Managements 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 Managements 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 RHDs 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
|
10
|
|
|
|
|
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
Managements 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA reflects non-cash stock-based compensation expense
totaling $43.3 million and $39.0 million for the years
ended December 31, 2006 and 2007, respectively, and
$13.9 million and $10.8 million for the three months
ended March 31, 2007 and 2008, respectively.
The following table summarizes the total effect on EBITDA as a
result of purchase accounting related to our acquisitions. The
amounts presented below represent total incremental net revenue
and expenses (other than depreciation and amortization) for the
respective periods which would have been reported absent
purchase accounting, assuming each acquisition occurred at the
beginning of the year it was consummated. In addition, under the
caption Managements discussion and analysis of
financial condition and results of operations Year
ended December 31, 2006 compared to Year Ended
December 31, 2005 Non-GAAP measures
Adjusted pro forma and combined adjusted amounts,
management has presented further combined adjusted information
for the year ended December 31, 2005, which includes the
adjustments presented below and Dex Medias reported GAAP
net revenue of $1,658.4 million and expenses (other than
depreciation and amortization) of $757.2 million for the
year ended December 31, 2005. See Managements
discussion and analysis of financial condition and results of
operations for further discussion of these items.
11
|
|
|
|
|
|
|
|
|
|
|
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.
|
In conjunction with the Dex Media merger and as a result of
purchase accounting required under GAAP, we recorded Dex
Medias debt at its fair value on January 31, 2006. We
recognize an offset to interest expense in each period for the
amortization of the corresponding fair value adjustment over the
life of the respective debt. The offset to interest expense was
$92.1 million for the year ended December 31, 2007,
compared to $26.4 million for the year ended
December 31, 2006. The offset to interest expense for the
year ended December 31, 2007 includes $62.2 million
related to the redemption of Dex Media Easts outstanding
9.875% senior notes and 12.125% senior subordinated
notes on November 26, 2007. The offset to interest expense
was $7.6 million and $4.3 million for the three months
ended March 31, 2007 and 2008, respectively. The decline in
the amortization of the fair value adjustment for the three
months ended March 31, 2008 was directly attributable to
our refinancing transactions conducted during the fourth quarter
of 2007.
|
|
|
(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:
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|
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|
|
|
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
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|
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.
|
Due to our losses in the three months ended March 31, 2008
and in the year ended December 31, 2006, the ratio was less
than 1:1 for these periods. We would have had to generate
additional earnings of $2,433.5 million and
$322.2 million to achieve a coverage ratio of 1:1 for the
three months ended March 31, 2008 and the year ended
December 31, 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.
12
Risk
factors
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&Ts 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:
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|
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our ability to obtain additional financing in excess of the
borrowing capacity under the revolving portions of the various
credit facilities of our subsidiaries on satisfactory terms to
fund working capital requirements, capital expenditures,
acquisitions, investments, debt service requirements, stock
repurchases, dividends and other general corporate requirements
is limited;
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|
we are more vulnerable to general economic downturns,
competition and industry conditions, which could place us at a
competitive disadvantage compared to our competitors that may be
less leveraged;
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|
we face increased exposure to rising interest rates as a portion
of our debt is at variable interest rates;
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|
we have reduced availability of cash flow to fund working
capital requirements, capital expenditures, acquisitions or
other strategic initiatives, investments and other general
corporate requirements because a substantial portion of our cash
flow is needed to service our debt obligations;
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|
|
we have limited flexibility in planning for, or reacting to,
changes in our business and the industry in which we operate;
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|
|
|
the agreements governing our debt substantially limit our
ability to access the cash flow and value of our subsidiaries
and, therefore, to make payments on our notes and the notes of
our subsidiaries;
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|
|
|
our ability to borrow additional funds or refinance existing
indebtedness may be limited; and
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|
|
there could be a material adverse effect on our business and
financial condition if we were unable to service our debt or
obtain additional financing, as needed.
|
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.
13
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:
|
|
|
|
|
incur additional debt;
|
|
|
|
pay dividends on, redeem or repurchase capital stock, which in
the case of our restricted subsidiaries could adversely affect
the ability of RHD to satisfy its obligations under the notes
(for more information, see the risk factor entitled 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 below in this prospectus);
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|
|
|
make certain investments;
|
|
|
|
enter into certain types of transactions with affiliates;
|
|
|
|
expand into unrelated businesses;
|
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|
|
create liens;
|
|
|
|
|
|
sell certain assets or merge with or into other companies;
|
|
|
|
|
|
in the case of the indenture governing the RHDI notes, enter
into agreements that restrict dividends to RHDI and its
restricted subsidiaries;
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|
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|
|
designate subsidiaries as unrestricted subsidiaries; and
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|
enter into guarantees of debt.
|
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
RHDIs 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 RHDIs 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 Medias 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.
14
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
15
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
16
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:
|
|
|
|
|
impair our ability to maintain or increase our advertising
prices;
|
|
|
|
cause businesses that purchase advertising in our Yellow Pages
directories to reduce or discontinue those purchases; and
|
|
|
|
discourage businesses that do not purchase advertising in our
Yellow Pages directories from doing so.
|
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.
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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 Qwests public filings
and announcements, Qwest has taken measures to improve its
18
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:
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Any of them, or a trustee acting on their behalf, could seek to
reject our agreements with them as executory
contracts under U.S. bankruptcy law, thus allowing them to
avoid their obligations under such contracts. Loss of
substantial rights under these agreements could effectively
require us to operate our business as an independent directory
business, which could have a material adverse effect on us.
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Any of them, or a trustee acting on their behalf, could seek to
sell certain of their assets, including the assets relating to
their local telephone business, to third parties pursuant to the
approval of the bankruptcy court. In such case, the purchaser of
any such assets might be able to avoid, among other things, our
rights under the respective directory service license and
publishing agreements, trademark license agreements and
non-competition agreements with our telecommunications partners.
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In the case of Qwest, we may have difficulties obtaining the
funds collected by Qwest on our behalf pursuant to the billing
and collection service agreements at the time such proceeding is
instituted, although pursuant to such agreements, Qwest prepares
settlement statements ten times per month for each state in the
Dex Media states summarizing the amounts due to Dex Media East
and Dex Media West and purchases Dex Media Easts and Dex
Media Wests accounts receivable billed by it within
approximately nine business days following such settlement date.
Further, if Qwest continued to bill our customers pursuant to
the billing and collection services agreement following any such
bankruptcy filing, customers of Qwest may be less likely to pay
on time, or at all, bills received, including the amount owed to
us.
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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 companys 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
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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
Sprints 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:
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to the extent it is necessary to protect a legitimate business
interest of the party seeking enforcement;
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if it does not unreasonably restrain the party against whom
enforcement is sought; and
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if it is not contrary to the public interest.
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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&Ts 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 Qwests 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 Qwests 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 Qwests 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.
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Pursuant to the directory services license agreement with
AT&T, we are required to discharge AT&Ts
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&Ts 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 Embarqs 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
21
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
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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:
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the general possibility, express threat or future occurrence of
terrorist or other related disruptive events; or
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the United States continuing or expanded involvement in
war, especially with respect to the major markets in which we
operate that depend heavily upon travel, tourism or the military.
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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 Medias collective
bargaining agreement with the International Brotherhood of
Electrical Workers of America, or IBEW, which covers
approximately 500 of Dex Medias unionized
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workforce, expires in May 2009, and Dex Medias collective
bargaining agreement with the Communication Workers of America,
or CWA, which covers approximately 1,000 of Dex Medias
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.
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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 RHDs 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, RHDs subsidiaries will be permitted under the
terms of their credit facilities and RHDs 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, RHDs subsidiaries may incur liabilities that are
not considered debt under the indentures governing RHDs
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 RHDs secured
debt and the notes will be structurally subordinated to
RHDs 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 RHDIs and RHDIs 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 RHDs 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 Medias 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 RHDs 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 RHDs 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 RHDs secured debt, if any, or holders of the debt of
RHDs 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 subsidiarys
creditors, except to the extent that claims of RHD itself as a
creditor of the subsidiary may be recognized. After the payment
of the subsidiarys liabilities, the subsidiary may not
have enough assets remaining to pay to RHD to permit RHDs
creditors, including the holders of the notes, to be paid.
25
The
notes will not be obligations of RHDs
subsidiaries.
RHDs subsidiaries are separate and distinct legal
entities. RHDs subsidiaries are not the issuers of the
notes and will not guarantee the obligations of RHD under the
notes. RHDs 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 RHDIs 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 RHDs
subsidiaries to it are subject to contractual restrictions and
could be subject to statutory restrictions.
RHDs subsidiaries may not have or may not provide
sufficient funds for RHD to make payments on the notes.
RHDs 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 RHDs
subsidiaries, the agreements governing RHDs 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 RHDs and its
subsidiaries ability to, among other things, dispose of
assets (including the stock of RHDs 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.
RHDs 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 subsidiarys 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.
26
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
27
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 Moodys Investors
Service, Inc. or Standard & Poors 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
28
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.
29
Use of
proceeds
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31, 2008
|
|
|
|
Actual
|
|
|
Adjustments
|
|
|
As Adjusted
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(Dollars in thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
29,901
|
|
|
$
|
(17,701
|
)
|
|
$
|
12,200
|
|
Current portion of long-term debt
|
|
|
186,343
|
|
|
|
|
|
|
|
186,343
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
RHD(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
6.875% senior notes due 2013
|
|
|
300,000
|
|
|
|
(47,680
|
)
|
|
|
252,320
|
|
6.875%
series A-1
senior discount notes due 2013
|
|
|
340,211
|
|
|
|
(29,099
|
)(2)
|
|
|
311,112
|
|
6.875%
series A-2
senior discount notes due 2013
|
|
|
615,438
|
|
|
|
(92,794
|
)(3)
|
|
|
522,644
|
|
8.875%
series A-3
senior notes due 2016
|
|
|
1,210,000
|
|
|
|
(151,161
|
)
|
|
|
1,058,839
|
|
8.875%
series A-4
senior notes due 2017
|
|
|
1,500,000
|
|
|
|
(264,740
|
)
|
|
|
1,235,260
|
|
RHDI
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit facility(4)
|
|
|
1,507,648
|
|
|
|
|
|
|
|
1,507,648
|
|
11.75% senior notes due 2015(1)
|
|
|
|
|
|
|
412,871
|
|
|
|
412,871
|
|
Dex Media
|
|
|
|
|
|
|
|
|
|
|
|
|
8% senior notes due 2010
|
|
|
511,686
|
|
|
|
|
|
|
|
511,686
|
|
9% senior discount notes due 2013
|
|
|
733,824
|
|
|
|
|
|
|
|
733,824
|
|
Dex Media East
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit facility(5)
|
|
|
1,101,900
|
|
|
|
|
|
|
|
1,101,900
|
|
Dex Media West
|
|
|
|
|
|
|
|
|
|
|
|
|
Previous credit facility(6)
|
|
|
1,031,061
|
|
|
|
(1,031,061
|
)
|
|
|
|
|
New credit facility(6)
|
|
|
|
|
|
|
1,080,000
|
|
|
|
1,080,000
|
|
8.5% senior notes due 2010
|
|
|
397,554
|
|
|
|
|
|
|
|
397,554
|
|
5.875% senior notes due 2011
|
|
|
8,770
|
|
|
|
|
|
|
|
8,770
|
|
9.875% senior subordinated notes due 2013
|
|
|
822,754
|
|
|
|
|
|
|
|
822,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt (including current portion)
|
|
|
10,080,846
|
|
|
|
(123,664
|
)
|
|
|
9,957,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity(7):
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
88,169
|
|
|
|
|
|
|
|
88,169
|
|
Additional paid-in capital
|
|
|
2,412,878
|
|
|
|
|
|
|
|
2,412,878
|
|
Treasury stock
|
|
|
(256,296
|
)
|
|
|
|
|
|
|
(256,296
|
)
|
Accumulated deficit
|
|
|
(2,008,651
|
)
|
|
|
158,826
|
|
|
|
(1,849,825
|
)
|
Accumulated other comprehensive loss
|
|
|
(53,096
|
)
|
|
|
|
|
|
|
(53,096
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
183,004
|
|
|
|
158,826
|
|
|
|
341,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
10,263,850
|
|
|
$
|
35,162
|
|
|
$
|
10,299,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
(1)
|
|
Reflects the exchange of approximately $47.7 million of the
6.875% senior notes, $31.2 million ($29.1 million
accreted value) of the 6.875%
series A-1
senior discount notes, $99.5 million ($92.8 million
accreted value) of the 6.875%
series A-2
senior discount notes, $151.2 million of the 8.875%
series A-3
senior notes and $264.7 million of the 8.875%
series A-4
senior notes for approximately $412.9 million of RHDI
notes. The RHDI exchange offers resulted in a gain of
approximately $172.6 million. The RHDI exchange offers will
be accounted for as an extinguishment of debt resulting in the
write-off of unamortized deferred financing costs of
$11.6 million related to the old notes.
|
|
|
|
(2)
|
|
Represents the accreted value at March 31, 2008 of
approximately $31.2 million principal amount at maturity of
the 6.875%
series A-1
senior discount notes.
|
|
|
|
(3)
|
|
Represents the accreted value at March 31, 2008 of
approximately $99.5 million principal amount at maturity of
the 6.875%
series A-2
senior discount notes.
|
|
|
|
(4)
|
|
The RHDI credit facility was amended to, among other things,
amend the indebtedness and restricted payment covenants to allow
for the issuance of the new notes and related subsidiary
guarantees pursuant to the RHDI exchange offers, as well as
modifications to pricing and financial covenants. The RHDI
credit facility also includes a $175.0 million revolving
credit tranche, which was undrawn at March 31, 2008. Fees
incurred in connection with this amendment of $17.7 million
were funded through cash on hand.
|
|
|
|
(5)
|
|
An additional $95.1 million of commitments is available to
be drawn under the revolving credit facility of the Dex Media
East credit facility.
|
|
|
|
(6)
|
|
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, and includes a $400.0 million
uncommitted incremental facility that may be incurred as
additional revolving loans or additional term loans. Dex Media
West borrowed $1,080.0 million under this credit facility
upon the consummation of the refinancing. The remaining proceeds
of $48.9 million were used to pay fees and expenses
associated with the refinancing of the Dex Media West credit
facility. This refinancing will be accounted for as an
extinguishment of debt resulting in a loss of approximately
$2.2 million associated with the write-off of unamortized
deferred financing costs related to the former Dex Media West
credit facility.
|
|
|
|
(7)
|
|
In connection with the RHDI exchange offers, we would recognize
an approximate gain of $172.6 million. Offsetting that gain
will be the write-off of unamortized deferred financing costs of
approximately $13.8 million noted above.
|
31
Selected
historical consolidated financial data
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 RHDs 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 periods
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 periods 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Reclass
|
|
|
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
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
You should read the following selected financial data together
with the information contained under the caption
Managements discussion and analysis of financial
condition and results of operations and RHDs
historical consolidated financial statements, including the
related notes, and the other information included in this
prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Three Months Ended March 31,
|
|
|
|
2003(1)
|
|
|
2004(1)(2)
|
|
|
2005(2)
|
|
|
2006(3)
|
|
|
2007(4)
|
|
|
2007(4)
|
|
|
2008(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands)
|
|
|
Statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
256,445
|
|
|
$
|
603,116
|
|
|
$
|
956,631
|
|
|
$
|
1,899,297
|
|
|
$
|
2,680,299
|
|
|
$
|
661,296
|
|
|
$
|
674,654
|
|
Goodwill impairment(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,463,615
|
|
Partnership income(2)
|
|
|
114,052
|
|
|
|
77,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)(6)
|
|
|
92,526
|
|
|
|
291,748
|
|
|
|
375,241
|
|
|
|
442,826
|
|
|
|
904,966
|
|
|
|
227,978
|
|
|
|
(2,237,606
|
)
|
Net income (loss)
|
|
|
(49,953
|
)
|
|
|
70,312
|
|
|
|
67,533
|
|
|
|
(237,704
|
)
|
|
|
46,859
|
|
|
|
15,951
|
|
|
|
(1,623,111
|
)
|
Preferred dividend(7)
|
|
|
58,397
|
|
|
|
21,791
|
|
|
|
11,708
|
|
|
|
1,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on repurchase of redeemable convertible preferred
stock(7)
|
|
|
|
|
|
|
|
|
|
|
133,681
|
|
|
|
(31,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable convertible preferred stock to
redemption value(7)
|
|
|
|
|
|
|
|
|
|
|
211,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income available to common shareholders
|
|
$
|
(108,350
|
)
|
|
$
|
48,521
|
|
|
$
|
(288,876
|
)
|
|
$
|
(208,483
|
)
|
|
|
46,859
|
|
|
$
|
15,951
|
|
|
$
|
(1,623,111
|
)
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.53
|
)
|
|
$
|
1.19
|
|
|
$
|
(9.10
|
)
|
|
$
|
(3.14
|
)
|
|
$
|
0.66
|
|
|
$
|
0.23
|
|
|
$
|
(23.60
|
)
|
Diluted
|
|
$
|
(3.53
|
)
|
|
$
|
1.15
|
|
|
$
|
(9.10
|
)
|
|
$
|
(3.14
|
)
|
|
$
|
0.65
|
|
|
$
|
0.22
|
|
|
$
|
(23.60
|
)
|
Shares used in computing earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,683
|
|
|
|
31,268
|
|
|
|
31,731
|
|
|
|
66,448
|
|
|
|
70,932
|
|
|
|
70,663
|
|
|
|
68,778
|
|
Diluted
|
|
|
30,683
|
|
|
|
32,616
|
|
|
|
31,731
|
|
|
|
66,448
|
|
|
|
71,963
|
|
|
|
72,003
|
|
|
|
68,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
|
As of March 31,
|
|
|
|
2003(1)
|
|
|
2004(1)(2)
|
|
|
2005(2)
|
|
|
2006(3)
|
|
|
2007(4)
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands)
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,538,734
|
|
|
$
|
3,978,922
|
|
|
$
|
3,873,918
|
|
|
$
|
16,147,468
|
|
|
|
16,089,093
|
|
|
$
|
15,978,274
|
|
|
$
|
13,518,895
|
|
Long-term debt, including current maturities(8)(9)
|
|
|
2,092,133
|
|
|
|
3,127,342
|
|
|
|
3,078,849
|
|
|
|
10,403,152
|
|
|
|
10,175,649
|
|
|
|
10,199,404
|
|
|
|
10,080,846
|
|
Redeemable convertible preferred stock
|
|
|
198,223
|
|
|
|
216,111
|
|
|
|
334,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders (deficit) equity
|
|
|
(56,245
|
)
|
|
|
17,985
|
|
|
|
(291,415
|
)
|
|
|
1,820,756
|
|
|
|
1,822,736
|
|
|
|
1,859,536
|
|
|
|
183,004
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
March 31,
|
|
|
|
2003(1)
|
|
|
2004(1)(2)
|
|
|
2005(2)
|
|
|
2006(3)
|
|
|
2007(4)
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands)
|
|
|
Statement of cash flow data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
248,597
|
|
|
$
|
406,303
|
|
|
$
|
392,052
|
|
|
$
|
768,309
|
|
|
|
691,809
|
|
|
$
|
143,752
|
|
|
$
|
99,936
|
|
Investing activities
|
|
|
(377,914
|
)
|
|
|
(1,431,633
|
)
|
|
|
(38,055
|
)
|
|
|
(1,980,009
|
)
|
|
|
(409,072
|
)
|
|
|
(15,620
|
)
|
|
|
(5,800
|
)
|
Financing activities
|
|
|
129,252
|
|
|
|
1,028,363
|
|
|
|
(356,959
|
)
|
|
|
1,360,156
|
|
|
|
(392,910
|
)
|
|
|
(209,720
|
)
|
|
|
(110,311
|
)
|
Other financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings to fixed charges(10)
|
|
|
|
|
|
|
1.6
|
x
|
|
|
1.4
|
x
|
|
|
|
|
|
|
1.1
|
x
|
|
|
1.1
|
x
|
|
|
|
|
|
|
|
(1)
|
|
Financial data includes the results of the Embarq Directory
Business commencing January 3, 2003. For the years ended
December 31, 2003 and 2004, net revenue, operating income,
net (loss) 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 Embarq
Directory Business prior to the acquisition.
|
|
(2)
|
|
Financial data includes the results of the AT&T Directory
Business commencing September 1, 2004. Before the AT&T
Directory Acquisition, we reported our 50% share of net income
and revenue participation income in DonTech, a 50/50 general
partnership between us and AT&T, as partnership income in
our consolidated statements of operations. Upon the AT&T
Directory Acquisition, AT&T ceased paying us revenue
participation income, we consolidate all net profits of DonTech
and we eliminated our partnership investment in DonTech.
Consequently, commencing on September 1, 2004, we no longer
report partnership income. For the years ended December 31,
2004 and 2005, net revenue, net income and income (loss)
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 Managements discussion and analysis of financial
condition and results of operations for further discussion
of these items.
|
|
(3)
|
|
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 Managements discussion and
analysis of financial condition and results of operations
for further discussion of these items.
|
|
|
|
(4)
|
|
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 RHDs 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.
|
|
|
|
(5)
|
|
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
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 its 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 our
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
|
34
|
|
|
|
|
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.
|
|
|
|
(6)
|
|
On January 1, 2006, we adopted the provisions of
SFAS No. 123(R),
Share-Based Payment
, and
recorded non-cash stock-based compensation expense totaling
$43.3 million and $39.0 million for the years ended
December 31, 2006 and 2007, respectively.
|
|
|
|
(7)
|
|
On January 14, 2005, we repurchased 100,303 shares of
our outstanding preferred stock from the GS Funds for
$277.2 million in cash. In connection with the preferred
stock repurchase, we recorded an increase to loss available to
common shareholders on the consolidated statement of operations
of $133.7 million to reflect the loss on the repurchase of
these shares for the year ended December 31, 2005. On
January 27, 2006, we completed the GS Repurchase of the
remaining 100,301 shares of our outstanding preferred stock
from the GS Funds for $336.1 million in cash, including
accrued cash dividends and interest. Based on the terms of the
stock purchase agreement, the repurchase of the preferred stock
became a probable event on October 3, 2005, requiring the
recorded value of the preferred stock to be accreted to its
redemption value of $334.1 million at December 31,
2005 and $336.1 million at January 27, 2006. The
accretion to redemption value of $211.0 million for the
year ended December 31, 2005 and $2.0 million (which
represented accrued dividends and interest) for the year ended
December 31, 2006 has been recorded as an increase to loss
available to common shareholders on the consolidated statements
of operations. In conjunction with the repurchase of the
preferred stock, we also reversed the previously recorded
beneficial conversion feature, or BCF, related to these shares
and recorded a decrease to loss available to common shareholders
on the consolidated statement of operations of approximately
$31.2 million for the year ended December 31, 2006.
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(8)
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In connection with the Dex Media merger on January 31,
2006, AT&T Directory Acquisition on September 1, 2004
and the Embarq Directory Acquisition on January 3, 2003, we
incurred a significant amount of debt. We also issued preferred
stock in November 2002 and January 2003 in connection with the
Embarq Directory Acquisition. Therefore, our cash and debt
balances during these periods were higher than in prior periods.
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(9)
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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
Managements 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.
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(10)
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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:
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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
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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.
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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.
36
Managements
discussion and analysis
of financial condition and results of operations
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 nations 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 countrys 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
communitys 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
37
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 Companys 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 managements 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
RHDIs 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.
38
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 RHDIs $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
Easts outstanding 9.875% senior notes due 2009 and
$341.3 million of Dex Media Easts outstanding
12.125% senior subordinated notes due 2012.
In December 2007, we redeemed RHDIs 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
39
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 RHDs 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 RHDs 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
Qwests 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.
40
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&Ts 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&Ts agent and grants us the exclusive license (and
obligation as specified in the agreement) to use the AT&T
brand and logo on print directories in the Territory. The
non-competition agreement prohibits AT&T (and its
affiliates and successors), with certain limited exceptions,
from (1) producing, publishing and distributing yellow and
white pages print directories in the Territory,
(2) soliciting or selling local or national yellow or white
pages advertising for inclusion in such directories, and
(3) soliciting or selling local Internet yellow pages
advertising for certain Internet yellow pages directories in the
Territory or licensing AT&T marks to any third party for
that purpose. The Internet Yellow Pages reseller agreement
grants us the (a) exclusive right to sell to local
advertisers within the Territory Internet yellow pages
advertising focused upon products and services to be offered
within that territory, and (b) non-exclusive right to sell
to local (excluding National advertisers) advertisers within the
Territory Internet yellow pages advertising focused upon
products and services to be offered outside of the Territory, in
each case, onto the YellowPages.com platform. The directory
publishing listing agreement gives us the right to purchase and
use basic AT&T subscriber listing information and updates
for the purpose of publishing directories. The AT&T
Directory Services Agreements (other than the Internet Yellow
Pages reseller agreement) have initial terms of 50 years,
commencing in September 2004, subject to automatic renewal and
early termination under specified circumstances. The Internet
Yellow Pages reseller agreement 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 Sprints spin-off
of its local telephone business, include a directory services
license agreement, a trademark license agreement and a
non-competition agreement with certain affiliates of 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.
41
The purposes of our acquisitions included the following:
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Building RHD into a leading publisher of yellow pages
directories and provider of online commercial search services;
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Adding leading Internet advertising talent and technology, to
strengthen RHDs position in the expanding local commercial
search market and to develop an online performance based
advertising network;
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Enhancing our local Internet marketing capabilities and
offerings.
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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
42
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 entitys 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.
43
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.
44
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:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
Expected volatility
|
|
|
23.5
|
%
|
|
|
28.2
|
%
|
Risk-free interest rate
|
|
|
4.5
|
%
|
|
|
4.4
|
%
|
Expected life
|
|
|
5 years
|
|
|
|
5 years
|
|
Forfeiture rate
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
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 SECs 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
45
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 periods presentation. Selling and
support expenses are now presented as a separate
46
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 periods 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Reclass
|
|
|
As Reclassified
|
|
|
|
(Amounts in millions)
|
|
|
Net revenues
|
|
$
|
662.8
|
|
|
$
|
(1.5
|
)
|
|
$
|
661.3
|
|
Production, publication and distribution expenses
|
|
|
294.2
|
|
|
|
(179.6
|
)
|
|
|
114.6
|
|
Selling and support expenses
|
|
|
|
|
|
|
178.2
|
|
|
|
178.2
|
|
General and administrative expenses
|
|
|
37.6
|
|
|
|
(0.1
|
)
|
|
|
37.5
|
|
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.
47
Net
revenues
The components of our net revenues for the three months ended
March 31, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Amounts in millions)
|
|
|
Gross directory advertising revenues
|
|
$
|
676.8
|
|
|
$
|
668.6
|
|
|
$
|
8.2
|
|
|
|
1.2
|
%
|
Sales claims and allowances
|
|
|
(11.8
|
)
|
|
|
(18.2
|
)
|
|
|
6.4
|
|
|
|
35.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net directory advertising revenues
|
|
|
665.0
|
|
|
|
650.4
|
|
|
|
14.6
|
|
|
|
2.2
|
|
Other revenues
|
|
|
9.7
|
|
|
|
10.9
|
|
|
|
(1.2
|
)
|
|
|
(11.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
674.7
|
|
|
$
|
661.3
|
|
|
$
|
13.4
|
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
directorys 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
48
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 directorys 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Amounts in millions)
|
|
|
Production, publication and distribution expenses
|
|
$
|
109.2
|
|
|
$
|
114.6
|
|
|
$
|
(5.4
|
)
|
|
|
(4.7
|
)%
|
Selling and support expenses
|
|
|
186.3
|
|
|
|
178.2
|
|
|
|
8.1
|
|
|
|
4.5
|
|
General and administrative expenses
|
|
|
34.9
|
|
|
|
37.5
|
|
|
|
(2.6
|
)
|
|
|
(6.9
|
)
|
Depreciation and amortization
|
|
|
118.3
|
|
|
|
103.0
|
|
|
|
15.3
|
|
|
|
14.9
|
|
Goodwill impairment
|
|
|
2,463.6
|
|
|
|
|
|
|
|
2,463.6
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,912.3
|
|
|
$
|
433.3
|
|
|
$
|
2,479.0
|
|
|
|
572.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
49
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:
|
|
|
|
|
|
|
$ Change
|
|
|
|
(Amounts
|
|
|
|
in millions)
|
|
|
Increased internet production and distribution costs
|
|
$
|
8.6
|
|
Decreased cost uplift expense
|
|
|
(8.9
|
)
|
Decreased IT expenses
|
|
|
(3.6
|
)
|
Decreased print, paper and distribution costs
|
|
|
(2.9
|
)
|
All other, net
|
|
|
1.4
|
|
|
|
|
|
|
Total decrease in production, publication and distribution
expenses for the three months ended March 31, 2008
|
|
$
|
(5.4
|
)
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
$ Change
|
|
|
|
(Amounts
|
|
|
|
in millions)
|
|
|
Increased advertising and branding expenses
|
|
$
|
9.1
|
|
Increased bad debt expense
|
|
|
8.8
|
|
Decreased cost uplift expense
|
|
|
(8.1
|
)
|
All other, net
|
|
|
(1.7
|
)
|
|
|
|
|
|
Total increase in selling and support expenses for the three
months ended March 31, 2008
|
|
$
|
8.1
|
|
|
|
|
|
|
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
50
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:
|
|
|
|
|
|
|
$ Change
|
|
|
|
(Amounts
|
|
|
|
in millions)
|
|
|
Decrease in non-cash stock-based compensation expense under
SFAS No. 123 (R)
|
|
$
|
(3.7
|
)
|
Decrease in IT expenses
|
|
|
(1.3
|
)
|
All other, net
|
|
|
2.4
|
|
|
|
|
|
|
Total decrease in G&A expenses for the three months ended
March 31, 2008
|
|
$
|
(2.6
|
)
|
|
|
|
|
|
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
51
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Total
|
|
$
|
(2,237.6
|
)
|
|
$
|
228.0
|
|
|
$
|
(2,465.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
52
In conjunction with the Dex Media merger and as a result of
purchase accounting required under GAAP, we recorded Dex
Medias debt at its fair value on January 31, 2006. We
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 periods 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
53
claims and bad debt expense in 2006 to conform to the current
periods 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Reclass
|
|
|
As Reclassified
|
|
|
|
(Amounts in millions)
|
|
|
Net revenue
|
|
$
|
1,895.9
|
|
|
$
|
3.4
|
|
|
$
|
1,899.3
|
|
Cost of revenue
|
|
|
987.1
|
|
|
|
(645.0
|
)
|
|
|
342.1
|
|
Selling and support expenses
|
|
|
|
|
|
|
656.0
|
|
|
|
656.0
|
|
General and administrative expenses
|
|
|
142.4
|
|
|
|
(7.6
|
)
|
|
|
134.8
|
|
Acquisitions
As a result of the Dex Media merger and the AT&T Directory
Acquisition, the related financings and associated purchase
accounting, our 2007 results reported in accordance with GAAP
are not comparable to our 2006 reported GAAP results. GAAP
results presented for the year ended December 31, 2006
include eleven months of results from the operations of Dex
Media, which we refer to as the Dex Media Business and which was
acquired on January 31, 2006. 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 in 2006 directory revenue and certain
expenses associated with directories that published prior to the
Dex Media merger, including all directories published in the
month the Dex Media merger was completed. Thus, our reported
2007 and 2006 GAAP results are not comparable and our 2006
results are not indicative of our underlying operating and
financial performance. Accordingly, management is presenting
adjusted pro forma information for the year ended
December 31, 2006 that, among other things, eliminates the
purchase accounting impact on revenue and certain expenses
related to the Dex Media merger and assumes the Dex Media merger
occurred on January 1, 2006. Management believes that the
presentation of this adjusted pro forma information will help
financial statement users better and more easily compare current
period underlying operating results against what the combined
company performance would more likely have been in the
comparable prior period. All of the adjusted pro forma amounts
disclosed under the caption Non-GAAP measures
Adjusted pro forma amounts and combined adjusted amounts
below or elsewhere are non-GAAP measures, which are reconciled
to the most comparable GAAP measures under that caption below.
While the adjusted pro forma results exclude the effects of
purchase accounting, and certain other non-recurring items, to
better reflect underlying operating results in 2006, because of
differences between RHD and Dex Media and their respective
accounting policies, the 2007 GAAP results and 2006 adjusted pro
forma results are not strictly comparable and should not be
treated as such.
GAAP
reported results
Net
revenue
The components of our net revenue for the years ended
December 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Gross directory advertising revenue
|
|
$
|
2,697.3
|
|
|
$
|
1,907.3
|
|
|
$
|
790.0
|
|
Sales claims and allowances
|
|
|
(54.8
|
)
|
|
|
(41.9
|
)
|
|
|
(12.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net directory advertising revenue
|
|
|
2,642.5
|
|
|
|
1,865.4
|
|
|
|
777.1
|
|
Other revenue
|
|
|
37.8
|
|
|
|
33.9
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
2,680.3
|
|
|
$
|
1,899.3
|
|
|
$
|
781.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our directory advertising revenue is earned primarily from the
sale of advertising in yellow pages directories we publish, net
of sales claims and allowances. Directory advertising revenue
also includes revenue
54
for Internet-based advertising products including online
directories such as DexKnows.com, Business.com, and Internet
marketing services. Directory advertising revenue is 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.
Revenue with respect to print advertising and Internet-based
advertising products that are sold with print advertising, is
recognized under the deferral and amortization method, whereby
revenue is initially deferred when a directory is published and
recognized ratably over the directorys life, which is
typically 12 months. Revenue with respect to Internet-based
services that are not sold with print advertising, such as
Internet marketing services, is recognized as delivered or
fulfilled.
Gross directory advertising revenue for the year ended
December 31, 2007 increased $790.0 million, or 41.4%,
from the year ended December 31, 2006. The increase is
primarily due to an increase of $778.2 million in gross
directory advertising revenue from directories acquired in the
Dex Media merger, which we refer to as the Qwest directories,
which included gross directory advertising revenue of
$1,647.1 million for the year ended December 31, 2007
as compared to $868.9 million for the year ended
December 31, 2006. Due to purchase accounting, gross
directory advertising revenue for the year ended
December 31, 2006 excluded the amortization of advertising
revenue for Qwest directories published prior to February 2006
totaling $661.5 million. Purchase accounting related to the
Dex Media merger had no impact on reported revenue in 2007. The
increase is also a result of recognizing a full year of results
during 2007 from the Dex Media Business acquired on
January 31, 2006, as opposed to eleven months of results
during 2006.
The increase in gross directory advertising revenue for the year
ended December 31, 2007 is also due to new product
introductions, including online products and services and
incremental revenue from Business.com and Local Launch. These
increases are partially offset by declines in renewal business,
declines in sales productivity related to systems modernization
and weaker housing trends in certain of our Embarq markets.
Sales claims and allowances for the year ended December 31,
2007 increased $12.9 million, or 30.8%, from the year ended
December 31, 2006. The increase in sales claims and
allowances for the year ended December 31, 2007 is
primarily due to recognizing a full year of results during 2007
from the acquired Dex Media Business, as opposed to eleven
months of results during 2006 and the related purchase
accounting impact during that period, offset by lower claims
experience during 2007 primarily in the Qwest markets.
Other revenue for the year ended December 31, 2007
increased $3.9 million, or 11.5%, from the year ended
December 31, 2006. Other revenue includes barter revenue,
late fees received on outstanding customer balances, 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
increase in other revenue for the year ended December 31,
2007 is primarily a result of recognizing a full year of results
during 2007 from the Dex Media Business, as opposed to eleven
months of results during 2006, partially offset by declines in
barter activity.
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 revenue, which under GAAP is recognized under the deferral
and amortization method. Advertising sales for the year ended
December 31, 2007 were $2,743.4 million, compared to
$2,732.8 million for the year ended December 31, 2006.
Advertising sales for these periods assumes the Business.com
Acquisition occurred on January 1, 2006, and for the year
ended December 31, 2006 assumes the Dex Media merger
occurred on January 1, 2006. The $10.6 million, or
0.4%, increase in advertising sales for the year ended
December 31, 2007 is a result of stronger ad sales in the
second and fourth quarters of 2007, increases in our new online
products and services, and Business.com and Local Launch
revenue, partially offset by declines in renewal business,
mainly driven by conservatism in advertiser spending based on
economic indicators. Revenue with respect to print advertising,
and Internet-based advertising products that are sold with print
advertising, is recognized under the deferral and amortization
method, whereby revenue is initially deferred when a directory
is published and recognized ratably over the directorys
life, which is typically 12 months. Revenue with respect to
Internet-
55
based services that are not sold with print advertising, such as
Internet marketing services, is recognized as delivered or
fulfilled.
Expenses
The components of our total expenses for the years ended
December 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Cost of revenue
|
|
$
|
450.3
|
|
|
$
|
342.1
|
|
|
$
|
108.2
|
|
Selling and support expenses
|
|
|
716.3
|
|
|
|
656.0
|
|
|
|
60.3
|
|
General and administrative expenses
|
|
|
145.6
|
|
|
|
134.8
|
|
|
|
10.8
|
|
Depreciation and amortization
|
|
|
463.1
|
|
|
|
323.6
|
|
|
|
139.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
1,775.3
|
|
|
$
|
1,456.5
|
|
|
$
|
318.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our operating expenses in 2007 include investments in 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
investments include launching our new Dex market brand and our
new URL, DexKnows.com, across our entire footprint, the
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, modernization and consolidation of our IT
platform. We expect that these investments 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. 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. All deferred costs related to
the sale and production of directories are recognized ratably
over the life of each directory under the deferral and
amortization method of accounting, with cost recognition
commencing in the month of directory distribution.
56
Cost
of revenue
Total cost of revenue for the year ended December 31, 2007
was $450.3 million, compared to $342.1 million
reported for the year ended December 31, 2006. The primary
components of the $108.2 million, or 31.6%, increase in
cost of revenue are as follows:
|
|
|
|
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Expenses related to the Dex Media Business excluded from the
year ended December 31, 2006 due to purchase accounting
from the Dex Media merger
|
|
$
|
119.3
|
|
Increased internet production and distribution costs
|
|
|
37.2
|
|
Increased print, paper and distribution costs
|
|
|
10.9
|
|
Decreased cost uplift expense
|
|
|
(49.3
|
)
|
Decreased barter expense
|
|
|
(8.0
|
)
|
All other, net
|
|
|
(1.9
|
)
|
|
|
|
|
|
Total increase in cost of revenue for the year ended
December 31, 2007
|
|
$
|
108.2
|
|
|
|
|
|
|
The increase in cost of revenue for the year ended
December 31, 2007 is primarily due to the effects of
purchase accounting associated with the Dex Media merger in
2006, as well as recognizing a full year of results from the
acquired Dex Media Business during 2007.
As a result of purchase accounting required by GAAP, print and
delivery costs related to directories that published prior to
and in the month of the Dex Media merger totaling
$119.3 million were not reported during the year ended
December 31, 2006. Directory expenses incurred during the
year ended December 31, 2006 include the amortization of
deferred directory costs relating to Qwest directories published
beginning in February 2006.
During the year ended December 31, 2007, we incurred
$37.2 million of additional expenses related to internet
production and distribution due to investment in our Triple Play
strategy, as well as recognizing a full year of results from the
acquired Dex Media Business, compared to the year ended
December 31, 2006. This investment focuses on enhancing and
growing our IYP and Internet marketing products and services.
During the year ended December 31, 2007, we incurred
$10.9 million of additional print, paper and distribution
costs, compared to the year ended December 31, 2006, due to
new companion print products in our Embarq and AT&T
markets, as well as recognizing a full year of results from the
acquired Dex Media Business. Companion directories are a small
format directory that serves as a complement to the core
directory, with replicated advertising from the core directory
available for an additional charge to our advertisers. Increases
were offset by the commencement of our print product
optimization program and negotiated price reductions in our
print expenses.
As a result of 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 and the AT&T
Directory Acquisition 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 is amortized
over the terms of the applicable directories to cost of revenue,
whereas cost uplift associated with commissions is amortized
over the terms of the applicable directories to selling and
support expenses. The fair value of these costs as of the date
each acquisition was completed was determined to be
$157.7 million and $81.3 million for the Dex Media
merger and the AT&T Directory Acquisition, respectively.
Cost uplift amortization associated with print, paper and
delivery costs totaled $15.3 million for the year ended
December 31, 2007, compared to $64.6 million for the
year ended December 31, 2006, related to the Dex Media
merger. This represents a decrease in cost uplift expense of
$49.3 million for the year ended December 31, 2007.
There was no amortization of cost uplift recognized as cost of
revenue for the years ended December 31, 2007 and 2006
relating to the AT&T Directory Acquisition.
57
During the year ended December 31, 2007, barter expenses
declined $8.0 million compared to the year ended
December 31, 2006, due to planned declines in barter
activity in our Qwest markets.
Changes in the All other category primarily relate to a decrease
in print delivery management costs due to synergies resulting
from the Dex Media merger.
Selling
and support expenses
Total selling and support expenses for the year ended
December 31, 2007 were $716.3 million, compared to
$656.0 million reported for the year ended
December 31, 2006. The primary components of the
$60.3 million, or 9.2%, increase in selling and support
expenses are as follows:
|
|
|
|
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Expenses related to the Dex Media Business excluded from the
year ended December 31, 2006 due to purchase accounting
from the Dex Media merger
|
|
$
|
100.7
|
|
Increased advertising and branding expenses
|
|
|
22.5
|
|
Decreased cost uplift expense
|
|
|
(45.8
|
)
|
Decreased commissions and salesperson costs
|
|
|
(9.5
|
)
|
All other, net
|
|
|
(7.6
|
)
|
|
|
|
|
|
Total increase in selling and support expenses for the year
ended December 31, 2007
|
|
$
|
60.3
|
|
|
|
|
|
|
The increase in selling and support expenses for the year ended
December 31, 2007 is primarily due to the effects of
purchase accounting associated with the Dex Media merger in
2006, as well as recognizing a full year of results from the
acquired Dex Media Business during 2007.
As a result of purchase accounting required by GAAP, deferred
commissions and other selling and support costs related to
directories that published prior to and in the month of the Dex
Media merger totaling $100.7 million were not reported
during the year ended December 31, 2006. Directory expenses
incurred during the year ended December 31, 2006 include
the amortization of deferred directory costs relating to Qwest
directories published beginning in February 2006.
During the year ended December 31, 2007, we incurred
$22.5 million of additional advertising and branding
expenses as compared to the year ended December 31, 2006.
These media and collateral costs were 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. The increase is also
attributable to recognizing a full year of results from the
acquired Dex Media Business. Advertising expense includes
$7.8 million related to traffic acquisition costs
associated with the operations of Business.com, with no
comparable expense for the prior corresponding period.
Cost uplift associated with commissions totaled
$13.6 million during the year ended December 31, 2007
relating to the Dex Media merger, compared to $59.4 million
for the year ended December 31, 2006 relating to the Dex
Media merger and the AT&T Directory Acquisition. This
represents a decrease in cost uplift of $45.8 million for
the year ended December 31, 2007.
During the year ended December 31, 2007, commissions and
salesperson costs declined $9.5 million compared to the
year ended December 31, 2006, primarily due to lower CMR
commission rates.
Changes in the All other category primarily relate to a decrease
in non-cash stock-based compensation expense, partially offset
by an increase in sales training costs due to new product
introductions across our entire footprint, including online
products and services.
58
General
and administrative expenses
General and administrative, or G&A, expenses for the year
ended December 31, 2007 were $145.6 million, compared
to $134.8 million for the year ended December 31,
2006. The primary components of the $10.8 million, or 8.0%,
increase in G&A expenses are as follows:
|
|
|
|
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Increase in IT expenses
|
|
$
|
7.3
|
|
Decreased general corporate expenses
|
|
|
(3.8
|
)
|
All other, net
|
|
|
7.3
|
|
|
|
|
|
|
Total increase in G&A expenses for the year ended
December 31, 2007
|
|
$
|
10.8
|
|
|
|
|
|
|
The increase in G&A expenses for the year ended
December 31, 2007 is primarily due recognizing a full year
of results from the acquired Dex Media Business during 2007, as
opposed to eleven months of results during 2006.
During the year ended December 31, 2007, we incurred
approximately $7.3 million of additional IT expenses
compared to the year ended December 31, 2006, due to
recognizing a full year of results from the acquired Dex Media
Business, investment in 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. This increase is
partially offset by cost savings resulting from lower rates
associated with a recently negotiated IT contract, which became
effective in July 2007.
G&A expenses for the year ended December 31, 2007
included reductions in general corporate expenses of
$3.8 million from the year ended December 31, 2006,
primarily due to achieving cost synergies and expense reduction
efforts associated with the Dex Media merger.
Depreciation
and amortization
Depreciation and amortization, or D&A, expense for the year
ended December 31, 2007 was $463.1 million, compared
to $323.6 million for the year ended December 31,
2006. Amortization of intangible assets was $408.3 million
for the year ended December 31, 2007, compared to
$277.5 million for the year ended December 31, 2006.
The increase in amortization expense for the year ended
December 31, 2007 is primarily due to recognizing a full
year of amortization related to intangible assets acquired in
the Dex Media merger, amortizing the local customer
relationships intangible asset acquired in the Dex Media merger
beginning in the first quarter of 2007 and amortization of
intangible assets acquired in the Business.com Acquisition.
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 on the consolidated statement of
operations for the year ended December 31, 2007.
Depreciation of fixed assets and amortization of computer
software was $54.8 million for the year ended
December 31, 2007, compared to $46.1 million for the
year ended December 31, 2006. The increase in depreciation
expense for the year ended December 31, 2007 was primarily
due to recognizing a full year of depreciation related to fixed
assets acquired in the Dex Media merger as well as additional
depreciation expense resulting from fixed asset additions
related to computer software.
59
Operating
income
Operating income for the years ended December 31, 2007 and
2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Total
|
|
$
|
905.0
|
|
|
$
|
442.8
|
|
|
$
|
462.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income for the year ended December 31, 2007 of
$905.0 million increased by $462.2 million from
operating income of $442.8 million for the year ended
December 31, 2006. The increase in operating income for the
year ended December 31, 2007 is due to the effects of
purchase accounting associated with the Dex Media merger in
2006, recognizing a full year of results from the acquired Dex
Media Business during 2007, and other revenue and expense trends
described above.
Non-operating
income
During the year ended December 31, 2007, we recognized a
non-operating gain on the sale of an investment of
$1.8 million.
Interest
expense, net
Net interest expense for the year ended December 31, 2007
was $830.9 million, compared to $765.1 million for the
year ended December 31, 2006, and includes
$40.0 million and $21.9 million, respectively, of
non-cash amortization of deferred financing costs. The increase
in net interest expense of $65.8 million for the year ended
December 31, 2007 when compared to the prior corresponding
period, is primarily due to call premium payments of
$71.7 million and write-off of unamortized deferred
financing costs of $16.8 million (which is included in the
amortization of deferred financing costs of $40.0 million
noted above) 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
associated with the Dex Media merger and GS Repurchase described
below and debt acquired in the Dex Media merger.
In conjunction with the Dex Media merger and as a result of
purchase accounting required under GAAP, we recorded Dex
Medias debt at its fair value on January 31, 2006. We
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
$92.1 million for the year ended December 31, 2007,
compared to $26.4 million for the year ended
December 31, 2006. The offset to interest expense for the
year ended December 31, 2007 includes $62.2 million
related to the redemption of Dex Media Easts outstanding
9.875% senior notes and 12.125% senior subordinated
notes on November 26, 2007.
The increase in net interest expense is also partially offset by
lower outstanding debt during the year ended December 31,
2007 due to debt repayments. See Liquidity and capital
resources for further detail regarding our debt
obligations.
Provision
(benefit) for income taxes
The effective tax rate on income before income taxes of 38.3%
for the year ended December 31, 2007 compares to 26.2% on
loss before income taxes for the year ended December 31,
2006. The increase in the rate is a result of higher state tax
expense due to the increase of uncertain tax liabilities in
various tax jurisdictions, specifically New York and North
Carolina, and due to an increase in the valuation allowance
against certain state net operating losses that we believe will
more likely than not expire prior to their utilization. In
addition, the rate increase also reflects recognition of
additional interest expense of $1.6 million and
$1.2 million in 2007 related to the taxable years 2004 and
2005, respectively, as a result of the IRS settlement in July
2007 described below.
60
The 2007 provision for income taxes of $29.0 million is
comprised of a federal tax provision of $27.5 million,
resulting from a current tax provision of $11.8 million
relating to an Internal Revenue Service, or IRS, settlement and
a deferred tax provision of $15.7 million resulting from a
current year taxable loss. The 2007 state tax provision of
$1.5 million results from a current tax provision of
$8.5 million relating to taxes due in states where our
subsidiaries file separate company returns, offset by a deferred
state tax benefit of $7.0 million relating to the
apportioned taxable income or loss among various states. A
federal net operating loss for income tax purposes of
approximately $303.3 million was generated in 2007
primarily as a result of tax amortization expense recorded with
respect to the intangible assets acquired in the Dex Media
merger, AT&T Directory Acquisition, Embarq Directory
Acquisition and Business.com Acquisition.
At December 31, 2007, we had federal and state net
operating loss carryforwards of approximately
$618.3 million (net of carryback) and $801.3 million,
respectively, which will begin to expire in 2026 and 2008,
respectively. These amounts include consideration of net
operating losses expected to expire unused due to the Internal
Revenue Code, or the Code, Section 382 limitation for
ownership changes related to Business.com that occurred prior to
the Business.com Acquisition.
The 2006 income tax benefit of $84.5 million is comprised
of a federal deferred tax benefit of $112.9 million
resulting from the periods taxable loss, offset by a state
tax provision of $28.4 million. The 2006 state tax
provision of $28.4 million primarily resulted from the
modification of apportioned taxable income or loss among various
states. A net operating loss for tax purposes of approximately
$216.3 million was generated in 2006 primarily as a result
of tax amortization expense recorded with respect to the
intangible assets acquired in the Dex Media merger, AT&T
Directory Acquisition and Embarq Directory Acquisition.
In July 2007, we effectively settled all issues under
consideration with the IRS related to its audit for taxable
years 2003 and 2004. Therefore, tax years 2005 and 2006 are
still subject to examination by the IRS. Certain state tax
returns are under examination by various regulatory authorities.
We continuously review issues raised in connection with ongoing
examinations and open tax years to evaluate the adequacy of our
reserves. We believe that our accrued tax liabilities under
FIN No. 48 are adequate to cover uncertain tax
positions related to U.S. federal and state income taxes.
Net
income (loss), loss available to common shareholders and
earnings (loss) per share
Net income for the year ended December 31, 2007 was
$46.9 million, compared to a net loss of
$(237.7) million reported for the year ended
December 31, 2006. Net income for the year ended
December 31, 2007 as compared to the net loss reported for
the year ended December 31, 2006 is primarily due to
recognizing a full year of results from the acquired Dex Media
Business during 2007, absent any adverse impact from purchase
accounting associated with the Dex Media merger. Net income for
the year ended December 31, 2007 was negatively impacted by
increased interest expense and D&A as described above.
On January 27, 2006, we repurchased the remaining
100,301 shares of our preferred stock from investment
partnerships affiliated with the GS Funds for
$336.1 million in cash, including accrued cash dividends
and interest, which we refer to as the GS Repurchase. Based on
the terms of the stock purchase agreement, the recorded value of
the preferred stock was accreted to its redemption value of
$336.1 million at January 27, 2006. The accretion to
redemption value of $2.0 million (which represented accrued
dividends and interest) was recorded as an increase to loss
available to common shareholders on the consolidated statement
of operations for the year ended December 31, 2006. In
conjunction with the GS Repurchase, we also reversed the
previously recorded BCF related to these shares and recorded a
decrease to loss available to common shareholders of
$31.2 million on the consolidated statement of operations
for the year ended December 31, 2006.
The resulting loss available to common shareholders was
$(208.5) million for the year ended December 31, 2006.
Subsequent to the GS Repurchase and for the year ended
December 31, 2007, we accounted for EPS in accordance with
SFAS No. 128. For the year ended December 31,
2006 (through January 27, 2006, the closing date of the GS
Repurchase), we accounted for EPS in accordance with Emerging
Issues Task Force, or EITF,
61
No. 03-6,
Participating Securities and the Two-Class Method under
FASB Statement 128
, which we refer to as
EITF 03-6,
which established standards regarding the computation of EPS by
companies that have issued securities other than common stock
that contractually entitle the holder to participate in
dividends and earnings of the company.
EITF 03-6
requires earnings available to common shareholders for the
period, after deduction of preferred stock dividends, to be
allocated between the common and preferred stockholders based on
their respective rights to receive dividends. Basic EPS is then
calculated by dividing loss allocable to common shareholders by
the weighted average number of shares outstanding.
EITF 03-6
does not require the presentation of basic and diluted EPS for
securities other than common stock. Therefore, the following EPS
amounts only pertain to our common stock.
Under the guidance of SFAS No. 128, diluted EPS is
calculated by dividing loss allocable to common shareholders by
the weighted average common shares outstanding plus dilutive
potential common stock. Potential common stock includes stock
options, SARs, restricted stock and warrants, the dilutive
effect of which is calculated using the treasury stock method,
and prior to the GS Repurchase, our preferred stock, the
dilutive effect of which was calculated using the
if-converted method.
The calculation of basic and diluted EPS for the years ended
December 31, 2007 and 2006, respectively, is presented
below.
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts in thousands,
|
|
|
|
except percentages and
|
|
|
|
per share amounts)
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders
|
|
$
|
46,859
|
|
|
$
|
(208,483
|
)
|
Amount allocable to common shareholders(1)
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Income (loss) allocable to common shareholders
|
|
|
46,859
|
|
|
|
(208,483
|
)
|
Weighted average common shares outstanding
|
|
|
70,932
|
|
|
|
66,448
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.66
|
|
|
$
|
(3.14
|
)
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders
|
|
$
|
46,859
|
|
|
$
|
(208,483
|
)
|
Amount allocable to common shareholders(1)
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Income (loss) allocable to common shareholders
|
|
$
|
46,859
|
|
|
|
(208,483
|
)
|
Weighted average common shares outstanding
|
|
|
70,932
|
|
|
|
66,448
|
|
Dilutive effect of stock awards and warrants(2)
|
|
|
1,031
|
|
|
|
|
|
Dilutive effect of preferred stock assuming conversion(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
71,963
|
|
|
|
66,448
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.65
|
|
|
$
|
(3.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In computing EPS using the two-class method, we have not
allocated the net loss reported for the year ended
December 31, 2006 between common and preferred shareholders
since preferred shareholders had no contractual obligation to
share in the net loss.
|
|
(2)
|
|
Due to the loss allocable to common shareholders reported for
the year ended December 31, 2006, the effect of all
stock-based awards, warrants and the assumed conversion of the
preferred stock were anti-dilutive and therefore are not
included in the calculation of diluted EPS. For the years ended
December 31, 2007 and 2006, 2,593 shares and
2,263 shares, respectively, of stock-based awards had
exercise prices that exceeded the average market price of our
common stock for the respective periods. For the year ended
December 31, 2006, the assumed conversion of the preferred
stock into 391 shares of common stock was anti-dilutive and
therefore not included in the calculation of diluted EPS.
|
62
Non-GAAP
measures Adjusted pro forma amounts
As a result of the Dex Media merger and AT&T Directory
Acquisition, the related financings and associated purchase
accounting, our 2007 results reported in accordance with GAAP
are not comparable to our 2006 reported GAAP results. GAAP
results presented for the year ended December 31, 2006
include eleven months of results from the Dex Media Business,
which was acquired on January 31, 2006. 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 in 2006 directory revenue and
certain expenses associated with directories that published
prior to the Dex Media merger, including all directories
published in the month the Dex Media merger was completed. Thus,
our reported 2007 and 2006 GAAP results are not comparable and
our 2006 results are not indicative of our underlying operating
and financial performance. Accordingly, management is presenting
adjusted pro forma information for the year ended
December 31, 2006 that, among other things, eliminates the
purchase accounting impact on revenue and certain expenses
related to the Dex Media merger and assumes the Dex Media merger
occurred on January 1, 2006. Management believes that the
presentation of this adjusted pro forma information will help
financial statement users better and more easily compare current
period underlying operating results against what the combined
company performance would more likely have been in the
comparable prior period. All of the adjusted pro forma amounts
disclosed below or elsewhere are non-GAAP measures, which are
reconciled to the most comparable GAAP measures below. While the
adjusted pro forma results exclude the effects of purchase
accounting, and certain other non-recurring items, to better
reflect underlying operating results in 2006, because of
differences between RHD and Dex Media and their respective
accounting policies, the 2007 GAAP results and 2006 adjusted pro
forma results are not strictly comparable and should not be
treated as such.
2007
reported GAAP operating income compared to 2006 adjusted pro
forma operating income
The components of reported GAAP operating income for the year
ended December 31, 2007 and adjusted pro forma operating
income for the year ended December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
Reported
|
|
|
|
Reported
|
|
|
|
|
|
Adjusted
|
|
|
|
|
|
|
GAAP
|
|
|
|
GAAP
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
Net revenue
|
|
$
|
2,680.3
|
|
|
|
$
|
1,899.3
|
|
|
$
|
789.2
|
(1)
|
|
$
|
2,688.5
|
|
|
$
|
(8.2
|
)
|
Expenses, other than depreciation and amortization
|
|
|
1,312.2
|
|
|
|
|
1,132.9
|
|
|
|
108.8
|
(2)
|
|
|
1,241.7
|
|
|
|
70.5
|
|
Depreciation and amortization
|
|
|
463.1
|
|
|
|
|
323.6
|
|
|
|
20.5
|
(3)
|
|
|
344.1
|
|
|
|
119.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
905.0
|
|
|
|
$
|
442.8
|
|
|
$
|
659.9
|
|
|
$
|
1,102.7
|
|
|
$
|
(197.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents all deferred revenue for directories that published
prior to the Dex Media merger, which would have been recognized
during the period absent purchase accounting required under
GAAP. Adjustments also include GAAP revenue for January 2006 as
reported by Dex Media.
|
|
(2)
|
|
Represents (a) certain deferred expenses for directories
that published prior to the Dex Media merger, which would have
been recognized during the period absent purchase accounting
required under GAAP, (b) GAAP expenses for January 2006 as
reported by Dex Media, (c) exclusion of transaction
expenses reported by Dex Media in January 2006 directly related
to the Dex Media merger and (d) the exclusion of cost
uplift recorded under purchase accounting associated with the
Dex Media merger and the AT&T Directory Acquisition.
|
|
(3)
|
|
Represents the additional amortization expense related to the
identifiable intangible assets acquired in the Dex Media merger,
assuming the Dex Media merger was consummated on January 1,
2006.
|
63
2007
reported GAAP net revenue compared to 2006 adjusted pro forma
net revenue
The components of reported GAAP net revenue for the year ended
December 31, 2007 and adjusted pro forma net revenue for
the year ended December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
Reported
|
|
|
|
Reported
|
|
|
|
|
|
Adjusted
|
|
|
|
|
|
|
GAAP
|
|
|
|
GAAP
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
Gross directory advertising revenue
|
|
$
|
2,697.3
|
|
|
|
$
|
1,907.3
|
|
|
$
|
798.1
|
(1)
|
|
$
|
2,705.4
|
|
|
$
|
(8.1
|
)
|
Sales claims and allowances
|
|
|
(54.8
|
)
|
|
|
|
(41.9
|
)
|
|
|
(23.0
|
)(1)
|
|
|
(64.9
|
)
|
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net directory advertising revenue
|
|
|
2,642.5
|
|
|
|
|
1,865.4
|
|
|
|
775.1
|
|
|
|
2,640.5
|
|
|
|
2.0
|
|
Other revenue
|
|
|
37.8
|
|
|
|
|
33.9
|
|
|
|
14.1
|
(2)
|
|
|
48.0
|
|
|
|
(10.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
2,680.3
|
|
|
|
$
|
1,899.3
|
|
|
$
|
789.2
|
|
|
$
|
2,688.5
|
|
|
$
|
(8.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents gross directory advertising revenue and sales claims
and allowances for directories that published prior to the Dex
Media merger, which would have been recognized during the period
absent purchase accounting required under GAAP. Adjustments also
include GAAP results for January 2006 as reported by Dex Media.
|
|
(2)
|
|
Other revenue includes barter revenue, late fees paid on
outstanding customer balances, commissions earned on sales
contracts with respect to advertising placed into other
publishers directories, sales of directories and certain
other print and internet products.
|
Gross directory advertising revenue with respect to print
advertising, and Internet-based advertising products that are
sold with print advertising, is recognized under the deferral
and amortization method, whereby revenue is initially deferred
when a directory is published and recognized ratably over the
directorys life, which is typically 12 months.
Revenue with respect to Internet-based services that are not
sold with print advertising, such as Internet marketing
services, is recognized as delivered or fulfilled. Accordingly,
revenue recognized in a reporting period consists of
(i) revenue incurred in that period and fully recognized in
that period, (ii) revenue incurred in a prior period, a
current portion of which is amortized and recognized in the
current period, and (iii) revenue 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.
Gross revenue for the year ended December 31, 2007 was
$2,697.3 million, representing a decrease of
$8.1 million, or 0.3%, from adjusted pro forma gross
revenue of $2,705.4 million for the year ended
December 31, 2006. The primary components of this decrease
include declines in renewal business, mainly driven by
conservatism in advertiser spending based on economic
indicators, weaker advertising sales in the first and third
quarters of 2007, partially offset by stronger advertising sales
in the second and fourth quarters of 2007, increases in our new
online products and services, Business.com and Local Launch
revenue.
Reported sales claims and allowances for the year ended
December 31, 2007 were $54.8 million, representing a
decrease of $10.1 million or 15.6% from adjusted pro forma
sales claims and allowances of $64.9 million reported for
the year ended December 31, 2006. This decrease is
primarily due to higher sales claims experience in 2006
associated with the prior legacy Dex Media systems conversion.
The system conversion issues were resolved during 2006.
Reported other revenue for the year ended December 31, 2007
was $37.8 million, representing a decrease of
$10.2 million or 21.3% from adjusted pro forma other
revenue of $48.0 million for the year ended
December 31, 2006. This decrease is primarily related to
declines in barter activity and declines in revenue related to
other advertising-related products.
2007
reported GAAP expenses compared to 2006 adjusted pro forma
expenses
Reported GAAP expenses, other than depreciation and
amortization, for the year ended December 31, 2007 of
$1,312.2 million increased by $70.5 million, or 5.7%,
from adjusted pro forma expenses of
64
$1,241.7 million for the year ended December 31, 2006.
The primary components of the $70.5 million increase in
reported GAAP expenses, other than depreciation and
amortization, for the year ended December 31, 2007 are
shown below:
|
|
|
|
|
|
|
$ Change
|
|
|
|
(Amounts in
|
|
|
|
millions)
|
|
|
Increased internet production and distribution costs
|
|
$
|
33.8
|
|
Cost uplift expense
|
|
|
28.9
|
|
Increased advertising and branding expenses
|
|
|
22.5
|
|
Increased print, paper and distribution costs
|
|
|
10.9
|
|
Increased IT expenses
|
|
|
4.1
|
|
Decreased commissions and salesperson costs
|
|
|
(9.5
|
)
|
Decreased barter expense
|
|
|
(8.0
|
)
|
Decreased general corporate expenses
|
|
|
(5.5
|
)
|
All other, net
|
|
|
(6.7
|
)
|
|
|
|
|
|
Total increase in 2007 reported GAAP expenses, other than
depreciation and amortization, compared to 2006 adjusted pro
forma expenses
|
|
$
|
70.5
|
|
|
|
|
|
|
Reported GAAP internet production and distribution costs for the
year ended December 31, 2007 increased $33.8 million
from adjusted pro forma internet production and distribution
costs for the year ended December 31, 2006 due to
investment in our Triple Play strategy as well as costs
associated with the operations of Business.com. Investment in
our Triple Play strategy focuses on enhancing and growing our
IYP and Internet marketing products and services. Adjusted pro
forma internet production and distribution costs for the year
ended December 31, 2006 also included expenses for January
2006 as reported by Dex Media.
During the year ended December 31, 2007, reported GAAP
expenses, other than depreciation and amortization, include
$28.9 million of cost uplift expense related to the Dex
Media merger, while adjusted pro forma expenses for the year
ended December 31, 2006 exclude cost uplift expense.
Similarly, reported GAAP expenses for the year ended
December 31, 2006 included $124.0 million of cost
uplift expense related to the Dex Media merger and AT&T
Directory Acquisition, with no comparable adjusted pro forma
expense for the year ended December 31, 2006. Cost uplift
related to the Dex Media merger has been fully recognized in
2007 as all directories that were scheduled to publish on a
12 month cycle have been published. Cost uplift related to
the Dex Media merger will not impact future periods.
During the year ended December 31, 2007, we incurred
$22.5 million of additional advertising and branding
expenses as compared to adjusted pro forma advertising and
branding expenses for the year ended December 31, 2006.
These media and collateral costs were 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. The increase in advertising
expense also includes $7.8 million related to traffic
acquisition costs associated with the operations of Business.com.
During the year ended December 31, 2007, we incurred
$10.9 million of additional print, paper and distribution
costs as compared to adjusted pro forma print, paper and
distribution costs during the year ended December 31, due
to new companion print products in our Embarq and AT&T
markets. Increases were offset by the commencement of our print
product optimization program and negotiated price reductions in
our print expenses.
During the year ended December 31, 2007, we incurred
approximately $4.1 million of additional GAAP IT
expenses compared to adjusted pro forma IT expenses for the year
ended December 31, 2006, due to recognizing a full year of
results from the acquired Dex Media Business, investment in 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. This increase is partially offset by cost savings
resulting from lower rates associated with a recently negotiated
IT contract, which became
65
effective in July 2007. Adjusted pro forma IT expenses for the
year ended December 31, 2006 also included expenses for
January 2006 as reported by Dex Media.
Commissions and salesperson costs for the year ended
December 31, 2007 decreased $9.5 million from adjusted
pro forma commissions and salesperson costs for the year ended
December 31, 2006, primarily due to lower CMR commission
rates.
During the year ended December 31, 2007, barter expenses
declined $8.0 million, compared to adjusted pro forma
barter expenses for the year ended December 31, 2006, due
to declines in barter activity in our Qwest markets.
Reported GAAP general corporate expenses for the year ended
December 31, 2007 were $5.5 million lower than
adjusted pro forma general corporate expenses for the year ended
December 31, 2006, primarily due to achieving cost
synergies and expense reduction efforts associated with the Dex
Media merger.
Changes in the All other category primarily relate to a decrease
in non-cash stock-based compensation expense, partially offset
by an increase in sales training costs due to new product
introductions across our entire footprint, including online
products and services.
Reported GAAP D&A expense for the year ended
December 31, 2007 was $463.1 million, compared to
adjusted pro forma D&A expense of $344.1 million for
the year ended December 31, 2006. Adjusted pro forma
D&A expense for the year ended December 31, 2006
includes incremental D&A as if the Dex Media merger had
occurred on January 1, 2006. The increase in reported
GAAP D&A for the year ended December 31, 2007 of
$119.0 million is primarily related to amortizing the local
customer relationships intangible asset acquired in the Dex
Media merger beginning in the first quarter of 2007, the
impairment charge associated with the tradenames acquired in the
Embarq Directory Acquisition discussed above, and amortization
of intangible assets acquired in the Business.com Acquisition.
2007
reported GAAP operating income compared to 2006 adjusted pro
forma operating income
Reported GAAP operating income for the year ended
December 31, 2007 was $905.0 million, representing a
decrease of $197.7 million from adjusted pro forma
operating income of $1,102.7 million for the year ended
December 31, 2006, reflecting the variances between
revenues and expenses from period to period described above.
Year
ended December 31, 2006 compared to year ended
December 31, 2005
Factors
affecting comparability
Reclassifications
Certain prior period amounts included in the consolidated
statements of operations have been reclassified to conform to
the current periods 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 and bad debt expense in 2005
to conform to the current periods presentation.
Adjustments for customer claims prior to 2006 were not material.
These reclassifications had no impact on operating income or net
income for the years ended December 31, 2006 and 2005. The
table below summarizes these reclassifications.
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
Year Ended December 31, 2005
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Reclass
|
|
|
As Reclassified
|
|
|
Reported
|
|
|
Reclass
|
|
|
As Reclassified
|
|
|
|
(Amounts in millions)
|
|
|
Net revenue
|
|
$
|
1,895.9
|
|
|
$
|
3.4
|
|
|
$
|
1,899.3
|
|
|
$
|
956.6
|
|
|
$
|
|
|
|
$
|
956.6
|
|
Cost of revenue
|
|
|
987.1
|
|
|
|
(645.0
|
)
|
|
|
342.1
|
|
|
|
436.0
|
|
|
|
(320.1
|
)
|
|
|
115.9
|
|
Selling and support expenses
|
|
|
|
|
|
|
656.0
|
|
|
|
656.0
|
|
|
|
|
|
|
|
327.4
|
|
|
|
327.4
|
|
General and administrative expenses
|
|
|
142.4
|
|
|
|
(7.6
|
)
|
|
|
134.8
|
|
|
|
60.2
|
|
|
|
(7.2
|
)
|
|
|
53.0
|
|
Acquisitions
As a result of the Dex Media merger and AT&T Directory
Acquisition, the related financings and associated purchase
accounting, our 2006 results reported in accordance with GAAP
are not comparable to our 2005 reported GAAP results. GAAP
results presented for the year ended December 31, 2006
include eleven months of results from the Dex Media Business,
which was acquired on January 31, 2006. 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 acquisition, including all directories published in the
month each acquisition was completed. Thus, our reported 2006
and 2005 GAAP results are not comparable or indicative of our
underlying operating and financial performance. Accordingly,
management is presenting (1) 2006 adjusted pro forma
information that, among other things, eliminates the purchase
accounting impact on revenue and certain expenses related to the
Dex Media merger and assumes the Dex Media merger occurred on
January 1, 2006, and (2) 2005 combined adjusted
information reflecting the sum of (a) RHDs 2005
adjusted results (reflecting adjustments relating to the
AT&T Directory Acquisition) and (b) Dex Medias
reported GAAP results during the period. Management believes
that the presentation of this adjusted pro forma and combined
adjusted information will help financial statement users better
and more easily compare current period underlying operating
results against what the combined company performance would more
likely have been in the comparable prior period. All of the
adjusted pro forma and combined adjusted amounts disclosed under
the caption Non-GAAP measures Adjusted pro
forma and combined adjusted amounts or elsewhere are
non-GAAP measures, which are reconciled to the most comparable
GAAP measures under that caption below. While the adjusted pro
forma and combined adjusted results each exclude the effects of
purchase accounting, and certain other non-recurring items, to
better reflect underlying operating results in the respective
periods, because of differences between RHD, Dex Media and
AT&T and their respective predecessor accounting policies,
the adjusted pro forma and combined adjusted results are not
strictly comparable and should not be treated as such.
SFAS No. 123 (R)
For the year ended December 31, 2006, we recognized
$43.3 million of stock-based compensation expense in
accordance with SFAS No. 123 (R) related to
stock-based awards granted under our various employee and
non-employee stock incentive plans, with no expense on a
comparable basis in 2005.
67
GAAP Reported
Results
Net
Revenue
The components of our net revenue for the years ended
December 31, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Gross directory advertising revenue
|
|
$
|
1,907.3
|
|
|
$
|
956.0
|
|
|
$
|
951.3
|
|
Sales claims and allowances
|
|
|
(41.9
|
)
|
|
|
(10.4
|
)
|
|
|
(31.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net directory advertising revenue
|
|
|
1,865.4
|
|
|
|
945.6
|
|
|
|
919.8
|
|
Other revenue
|
|
|
33.9
|
|
|
|
11.0
|
|
|
|
22.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
1,899.3
|
|
|
$
|
956.6
|
|
|
$
|
942.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our directory advertising revenue is earned primarily from the
sale of advertising in yellow pages directories we publish, net
of sales claims and allowances. Directory advertising revenue
also includes revenue for those Internet-based advertising
products that are bundled with print advertising, including
certain IYP products, and Internet-based advertising products
not bundled with print advertising, such as our SEM and SEO
services. Directory advertising revenue is affected by several
factors, including changes in the quantity and size of
advertisements sold, defectors and new advertisers, as well as
the proportion of premium advertisements sold, changes in the
pricing of advertising, changes in the quantity and mix of
advertising purchased per account and the introduction of
additional products that generate incremental revenue. Revenue
with respect to print advertising, and Internet-based
advertising products that are bundled with print advertising, is
recognized under the deferral and amortization method, whereby
revenue is initially deferred when a directory is published and
recognized ratably over the directorys life, which is
typically 12 months. Revenue with respect to Internet-based
services that are not bundled with print advertising, such as
SEM and SEO services, is recognized as delivered or fulfilled.
Total net revenue in 2006 was $1,899.3 million,
representing an increase of $942.7 million from total net
revenue reported in 2005 of $956.6 million. The increase in
total net revenue in 2006 is primarily a result of the Dex Media
merger, as well as, to a lesser extent, purchase accounting
resulting from the AT&T Directory Acquisition. Total net
revenue for 2006 includes $857.2 million of net revenue
from Qwest directories with no comparable revenue in 2005. Due
to purchase accounting, total net revenue for 2006 excluded the
amortization of advertising revenue for Qwest directories
published before February 2006 under the deferral and
amortization method totaling $649.1 million, which would
have been reported in the period absent purchase accounting.
Purchase accounting related to the Dex Media merger will not
adversely impact reported revenue during 2007. Purchase
accounting resulting from the AT&T Directory Acquisition
negatively impacted net revenue during 2005 by
$85.0 million with respect to AT&T-branded directories
that published prior to the AT&T Directory Acquisition,
which would have been recognized during 2005 had it not been for
purchase accounting required under GAAP. Purchase accounting
related to the AT&T Directory Acquisition did not adversely
impact reported revenue during 2006.
The increase in total net revenue also resulted from higher
recurring advertising in our major Embarq markets and improved
sales performance in certain of our AT&T markets. The
increase in total net revenue is offset by declines in some of
our other AT&T markets due to re-alignment of the coverage
areas of our publications to better reflect shopping patterns as
well as tightening our credit standards to build a more stable
account base over time.
Other revenue in 2006 totaled $33.9 million, representing
an increase of $22.9 million from other revenue reported in
2005 of $11.0 million. The increase in other revenue in
2006 is primarily a result of the Dex Media merger. Other
revenue includes barter revenue, late fees paid on outstanding
customer balances, commissions earned on sales contracts with
respect to advertising placed into other publishers
directories, and sales of directories and certain other print
products.
68
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 revenue, which under GAAP is recognized under the deferral
and amortization method. Advertising sales for the years ended
December 31, 2006 and 2005 were $2,648.2 million and
$2,695.1 million, respectively, and assumes the Dex Media
merger occurred on January 1, 2005. The $46.9 million
decrease in advertising sales is primarily a result of the
transition and integration of our Dex Media Business, including
higher customer sales claims and allowances resulting from prior
legacy Dex Media systems conversion that led to declines in
advertising sales in certain of our Qwest markets. The decrease
in advertising sales also resulted from declines in national
sales associated with rescoping and consolidation of products in
our AT&T markets. These declines are partially offset by
continued growth associated with our products in our Embarq
markets. This decrease in advertising sales will adversely
impact amortization of directory advertising revenues over the
next four quarters. Revenue with respect to print advertising,
and Internet-based advertising products that are bundled with
print advertising, is recognized under the deferral and
amortization method, whereby revenue is initially deferred when
a directory is published and recognized ratably over the
directorys life, which is typically 12 months.
Revenue with respect to Internet-based services that are not
bundled with print advertising, such as SEM and SEO services, is
recognized as delivered or fulfilled.
Expenses
The components of our total expenses for the years ended
December 31, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Cost of revenue
|
|
$
|
342.1
|
|
|
$
|
115.9
|
|
|
$
|
226.2
|
|
Selling and support expenses
|
|
|
656.0
|
|
|
|
327.4
|
|
|
|
328.6
|
|
General and administrative expenses
|
|
|
134.8
|
|
|
|
53.0
|
|
|
|
81.8
|
|
Depreciation and amortization expense
|
|
|
323.6
|
|
|
|
85.1
|
|
|
|
238.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,456.5
|
|
|
$
|
581.4
|
|
|
$
|
875.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substantially all expenses are derived from our directory
publishing business and Internet-based advertising products and
services. Certain costs directly related to the selling and
production of directories are initially deferred and recognized
ratably over the life of the directory. These costs are
specifically identifiable to a particular directory and include
sales commissions and print, paper and initial distribution
costs. Sales commissions include commissions 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. All deferred costs related to
the sale and production of directories are recognized ratably
over the life of each directory under the deferral and
amortization method of accounting, with cost recognition
commencing in the month of directory distribution.
69
Cost
of revenue
Total cost of revenue in 2006 was $342.1 million compared
to $115.9 million in 2005. The primary components of the
$226.2 million increase in cost of revenue in 2006,
compared to 2005, are as follows:
|
|
|
|
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Expenses recorded in 2006 related to the Dex Media Business
|
|
$
|
154.1
|
|
Expenses related to the AT&T Directory Business excluded
from the comparable 2005 period due to purchase accounting from
the AT&T Directory Acquisition
|
|
|
4.7
|
|
Increased cost uplift expense (defined below)
|
|
|
64.6
|
|
All other
|
|
|
2.8
|
|
|
|
|
|
|
Total 2006 increase in cost of revenue, compared to 2005
|
|
$
|
226.2
|
|
|
|
|
|
|
Cost of revenue in 2006 increased $226.2 million compared
to 2005 primarily as a result of the Dex Media merger. Expenses
of $154.1 million incurred to support the Dex Media
Business during 2006 include printing, paper, distribution,
Internet production and distribution and other cost of revenue.
There were no comparable expenses during 2005.
Similar to the deferral and amortization method of revenue
recognition, certain costs directly related to the production of
our directories are initially deferred when incurred and
recognized ratably over the life of a directory. As a result of
purchase accounting required by GAAP, print and delivery costs
totaling $119.3 million were not reported during 2006
related to directories that published prior to and in the month
of the Dex Media merger. Directory expenses incurred during 2006
include the amortization of deferred directory costs relating to
Qwest directories published beginning in February 2006. In
addition, $4.7 million of print and delivery costs for
directories that published prior to the AT&T Directory
Acquisition were not reported during 2005 due to purchase
accounting.
As a result of 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 and the AT&T
Directory Acquisition 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 is amortized
over the terms of the applicable directories to cost of revenue,
whereas cost uplift associated with commissions is amortized
over the terms of the applicable directories to selling and
support expenses. The fair value of these costs was determined
to be $157.7 million and $81.3 million for the Dex
Media merger and the AT&T Directory Acquisition,
respectively. Cost uplift amortization associated with print,
paper and delivery costs totaled $64.6 million during 2006
relating to the Dex Media merger, with no comparable expense
during 2005. There was no amortization of cost uplift recognized
as cost of revenue for the years ended December 31, 2006
and 2005 relating to the AT&T Directory Acquisition.
70
Selling
and support expenses
Total selling and support expenses were $656.0 million in
2006 compared to $327.4 million in 2005. The primary
components of the $328.6 million increase in selling and
support expenses in 2006, compared to 2005, are as follows:
|
|
|
|
|
|
|
$ Change
|
|
|
|
(Amounts in
|
|
|
|
millions)
|
|
|
Expenses recorded in 2006 related to the Dex Media Business
|
|
$
|
295.0
|
|
Expenses related to the AT&T Directory Business excluded
from the comparable 2005 period due to purchase accounting from
the AT&T Directory Acquisition
|
|
|
10.4
|
|
Stock-based compensation expense resulting from the adoption of
SFAS No. 123(R)
|
|
|
15.5
|
|
Increased commissions and salesperson costs
|
|
|
10.1
|
|
Decreased cost uplift expense
|
|
|
(5.6
|
)
|
All other
|
|
|
3.2
|
|
|
|
|
|
|
Total 2006 increase in selling and support expenses, compared to
2005
|
|
$
|
328.6
|
|
|
|
|
|
|
Selling and support expenses in 2006 increased
$328.6 million compared to 2005 primarily as a result of
the Dex Media merger. Expenses of $295.0 million incurred
to support the Dex Media Business during 2006 include bad debt,
commissions, salesperson expenses, advertising and other selling
and support expenses. There were no comparable expenses during
2005.
Similar to the deferral and amortization method of revenue
recognition, certain costs directly related to the selling of
our directories are initially deferred when incurred and
recognized ratably over the life of a directory. As a result of
purchase accounting required by GAAP, deferred commissions and
other selling and support costs totaling $100.7 million
were not reported during 2006 related to directories that
published prior to and in the month of the Dex Media merger.
Directory expenses incurred during 2006 include the amortization
of deferred directory costs relating to Qwest directories
published beginning in February 2006. In addition,
$10.4 million of deferred commissions for directories that
published prior to the AT&T Directory Acquisition were not
reported during 2005 due to purchase accounting. Purchase
accounting related to the AT&T Directory Acquisition
adversely impacted selling and support expenses during 2006 by
$2.1 million, due to the remaining amortization of cost
uplift.
Selling and support expenses during 2006 also included
$15.5 million of non-cash stock-based compensation expense
resulting from SFAS No. 123 (R), which we adopted
effective January 1, 2006, with no expense on a comparable
basis in 2005. During 2006, $4.8 million of non-cash
stock-based compensation expense resulted from modifications to
stock-based awards due to acceleration of vesting terms as a
result of the Dex Media merger. Selling and support expenses
includes non-cash stock-based compensation expense for employees
whose wages are classified as selling and support expenses.
Also during 2006, we incurred approximately $10.1 million
of additional selling expenses, including commissions and
salesperson costs, compared to 2005 due to initiatives to
improve sales results in certain markets.
Cost uplift associated with commissions, which is amortized as
selling and support expenses, totaled $59.4 million during
2006 relating to the Dex Media merger and the AT&T
Directory Acquisition. This represents a decrease in cost uplift
of $5.6 million from $65.0 million recorded during
2005 relating to the AT&T Directory Acquisition.
71
General
and administrative expenses
G&A expenses in 2006 were $134.8 million compared to
$53.0 million in 2005, representing an increase of
$81.8 million. The primary components of the
$81.8 million increase in G&A expenses in 2006,
compared to 2005, are as follows:
|
|
|
|
|
|
|
$ Change
|
|
|
|
(Amounts in
|
|
|
|
millions)
|
|
|
Increased G&A expenses related to the Dex Media Business
|
|
$
|
50.1
|
|
Stock-based compensation expense resulting from the adoption of
SFAS No. 123 (R)
|
|
|
27.8
|
|
Increase in IT expenses
|
|
|
10.4
|
|
All other G&A expenses
|
|
|
(6.5
|
)
|
|
|
|
|
|
Total 2006 increase in G&A expenses, compared to 2005
|
|
$
|
81.8
|
|
|
|
|
|
|
G&A expenses during 2006 included $50.1 million of
G&A expenses primarily to support the acquired Dex Media
Business, with no comparable expense in 2005. G&A expenses
include financial services, human resources and administrative
services.
G&A expenses during 2006 also included $27.8 million
of non-cash stock-based compensation expense resulting from
SFAS No. 123 (R), which we adopted effective
January 1, 2006, with no expense on a comparable basis in
2005. During 2006, $8.6 million of non-cash stock-based
compensation expense resulted from modifications to stock-based
awards due to acceleration of vesting terms as a result of the
Dex Media merger. G&A expenses include non-cash stock-based
compensation expense for employees whose wages are classified as
G&A expenses.
During 2006, we incurred approximately $10.4 million of
additional IT expenses compared to 2005, due to enhancements and
technical support of multiple production systems as we begin
implementing our integration plan to a consolidated IT platform
subsequent to the Dex Media merger.
Depreciation
and amortization
D&A expenses during 2006 totaled $323.6 million
compared to $85.1 million in 2005, representing an increase
of $238.5 million. Amortization of intangible assets was
$277.5 million during 2006 compared to $72.1 million
in 2005. The increase in amortization expense is due to the
increase in intangible assets resulting from the Dex Media
merger.
Depreciation of fixed assets and amortization of computer
software was $46.1 million during 2006 compared to
$13.0 million in 2005. The increase in depreciation expense
was primarily due to the depreciable assets acquired in the Dex
Media merger.
Operating
income
Operating income for the years ended December 31, 2006 and
2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Total
|
|
$
|
442.8
|
|
|
$
|
375.2
|
|
|
$
|
67.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income for 2006 of $442.8 million increased by
$67.6 million from 2005 operating income of
$375.2 million, primarily as a result of the Dex Media
merger. The results for 2006 and 2005 were adversely affected by
purchase accounting that precluded us from recognizing all
deferred revenue and certain expenses associated with those
directories published prior to the Dex Media merger and
AT&T Directory Acquisition, including all directories
published in the month each acquisition was completed. While
total net revenue in 2006 increased by $942.7 million over
total net revenue in 2005, primarily resulting from the Dex
Media merger, offsetting that increase in total net revenue was
an increase in total expenses in 2006 of $875.1 million,
72
also primarily a result of the Dex Media merger and the 2005
purchase accounting impact from the AT&T Directory
Acquisition.
Since all deferred net revenue related to directories published
prior to and in the month of the Dex Media merger and AT&T
Directory Acquisition is eliminated in purchase accounting, but
only certain direct expenses related to these directories are
eliminated under purchase accounting, purchase accounting has a
disproportionate adverse effect on reported revenues. Each month
subsequent to the Dex Media merger until the impact of purchase
accounting expires, revenue will increase at a higher rate than
the related expenses when compared to the prior year.
In addition to the impact of purchase accounting, total expenses
in 2006 reflect non-cash stock-based compensation expense
recognized as a result of the adoption of
SFAS No. 123 (R), with no expense on a comparable
basis in 2005. Additionally, 2006 cost of revenue reflects an
increase in deferred cost uplift amortization as described above.
When the effects of purchase accounting are eliminated, adjusted
pro forma operating income for 2006 is substantially higher
compared to GAAP operating income in 2005. See Non-GAAP
measures Adjusted pro forma and combined adjusted
amounts below.
Operating income in 2007 will be impacted solely by the cost
uplift aspect of purchase accounting related to the Dex Media
merger of approximately $35.8 million.
Interest
expense, net
Net interest expense in 2006 was $765.1 million, compared
to $264.5 million in 2005. The increase in net interest
expense of $500.6 million in 2006 is a result of
dramatically higher outstanding debt balances associated with
the Dex Media merger, combined with higher interest rates. See
Liquidity and Capital Resources for a further
description of our debt obligations and the provisions of the
related debt instruments. Net interest expense in 2005 includes
a $25.3 million call premium payment and write-off of
unamortized deferred financing costs of $7.4 million
associated with the December 20, 2005 tender offer and exit
consent solicitation of RHDIs 8.875% senior notes due
2010. Net interest expense in 2006 includes $21.9 million
of non-cash amortization of deferred financing costs, compared
to $23.6 million of non-cash amortization of deferred
financing costs in 2005 (including the write-off of unamortized
deferred financing costs of $7.4 million noted above).
In conjunction with the Dex Media merger and as a result of
purchase accounting required under GAAP, we recorded Dex
Medias debt at its fair value on January 31, 2006. We
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 in
2006 was $26.4 million.
(Benefit)
provision for income taxes
The 2006 income tax benefit of $84.5 million is comprised
of a federal deferred tax benefit of $112.9 million
resulting from the current period taxable loss, offset by a
state tax provision of $28.4 million. The 2006 state
tax provision of $28.4 million primarily resulted from the
modification of apportioned taxable income or loss among various
states as reflected in our 2005 state tax returns that were
filed in 2006. A net operating loss of approximately
$216.3 million was generated in 2006 primarily as a result
of tax amortization expense recorded with respect to the
intangible assets acquired in the Dex Media merger, AT&T
Directory Acquisition and Embarq Directory Acquisition.
At December 31, 2006, we had federal and state net
operating loss carryforwards of approximately
$712.8 million (net of carryback) and $782.3 million,
respectively, which will begin to expire in 2023 and 2008,
respectively. We also had $3.6 million of federal
alternative minimum tax, or AMT, credit carryforward, which does
not expire.
The 2005 provision for income taxes of $43.2 million is
comprised of a deferred tax provision due to the taxable loss
generated in the current period. The 2005 deferred tax provision
resulted in an effective tax rate
73
of 39.0% and net operating losses of approximately
$168.6 million related to tax deductions and amortization
expense recorded for tax purposes compared to book purposes with
respect to the intangible assets acquired in the Embarq
Directory Acquisition and the AT&T Directory Acquisition.
The 2005 effective tax rate reflects a decrease in the state and
local tax rate due to integration of the Embarq Directory
Acquisition and the AT&T Directory Acquisition.
We are currently under federal tax audit by the IRS for the
taxable years 2003 and 2004. We believe that adequate provisions
have been made with respect to the federal tax audit and believe
the resolution of such audit will not have a material adverse
effect on our financial position, results of operations or cash
flows. In addition, certain state tax returns are under
examination by various regulatory authorities. We continuously
review issues raised in connection with ongoing examinations and
open tax years to evaluate the adequacy of our reserves. We
believe that our accrued tax liabilities are adequate to cover
all probable U.S. federal and state income tax loss
contingencies.
Net
(loss) income, loss available to common shareholders and loss
per share
Net loss for 2006 was $(237.7) million as compared to net
income of $67.5 million in 2005. The results for 2006 and
2005 were adversely affected by purchase accounting that
precluded us from recognizing all deferred revenue and certain
expenses associated with those directories published prior to
the Dex Media merger and AT&T Directory Acquisition,
including all directories published in the month each
acquisition was completed. The net loss recorded in 2006 also
reflects increased interest expense associated with the
dramatically higher outstanding debt balances associated with
the Dex Media merger, combined with higher interest rates, as
well as an increase in amortization expense associated with
intangible assets acquired in the Dex Media merger.
Purchase accounting resulting from the Dex Media merger will
impact reported results in 2007 by the cost uplift aspect of
purchase accounting described above of approximately
$35.8 million and the offset to interest expense related to
the fair value adjustment of Dex Medias debt described
above of approximately $31.3 million.
Prior to the GS Repurchase in January 2006, the 8% dividend on
our preferred stock reduced earnings available to common
shareholders from which earnings per share amounts were
calculated. The amount of the preferred stock dividend included
the stated 8% dividend, plus a deemed dividend for a BCF. The
BCF is a function of the conversion price of the preferred
stock, the fair value of the related warrants issued with the
preferred stock and the fair market value of the underlying
common stock on the date of issuance of the preferred stock. In
connection with the issuance of our preferred stock and each
subsequent quarterly accrued dividend through October 3,
2005, a BCF was recorded because the fair value of the
underlying common stock at the time of issuance of the preferred
stock was greater than the conversion price of the preferred
stock. The full amount of the BCF was treated as a deemed
dividend because the preferred stock was convertible into common
stock immediately after issuance in January 2003. The preferred
stock dividend for 2005 of $11.7 million consisted of the
8% dividend of $10.1 million (including $2.5 million
of accrued cash dividends recognized during the fourth quarter
of 2005) and a BCF of $1.6 million.
On January 14, 2005, we repurchased 100,303 shares of
our outstanding preferred stock from the GS Funds for
$277.2 million in cash. In connection with the preferred
stock repurchase, we recorded an increase to loss available to
common shareholders of $133.7 million to reflect the loss
on the repurchase of these shares. The excess of the cash paid
to the GS Funds over the carrying amount of the repurchased
preferred stock, plus the amount previously recognized for the
BCF associated with these shares was recognized as the loss on
repurchase.
On January 27, 2006, we completed the GS Repurchase,
whereby we repurchased the remaining 100,301 shares of our
outstanding Preferred Stock from the GS Funds for
$336.1 million in cash. As a result of the GS Repurchase
becoming a probable event under the terms of the stock purchase
agreement on October 3, 2005 (See Note 7,
Redeemable Preferred Stock, Warrants and Other of
the notes to the consolidated financial statements included
herein), the recorded value of the preferred stock was accreted
to its redemption value of $334.1 million at
December 31, 2005 and $336.1 million at
January 27, 2006. The
74
accretion to redemption value of $211.0 million and
$2.0 million (which represented accrued dividends and
interest) for the years ended December 31, 2005 and 2006,
respectively, has been recorded as an increase to loss available
to common shareholders on the consolidated statements of
operations. In conjunction with the GS Repurchase, we also
reversed the previously recorded BCF related to these shares and
recorded a decrease to loss available to common shareholders on
the consolidated statement of operations of approximately
$31.2 million for the year ended December 31, 2006.
The resulting loss available to common shareholders was
$(208.5) million for 2006, as compared to
$(288.9) million in 2005.
For the years ended December 31, 2006 (through
January 27, 2006, the closing date of the GS Repurchase)
and 2005, we accounted for (loss) earnings per share in
accordance with
EITF 03-6,
which established standards regarding the computation of EPS by
companies that have issued securities other than common stock
that contractually entitle the holder to participate in
dividends and earnings of the company.
EITF 03-6
requires earnings available to common shareholders for the
period, after deduction of preferred stock dividends, to be
allocated between the common and preferred shareholders based on
their respective rights to receive dividends. Basic EPS was then
calculated by dividing (loss) income allocable to common
shareholders by the weighted average number of shares
outstanding.
EITF 03-6
does not require the presentation of basic and diluted EPS for
securities other than common stock. Therefore, the following EPS
amounts only pertain to our common stock.
Under the guidance of
EITF 03-6,
diluted EPS was calculated by dividing (loss) income allocable
to common shareholders by the weighted average common shares
outstanding plus dilutive potential common stock. Potential
common stock includes stock options, SARs, restricted stock and
warrants, the dilutive effect of which is calculated using the
treasury stock method, and prior to the GS Repurchase, our 8%
Preferred Stock, the dilutive effect of which was calculated
using the if-converted method.
Subsequent to the GS Repurchase, we account for EPS in
accordance with SFAS No. 128,
Earnings Per Share,
and no longer utilize the two-class method for EPS
computations. The calculation of basic and diluted loss per
share for the years ended December 31, 2006 and 2005,
respectively, are presented below.
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands, except percentages and per share
amounts)
|
|
|
Basic EPS Two-Class Method
|
|
|
|
|
|
|
|
|
Loss available to common shareholders
|
|
$
|
(208,483
|
)
|
|
$
|
(288,876
|
)
|
Amount allocable to common shareholders(1)
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Loss allocable to common shareholders
|
|
|
(208,483
|
)
|
|
|
(288,876
|
)
|
Weighted average common shares outstanding
|
|
|
66,448
|
|
|
|
31,731
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share Two-Class Method
|
|
$
|
(3.14
|
)
|
|
$
|
(9.10
|
)
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands, except percentages and per share
amounts)
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
Loss available to common shareholders
|
|
$
|
(208,483
|
)
|
|
$
|
(288,876
|
)
|
Amount allocable to common shareholders(1)
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Loss allocable to common shareholders
|
|
|
(208,483
|
)
|
|
|
(288,876
|
)
|
Weighted average common shares outstanding
|
|
|
66,448
|
|
|
|
31,731
|
|
Dilutive effect of stock awards and warrants(2)
|
|
|
|
|
|
|
|
|
Dilutive effect of preferred stock assuming conversion(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
66,448
|
|
|
|
31,731
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(3.14
|
)
|
|
$
|
(9.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In computing EPS using the two-class method, we have not
allocated the net loss reported for the years ended
December 31, 2006 and 2005, respectively, between common
and preferred shareholders since preferred shareholders had no
contractual obligation to share in the net loss.
|
|
(2)
|
|
Due to the loss allocable to common shareholders reported for
the years ended December 31, 2006 and 2005, respectively,
the effect of all stock-based awards, warrants and the assumed
conversion of the preferred stock were anti-dilutive and
therefore are not included in the calculation of diluted EPS.
For the years ended December 31, 2006 and 2005,
2,263 shares and 60 shares, respectively, of stock-based
awards had exercise prices that exceeded the average market
price of our common stock for the respective periods. For the
years ended December 31, 2006 and 2005, the assumed
conversion of the preferred stock into 391 shares and
5,132 shares, respectively, of common stock was
anti-dilutive and therefore not included in the calculation of
diluted EPS.
|
Non-GAAP
measures Adjusted pro forma and combined adjusted
amounts
As a result of the Dex Media merger and AT&T Directory
Acquisition, the related financings and associated purchase
accounting, our 2006 results reported in accordance with GAAP
are not comparable to our 2005 reported GAAP results. GAAP
results presented for the year ended December 31, 2006
include eleven months of results from the Dex Media Business,
which was acquired on January 31, 2006. 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 acquisition, including all directories published in the
month each acquisition was completed. Thus, our reported 2006
and 2005 GAAP results are not comparable or indicative of our
underlying operating and financial performance. Accordingly,
management is presenting (1) 2006 adjusted pro forma
information that, among other things, eliminates the purchase
accounting impact on revenue and certain expenses related to the
Dex Media merger and assumes the Dex Media merger occurred on
January 1, 2006, and (2) 2005 combined adjusted
information reflecting the sum of (a) RHDs 2005
adjusted results (reflecting adjustments relating to the
AT&T Directory Acquisition) and (b) Dex Medias
reported GAAP results during the period. Management believes
that the presentation of this adjusted pro forma and combined
adjusted information will help financial statement users better
and more easily compare current period underlying operating
results against what the combined company performance would more
likely have been in the comparable prior period. All of the
adjusted pro forma and combined adjusted amounts disclosed below
or elsewhere are non-GAAP measures, which are reconciled to the
most comparable GAAP measures under that caption below. While
the adjusted pro forma and combined adjusted results each
exclude the effects of purchase accounting, and certain other
non-recurring items, to better reflect underlying operating
results in the respective periods, because of differences
between
76
RHD, Dex Media and AT&T and their respective predecessor
accounting policies, the adjusted pro forma and combined
adjusted results are not strictly comparable and should not be
treated as such.
2006
adjusted pro forma operating income compared to 2005 combined
adjusted operating income
The components of adjusted pro forma operating income for the
year ended December 31, 2006 and combined adjusted
operating income for the year ended December 31, 2005 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
Reported
|
|
|
|
|
|
|
|
|
|
GAAP
|
|
|
Adjustments
|
|
|
Adjusted Pro Forma
|
|
|
|
(Amounts in millions)
|
|
|
Net revenue
|
|
$
|
1,899.3
|
|
|
$
|
789.2
|
(1)
|
|
$
|
2,688.5
|
|
Expenses, other than depreciation and amortization
|
|
|
1,132.9
|
|
|
|
108.8
|
(2)
|
|
|
1,241.7
|
|
Depreciation and amortization
|
|
|
323.6
|
|
|
|
20.5
|
(3)
|
|
|
344.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
442.8
|
|
|
$
|
659.9
|
|
|
$
|
1,102.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2005
|
|
|
|
Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
|
|
|
Adjustments
|
|
|
Dex Media GAAP
|
|
|
Combined Adjusted
|
|
|
|
(Amounts in millions)
|
|
|
Net revenue
|
|
$
|
956.6
|
|
|
$
|
85.0
|
(4)
|
|
$
|
1,658.4
|
(6)
|
|
$
|
2,700.0
|
|
Expenses, other than depreciation and amortization
|
|
|
496.3
|
|
|
|
(49.9
|
)(5)
|
|
|
757.2
|
(6)
|
|
|
1,203.6
|
|
Depreciation and amortization
|
|
|
85.1
|
|
|
|
|
|
|
|
377.2
|
(6)
|
|
|
462.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
375.2
|
|
|
$
|
134.9
|
|
|
$
|
524.0
|
|
|
$
|
1,034.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents all deferred revenue for directories that published
prior to the Dex Media merger, which would have been recognized
during the period absent purchase accounting required under
GAAP. Adjustments also include GAAP revenue for January 2006 as
reported by Dex Media.
|
|
(2)
|
|
Represents (a) certain deferred expenses for directories
that published prior to the Dex Media merger, which would have
been recognized during the period absent purchase accounting
required under GAAP, (b) GAAP expenses for January 2006 as
reported by Dex Media, (c) exclusion of transaction
expenses reported by Dex Media in January 2006 directly related
to the Dex Media merger and (d) the exclusion of cost
uplift recorded under purchase accounting for the AT&T
Directory Acquisition and the Dex Media merger.
|
|
(3)
|
|
Represents the additional amortization expense related to the
identifiable intangible assets acquired in the Dex Media merger
over their estimated useful lives, assuming the Dex Media merger
was consummated on January 1, 2006.
|
|
(4)
|
|
Represents all deferred revenue for directories that published
prior to the AT&T Directory Acquisition, which would have
been recognized during the period had it not been for purchase
accounting required under GAAP.
|
|
(5)
|
|
Represents elimination of cost uplift for the AT&T
Directory Acquisition, net of certain deferred expenses for
AT&T directories that published prior to the AT&T
Directory Acquisition, which would have been recognized during
the period had it not been for purchase accounting required
under GAAP.
|
|
(6)
|
|
Represents net revenue, expenses and depreciation and
amortization reported by Dex Media on a GAAP basis for the year
ended December 31, 2005.
|
77
2006
adjusted pro forma revenue compared to 2005 combined adjusted
revenue
The components of adjusted pro forma revenue for the year ended
December 31, 2006 and combined adjusted revenue for the
year ended December 31, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
Reported
|
|
|
Dex Media merger
|
|
|
|
|
|
|
GAAP
|
|
|
Adjustments
|
|
|
Adjusted Pro Forma
|
|
|
|
(Amounts in millions)
|
|
|
Gross directory advertising revenue
|
|
$
|
1,907.3
|
|
|
$
|
798.1
|
(1)
|
|
$
|
2,705.4
|
|
Sales claims and allowances
|
|
|
(41.9
|
)
|
|
|
(23.0
|
)(1)
|
|
|
(64.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net directory advertising revenue
|
|
|
1,865.4
|
|
|
|
775.1
|
|
|
|
2,640.5
|
|
Other revenue
|
|
|
33.9
|
|
|
|
14.1
|
(2)
|
|
|
48.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
1,899.3
|
|
|
$
|
789.2
|
|
|
$
|
2,688.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2005
|
|
|
|
Reported
|
|
|
AT&T Directory Acquisition
|
|
|
|
|
|
Combined
|
|
|
|
GAAP
|
|
|
Adjustments
|
|
|
Dex Media GAAP
|
|
|
Adjusted
|
|
|
|
(Amounts in millions)
|
|
|
Gross directory advertising revenue
|
|
$
|
956.0
|
|
|
$
|
85.5
|
(3)
|
|
$
|
1,609.5
|
(4)
|
|
$
|
2,651.0
|
|
Sales claims and allowances
|
|
|
(10.4
|
)
|
|
|
(0.5
|
)(3)
|
|
|
|
|
|
|
(10.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net directory advertising revenue
|
|
|
945.6
|
|
|
|
85.0
|
|
|
|
1,609.5
|
|
|
|
2,640.1
|
|
Other revenue
|
|
|
11.0
|
|
|
|
|
|
|
|
48.9
|
(4)
|
|
|
59.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
956.6
|
|
|
$
|
85.0
|
|
|
$
|
1,658.4
|
|
|
$
|
2,700.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents gross directory advertising revenue and sales claims
and allowances for directories that published prior to the Dex
Media merger, which would have been recognized during the period
had it not been for purchase accounting required under GAAP.
Adjustments also include GAAP results for January 2006 as
reported by Dex Media.
|
|
(2)
|
|
Other revenue includes barter revenue, late fees paid on
outstanding customer balances, commissions earned on sales
contracts with respect to advertising placed into other
publishers directories, sales of directories and certain
other print and internet products.
|
|
(3)
|
|
Represents gross directory advertising revenue and sales claims
and allowances for AT&T directories that published prior to
the AT&T Directory Acquisition, which would have been
recognized during the period had it not been for purchase
accounting required under GAAP.
|
|
(4)
|
|
Represents 2005 reported GAAP results for Dex Media. Prior to
the Dex Media merger, Dex Media only reported directory
advertising revenue net of sales claims and allowances.
|
Adjusted pro forma net revenue for 2006 was
$2,688.5 million, representing a decrease of
$11.5 million or 0.4% from combined adjusted net revenue of
$2,700.0 million in 2005. Under the deferral and
amortization method of revenue recognition, revenue from
directory advertising sales is initially deferred when a
directory is published and recognized ratably over the life of
the directory, which is typically 12 months. Adjusted pro
forma net directory advertising revenue for 2006 decreased from
combined adjusted net directory advertising revenue in 2005
primarily due to unfavorable sales claims and allowance
experience primarily in the Qwest markets resulting from
customer claims associated with the prior legacy Dex Media
systems conversion, as well as declines in some of our AT&T
markets due to rescoping and consolidation of products, offset
by the amortization of revenue from favorable sales performances
in certain of our larger markets over the prior four quarters.
78
2006
adjusted pro forma expenses compared to 2005 combined adjusted
expenses
Adjusted pro forma expenses, other than depreciation and
amortization, for 2006 of $1,241.7 million increased by
$38.1 million from combined adjusted expenses of
$1,203.6 million for 2005. The primary components of the
$38.1 million increase in 2006 adjusted pro forma expenses,
other than depreciation and amortization, are shown below:
|
|
|
|
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Stock-based compensation expense resulting from adoption of
SFAS No. 123 (R)
|
|
$
|
43.3
|
|
Increased internet production and distribution costs
|
|
|
23.4
|
|
Increased advertising costs
|
|
|
16.0
|
|
Decreased general corporate expenses
|
|
|
(32.3
|
)
|
Decreased other marketing costs
|
|
|
(10.8
|
)
|
All other
|
|
|
(1.5
|
)
|
|
|
|
|
|
Total increase in 2006 adjusted pro forma expenses, other than
depreciation and amortization, compared to 2005 combined
adjusted expenses
|
|
$
|
38.1
|
|
|
|
|
|
|
Adjusted pro forma expenses, other than depreciation and
amortization, for 2006 were impacted by $43.3 million of
non-cash stock-based compensation expense resulting from
SFAS No. 123 (R), which we adopted effective
January 1, 2006, with no expense on a comparable basis in
2005. During 2006, $13.4 million of the reported
$43.3 million of non-cash stock-based compensation expense
resulted from modifications to stock-based awards outstanding
due to acceleration of vesting terms as a result of the Dex
Media merger.
Adjusted pro forma expenses, other than depreciation and
amortization, in 2006 increased by $23.4 million from 2005
combined adjusted expenses, due to increased Internet production
and distribution costs as we expanded our digital product line
offerings, which includes the acquired Dex Media Business.
Adjusted pro forma advertising costs in 2006 were
$16.0 million greater, compared to combined adjusted
advertising expenses in 2005 due to increased market investment
and competitive responses.
Adjusted pro forma general corporate expenses were
$32.3 million lower and marketing costs were
$10.8 million lower for 2006 compared to combined adjusted
expenses in 2005. Reductions in adjusted pro forma expenses
relate partially to achieving economies that accompany scale
subsequent to the Dex Media merger, as well as RHD-wide efforts
to reduce certain expenses throughout 2006.
Adjusted pro forma D&A for 2006 was $344.1 million and
includes incremental D&A as if the Dex Media merger had
occurred on January 1, 2006. Combined adjusted D&A for
2005 of $462.3 million represents D&A reported by both
RHD and Dex Media. The decrease in adjusted pro forma D&A
for 2006 of $118.2 million from combined adjusted D&A
for 2005 is primarily related to differences between RHD and Dex
Medias valuation and useful life assumptions utilized for
the amortization of Dex Medias intangible assets.
2006
adjusted pro forma operating income compared to 2005 combined
adjusted operating income
Adjusted pro forma operating income for 2006 was
$1,102.7 million, representing an increase of
$68.6 million or 6.6% from combined adjusted operating
income in 2005 of $1,034.1 million, reflecting the
variances between revenues and expenses from period to period
described above.
79
Liquidity
and capital resources
Debt
Long-term debt of RHD at March 31, 2008, December 31,
2007 and 2006, including fair value adjustments required by GAAP
as a result of the Dex Media merger, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
RHD
|
|
|
|
|
|
|
|
|
|
|
|
|
6.875% Senior Notes due 2013
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
6.875%
Series A-1
Senior Discount Notes due 2013
|
|
|
340,211
|
|
|
|
339,222
|
|
|
|
335,401
|
|
6.875%
Series A-2
Senior Discount Notes due 2013
|
|
|
615,438
|
|
|
|
613,649
|
|
|
|
606,472
|
|
8.875%
Series A-3
Senior Notes due 2016
|
|
|
1,210,000
|
|
|
|
1,210,000
|
|
|
|
1,210,000
|
|
8.875%
Series A-4
Senior Notes due 2017
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
|
|
|
|
RHDI
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,507,648
|
|
|
|
1,571,536
|
|
|
|
1,946,535
|
|
8.875% Senior Notes due 2010
|
|
|
|
|
|
|
|
|
|
|
7,934
|
|
10.875% Senior Subordinated Notes due 2012
|
|
|
|
|
|
|
|
|
|
|
600,000
|
|
Dex Media, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
8% Senior Notes due 2013
|
|
|
511,686
|
|
|
|
512,097
|
|
|
|
513,663
|
|
9% Senior Discount Notes due 2013
|
|
|
733,824
|
|
|
|
719,112
|
|
|
|
663,153
|
|
Dex Media East
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,101,900
|
|
|
|
1,106,050
|
|
|
|
656,571
|
|
9.875% Senior Notes due 2009
|
|
|
|
|
|
|
|
|
|
|
476,677
|
|
12.125% Senior Subordinated Notes due 2012
|
|
|
|
|
|
|
|
|
|
|
390,314
|
|
Dex Media West
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,031,061
|
|
|
|
1,071,491
|
|
|
|
1,450,917
|
|
8.5% Senior Notes due 2010
|
|
|
397,554
|
|
|
|
398,736
|
|
|
|
403,260
|
|
5.875% Senior Notes due 2011
|
|
|
8,770
|
|
|
|
8,774
|
|
|
|
8,786
|
|
9.875% Senior Subordinated Notes due 2013
|
|
|
822,754
|
|
|
|
824,982
|
|
|
|
833,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total RHD Consolidated
|
|
|
10,080,846
|
|
|
|
10,175,649
|
|
|
|
10,403,152
|
|
Less current portion
|
|
|
186,343
|
|
|
|
177,175
|
|
|
|
382,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
9,894,503
|
|
|
$
|
9,998,474
|
|
|
$
|
10,020,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
facilities
At March 31, 2008, total outstanding debt under our credit
facilities was $3,640.6 million, comprised of
$1,507.6 million under the RHDI credit facility,
$1,101.9 million under the new Dex Media East credit
facility and $1,031.1 million under the Dex Media West
credit facility.
RHD
To finance the Business.com Acquisition and related fees and
expenses, on August 23, 2007, RHD entered into the
$328.0 million RHD credit facility, with a scheduled
maturity date of December 31, 2011. On October 2,
2007, the RHD credit facility was paid in full from the proceeds
of the notes issued on that date.
80
The repayment of the RHD credit facility was accounted for as an
extinguishment of debt resulting in a loss charged to interest
expense during the year ended December 31, 2007 of
$0.8 million related to the write-off of unamortized
deferred financing costs.
RHDI
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. The remaining $75.0 million matures in December 2009.
As amended, the RHDI credit facility bears interest, at our
option, the base rate or Eurodollar rate plus the following
margins.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eurodollar Rate
|
|
|
|
|
|
Initial Amount of
|
|
|
|
Loans
|
|
|
Base Rate Loans
|
|
|
Facility/Commitment
|
|
|
Revolver
|
|
|
3.50
|
%
|
|
|
2.50
|
%
|
|
$
|
175.0 million
|
|
Tranche D-1
Term Loans
|
|
|
3.75
|
%
|
|
|
2.75
|
%
|
|
$
|
350.0 million
|
|
Tranche D-2
Term Loans
|
|
|
3.75
|
%
|
|
|
2.75
|
%
|
|
$
|
1,422.0 million
|
|
As of March 31, 2008, outstanding balances under the RHDI
credit facility totaled $1,507.6 million, comprised of
$301.2 million under Term
Loan D-1,
$1,206.4 million under Term
Loan D-2
and no amount was outstanding under the $175.0 million RHDI
revolving credit facility (with an additional $0.3 million
utilized under a standby letter of credit). All Term Loans
require quarterly principal and interest payments. The RHDI
credit facility provides for an uncommitted Term Loan C for
potential borrowings up to $400.0 million, such proceeds,
if borrowed, to be used to fund acquisitions, refinance certain
indebtedness or to make certain restricted payments. On
October 17, 2007, $91.8 million, $16.2 million
and $83.0 million of Term Loans
A-4,
D-1,
and
D-2,
respectively, were repaid from the proceeds of the notes issued
on October 17, 2007. The repayment of these term loans was
accounted for as an extinguishment of debt resulting in a loss
charged to interest expense during the year ended
December 31, 2007 of $4.2 million related to the
write-off of unamortized deferred financing costs. The Term
Loans D-1
and
D-2
require accelerated amortization beginning in 2010 through final
maturity in June 2011. The weighted average interest rate of
outstanding debt under the RHDI credit facility was 4.39% and
6.50% at March 31, 2008 and December 31, 2007,
respectively.
Dex Media
East
On October 24, 2007, we replaced the former Dex Media East
credit facility with a new Dex Media East credit facility. The
new Dex Media East credit facility consists 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 revolving loan facility or incur additional term
loans by such amount. The new Dex Media East credit facility is
secured by pledges of similar assets and has similar covenants
and events of default as the former Dex Media East credit
facility.
As of March 31, 2008, the outstanding balances under the
Dex Media East credit facility totaled $1,101.9 million,
comprised of $700.0 million under Term Loan A and
$400.0 million under Term Loan B and $1.9 million
was outstanding under the $100.0 million revolving credit
facility (with an additional $3.0 million utilized under
three standby letters of credit). The new Dex Media East
revolving credit facility and Term Loan A will mature in
October 2013, and the Term Loan B will mature in October
2014. The weighted average interest rate of outstanding debt
under the new Dex Media East credit facility was 4.75% and 6.87%
at March 31, 2008 and December 31, 2007, respectively.
The former Dex Media East credit facility, as amended and
restated in connection with the Dex Media merger, consisted of
revolving loan commitments and a Term Loan A and Term
Loan B. On October 17, 2007, $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,
were repaid from the proceeds of the notes issued on
October 17, 2007.
81
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 revolving credit facility. The repayment of the
term loans and revolving loan commitments outstanding under the
former Dex Media East credit facility was accounted for as an
extinguishment of debt resulting in a loss charged to interest
expense during the year ended December 31, 2007 of
$0.2 million related to the write-off of unamortized
deferred financing costs.
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 Easts outstanding
9.875% senior notes due 2009 and $341.3 million of Dex
Media Easts outstanding 12.125% senior subordinated
notes due 2012. See below for further details.
As of March 31, 2008, the new Dex Media East credit
facility bears interest, at our option, at either:
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The higher of (i) the base rate determined by the
administrative agent, JP Morgan Chase Bank, N.A., and
(ii) the Federal Funds Effective Rate (as defined) plus
0.50%, and in each case, plus a 0.75% (or 0.50% if leverage
ratio is less than 2 to 1) margin on the new Dex Media East
revolving credit facility and Term Loan A and a 1.00%
margin on Term Loan B; or
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The LIBOR rate plus a 1.75% (or 1.50% if leverage ratio is less
than 2 to 1) margin on the new Dex Media East revolving
credit facility and Term Loan A and a 2.00% margin on Term
Loan B. We may elect interest periods of 1, 2, 3, or
6 months (or 9 or 12 months if, at the time of the
borrowing, all lenders agree to make such term available), for
LIBOR borrowings.
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Dex Media
West
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. The
revolving credit facility and the tranche A term loan each bear
interest at a floating rate, based upon, at our option, the base
rate or a Eurodollar rate plus a margin of 2.75% (or 2.50% if
Dex Media Wests leverage is less than 3.0 to 1.0) in the
case of base rate loans or 3.75% (or 3.50% if Dex Media
Wests leverage is less than 3.0 to 1.0) in the case of
Eurodollar rate loans. The tranche B term loan bears interest at
a floating rate based upon, at our option, the base rate or a
Eurodollar rate plus a margin of 3.0% in the case of base rate
loans and 4.0% in the case of Eurodollar rate loans.
As of March 31, 2008, outstanding balances under the
previous Dex Media West credit facility totaled
$1,031.1 million, comprised of $135.8 million under
Term Loan A, $307.1 million under Term Loan B-1, and
$583.1 million under Term Loan B-2 and $5.1 million
was outstanding under the $100.0 million revolving credit
facility. The weighted average interest rate of outstanding debt
under the Dex Media West credit facility was 4.49% and 6.51% at
March 31, 2008 and December 31, 2007, respectively.
Notes,
preferred stock and warrants
At March 31, 2008, RHD and its subsidiaries had total
outstanding notes of $6,440.2 million, comprised of
$3,965.6 million outstanding RHD notes,
$1,245.5 million outstanding Dex Media notes and
$1,229.1 million outstanding Dex Media West notes. After
giving effect to the RHDI exchange offers, as of March 31,
2008, RHD and its subsidiaries would have had total outstanding
notes of approximately $6,267.6 million,
82
comprised of approximately $3,380.2 million outstanding
RHD notes, $412.9 million outstanding RHDI notes,
$1,245.5 million outstanding Dex Media notes and
$1,229.0 million outstanding Dex Media West notes.
RHD
At March 31, 2008, RHD had total outstanding notes of
$3,965.6 million, comprised of $300.0 million of
6.875% senior notes, $340.2 million of 6.875%
series A-1
senior discount notes, $615.4 million of 6.875%
series A-2
senior discount notes, $1,210.0 million of 8.875%
series A-3
senior notes and $1,500.0 million of the 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.
On October 2, 2007, we issued $1.0 billion of the
notes. Proceeds from those notes were (a) used to repay the
$328 million 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 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 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.
Interest on the notes is payable semi-annually on April 15 and
October 15 of each year, commencing on April 15, 2008. The
notes are senior unsecured obligations of RHD, senior in right
of payment to all of RHDs existing and future senior
subordinated debt and future subordinated obligations and rank
equally with RHDs existing and future senior unsecured
debt. The notes are effectively subordinated to RHDs
secured debt, including RHDs guarantee of borrowings under
the RHDI credit facility and are structurally subordinated to
any existing or future liabilities (including trade payables) of
our direct and indirect subsidiaries. At December 31, 2007,
the notes had a fair market value of $1.37 billion.
The notes were issued to certain institutional investors in an
offering exempt from registration requirements under the
Securities Act of 1933. Under the terms of registration rights
agreements, we have agreed to file a registration statement, of
which this prospectus forms a part, for the notes within
210 days subsequent to the initial closing.
We issued $300 million of our 6.875% senior notes, the
proceeds of which were used to redeem 100,303 shares of the
then outstanding preferred stock from the GS Funds, pay
transaction costs and repay debt associated with the RHDI credit
facility. Interest is payable on the 6.875% senior notes
semi-annually in arrears on January 15 and July 15 of each year,
commencing July 15, 2005. At December 31, 2007, the
6.875% senior notes had a fair market value of
$265.5 million.
In order to fund the cash portion of the Dex Media merger
purchase price, we issued $660 million aggregate principal
amount at maturity ($600.5 million gross proceeds) of
6.875%
series A-2
senior discount notes and $1.21 billion principal amount of
8.875%
series A-3
senior notes. Interest is payable semi-annually on January 15
and July 15 of each year for the
series A-2
senior discount Notes and the
series A-3
senior notes, commencing July 15, 2006. We also issued
$365 million aggregate principal amount at maturity
($332.1 million gross proceeds) of 6.875%
series A-1
senior discount notes to fund the GS Repurchase. Interest is
payable semi-annually on January 15 and July 15 of each year,
commencing July 15, 2006. All of these notes are unsecured
obligations of RHD, senior in right of payment to all future
senior subordinated and subordinated indebtedness of RHD and
structurally subordinated to all indebtedness of our
subsidiaries. At December 31, 2007, the 6.875%
series A-1
senior discount notes, the
series A-2
senior discount notes and 8.875%
series A-3
senior notes had a fair market value of $300.2 million,
$543.1 million and $1.12 billion, respectively.
On May 30, 2006, RHD redeemed the outstanding preferred
stock purchase rights issued pursuant to its stockholder rights
plan at a redemption price of one cent per right for a total
redemption payment of
83
$0.7 million. This payment was recorded as a charge to
retained earnings for the year ended December 31, 2006.
On November 2, 2006, we repurchased all outstanding
warrants to purchase 1.65 million shares of our common
stock for an aggregate purchase price of approximately
$53.1 million.
RHDI
In connection with the Embarq Directory Acquisition, RHDI issued
$325 million of the RHDI senior notes and $600 million
of the RHDI senior subordinated notes. On December 20,
2005, we repurchased through a tender offer and exit consent
solicitation $317.1 million of the RHDI senior notes.
Proceeds from the RHDI credit facilitys $350 million
Term
Loan D-1
were used to fund the partial repurchase of the RHDI senior
notes, a tender premium of $25.3 million and pay
transaction costs of the tender offer. The partial repurchase of
the RHDI senior notes was accounted for as an extinguishment of
debt resulting in a loss of $32.7 million charged to
interest expense during the year ended December 31, 2005,
consisting of the tender premium and the write-off of
unamortized deferred financing costs of $7.4 million. In
December 2007, we redeemed the remaining $7.9 million of
RHDI senior notes. Proceeds from the RHDI revolving credit
facility were used to fund the redemption, a redemption premium
of $0.2 million and pay transaction costs. The redemption
of the RHDI senior notes was accounted for as an extinguishment
of debt resulting in a loss of $0.2 million charged to
interest expense during the year ended December 31, 2007,
consisting of the redemption premium and the write-off of
unamortized deferred financing costs of less than
$0.1 million.
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. Proceeds from the notes
issued on October 2, 2007 were contributed by RHD to RHDI
in order to fund the repurchase of the RHDI senior subordinated
notes, a tender premium of $39.7 million and pay
transaction costs of the tender offer. In December 2007, the
remaining $0.1 million of RHDI senior subordinated notes
were redeemed. The tender and redemption of the RHDI senior
subordinated notes was accounted for as an extinguishment of
debt resulting in a loss of $51.3 million charged to
interest expense during the year ended December 31, 2007,
consisting of the tender premium and the write-off of
unamortized deferred financing costs of $11.6 million.
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.
Dex
Media
At March 31, 2008, Dex Media had total outstanding notes of
$1,245.5 million, comprised of $511.7 million
8% senior notes and $733.8 million 9% senior
discount notes.
Dex Media has issued $500 million aggregate principal
amount of 8% senior notes due 2013. These Senior Notes are
unsecured obligations of Dex Media and interest is payable on
May 15 and November 15 of each year. As of March 31, 2008,
$500 million aggregate principal amount was outstanding
excluding fair value adjustments. At December 31, 2007, the
8% senior notes had a fair market value of
$466.3 million.
Dex Media has issued $750 million aggregate principal
amount of 9% senior discount notes due 2013, under two
indentures. Under the first indenture totaling $389 million
aggregate principal amount, the 9% senior discount notes
were issued at an original issue discount with interest accruing
at 9%, per annum, compounded semi-annually. These senior
discount notes are unsecured obligations of Dex Media and
interest accrues in the form of increased accreted value until
November 15, 2008, which we refer to as the Full Accretion
Date, at which time the accreted value will be equal to the full
principal amount at maturity. Under the second indenture
totaling $361 million aggregate principal amount, interest
accrues at 8.37% per annum, compounded semi-annually, which
creates a premium at the Full Accretion Date that will be
amortized over the remainder of the term. After
November 15, 2008, the 9% senior discount notes bear
cash interest at 9% per annum,
84
payable semi-annually on May 15 and November 15 of each year.
These senior discount notes are unsecured obligations of Dex
Media and no cash interest will accrue on the discount notes
prior to the Full Accretion Date. As of March 31, 2008,
$719.7 million aggregate principal amount was outstanding
excluding fair value adjustments. At December 31, 2007, the
9% senior discount notes had a fair market value of
$673.1 million.
Dex Media
East
On November 26, 2007, proceeds from the new Dex Media East
credit facility were used to fund the redemption of
$449.7 million of Dex Media Easts outstanding
9.875% senior notes due 2009, $341.3 million of Dex
Media Easts outstanding 12.125% senior subordinated
notes due 2012, redemption premiums associated with these senior
notes and senior subordinated notes of $11.1 million and
$20.7 million, respectively, and pay transaction costs. The
redemption of these senior notes and senior subordinated notes
was accounted for as an extinguishment of debt resulting in a
loss of $31.8 million charged to interest expense during
the year ended December 31, 2007 related to the redemption
premiums. In addition, as a result of redeeming these senior
notes and senior subordinated notes, interest expense was offset
by $62.2 million during the year ended December 31,
2007, resulting from accelerated amortization of the remaining
fair value adjustment recorded as a result of the Dex Media
merger.
2007 and
2008 refinancings
The purpose of these refinancing transactions that occurred
throughout 2007 was to refinance certain debt obligations with
debt yielding more favorable interest rates and to simplify and
provide for more flexibility within our operating and capital
structure. The purpose of these refinancing transactions in 2008
was to refinance certain debt obligations to extend maturities
and to simplify and provide for more flexibility within our
operating and capital structure.
Dex Media
West
At March 31, 2008, Dex Media West had total outstanding
notes of $1,229.1 million, comprised of $397.6 million
8.5% senior notes, $8.8 million 5.875% senior
notes and $822.8 million senior subordinated notes.
Dex Media West issued $385 million aggregate principal
amount of 8.5% senior notes due 2010. These senior notes
are unsecured obligations of Dex Media West and interest is
payable on February 15 and August 15 of each year. As of
March 31, 2008, $385 million aggregate principal
amount was outstanding excluding fair value adjustments. At
December 31, 2007, the 8.5% senior notes had a fair
market value of $389.8 million.
Dex Media West issued $300 million aggregate principal
amount of 5.875% senior notes due 2011. These senior notes
are unsecured obligations of Dex Media West and interest is
payable on May 15 and November 15 of each year. As of
March 31, 2008, $8.7 million aggregate principal
amount was outstanding excluding fair value adjustments. At
December 31, 2007, the 5.875% senior notes had a fair
market value of $8.7 million.
Dex Media West issued $780 million aggregate principal
amount of 9.875% senior subordinated notes due 2013. These
senior subordinated notes are unsecured obligations of Dex Media
West and interest is payable on February 15 and August 15 of
each year. As of March 31, 2008, $761.7 million
aggregate principal amount was outstanding excluding fair value
adjustments. At December 31, 2007, the 9.875% senior
subordinated notes had a fair market value of
$788.4 million.
Our credit facilities and the indentures governing the notes
contain usual and customary affirmative and negative covenants
that, among other things, place limitations on our ability to
(i) incur additional indebtedness; (ii) pay dividends
and repurchase our capital stock; (iii) enter into mergers,
consolidations, acquisitions, asset dispositions and
sale-leaseback transactions; (iv) make capital
expenditures; (v) issue capital stock of our subsidiaries;
(vi) engage in transactions with our affiliates; and
(vii) make investments, loans and advances. our credit
facilities also contain financial covenants relating to maximum
consolidated leverage, minimum interest coverage and maximum
senior secured leverage as defined therein. Substantially all of
RHDIs and its subsidiaries assets, including the capital
stock of RHDI and its subsidiaries, are pledged to secure the
obligations under the RHDI credit facility. Substantially all of
the assets of Dex Media East and Dex Media
85
West and their subsidiaries, including their equity interests,
are pledged to secure the obligations under their respective
credit facilities.
Impact of
purchase accounting
As a result of the Dex Media merger and in accordance with
SFAS No. 141, we were required to record Dex
Medias outstanding debt at its fair value as of the date
of the Dex Media merger, and as such, a fair value adjustment
was established at January 31, 2006. This fair value
adjustment is amortized as a reduction of interest expense over
the remaining term of the respective debt agreements using the
effective interest method and does not impact future scheduled
interest or principal payments. Amortization of the fair value
adjustment included as a reduction of interest expense was
$92.1 million (including $62.2 million related to the
redemption of Dex Media Easts senior notes and senior
subordinated notes), $26.4 million and $4.3 million
during the years ended December 31, 2007 and 2006 and the
three months ended March 31, 2008, respectively. A total
premium of $222.3 million was recorded upon consummation of
the Dex Media merger, of which $99.5 million remained
unamortized at March 31, 2008 as shown in the following
table. In connection with the redemption of Dex Media
Easts senior notes and senior subordinated notes, the
remaining fair value adjustment related to these debt
obligations was fully amortized as of December 31, 2007.
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Long-Term
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Debt at
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Long-Term
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December 31,
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Debt at March
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Initial
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Unamortized
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2007
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Unamortized
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Long-
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31, 2008
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Fair Value
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Fair Value
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Long-Term
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Excluding
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Fair Value
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Term
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Excluding
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Book Value at
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Fair Value at
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Adjustment at
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Adjustment at
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Debt at
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Unamortized
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Adjustment at
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Debt at
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Unamortized
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January 31,
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January 31,
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January 31,
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December 31,
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December 31,
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Fair Value
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March 31,
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March 31,
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Fair Value
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2006
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2006
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2006
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2007
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2007
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Adjustment
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2008
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2008
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Adjustment
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(Amounts in millions)
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Dex Media, Inc. 8% Senior Notes
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$
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500.0
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$
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515.0
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$
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15.0
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$
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12.1
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$
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512.1
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$
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500.0
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$
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11.7
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$
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511.7
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$
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500.0
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Dex Media, Inc. 9% Senior Discount Notes
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598.8
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616.0
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17.2
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14.6
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719.1
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704.5
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14.1
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733.8
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719.7
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Dex Media East 9.875% Senior Notes
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450.0
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484.3
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34.3
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Dex Media East 12.125% Senior Subordinated Notes
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341.3
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395.9
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54.6
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Dex Media West 8.5% Senior Notes
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385.0
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407.1
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22.1
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13.7
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398.7
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385.0
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12.5
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397.6
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385.1
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Dex Media West 5.875% Senior Notes
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300.0
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300.1
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0.1
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0.1
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8.8
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8.7
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0.1
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8.8
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8.7
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Dex Media West 9.875% Senior Subordinated Notes
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761.8
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840.8
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79.0
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63.3
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825.0
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761.7
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61.1
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822.8
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761.7
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Total Dex Media Outstanding Debt at January 31, 2006
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$
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3,336.9
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$
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3,559.2
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$
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222.3
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$
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103.8
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$
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2,463.7
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$
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2,359.9
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$
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99.5
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$
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2,474.7
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$
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2,375.2
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Liquidity
and cash flows
Our primary source of liquidity will continue to be cash flow
generated from operations as well as available borrowing
capacity under the revolving portions of our credit facilities.
We expect that our primary liquidity requirements will be to
fund operations and service our indebtedness. Our ability to
meet our debt service requirements will be dependent on our
ability to generate sufficient cash from operations and incur
additional borrowings under our credit facilities. Our primary
sources of cash flow will consist mainly of cash receipts from
the sale of advertising in our yellow pages and from our online
products and services and can be impacted by, among other
factors, general economic conditions, competition from other
yellow pages directory publishers and other alternative
products, consumer confidence and the level of demand for our
advertising products and services. We believe that cash flows
from operations, along with borrowing capacity under the
revolving portions of our credit facilities, will be adequate to
fund our operations and capital expenditures and meet our debt
service requirements for at least the next 15-24 months.
However, we make no assurances that our business will generate
sufficient cash flow from operations or that sufficient
borrowing will be available under the revolving portions of our
credit facilities to enable us to fund our operations and
capital expenditures, meet all debt service requirements, pursue
all of our strategic initiatives, or for other purposes. From
time to time we may purchase our equity
and/or
debt
securities
and/or
our
subsidiaries debt securities through privately negotiated
transactions, open market purchases or otherwise depending on,
among other things, the availability of funds, alternative
investments and market conditions.
86
Primarily as a result of our business combinations and preferred
stock repurchase transactions, we have a significant amount of
debt. Aggregate outstanding debt as of March 31, 2008 was
$10.1 billion (including fair value adjustments required by
GAAP as a result of the Dex Media merger).
During the three months ended March 31, 2008, we made
scheduled principal payments of $31.4 million and prepaid
an additional $60.0 million in principal under our credit
facilities, which resulted in total credit facility repayments
of $91.4 million excluding revolver payments. During the
three months ended March 31, 2008, we made revolver
payments of $232.4 million offset by revolver borrowings of
$215.3 million resulting in a net decrease of
$17.1 million of the revolving portions under our credit
facilities.
The completion of the Dex Media merger triggered change of
control offers on all of Dex Medias and its subsidiaries
outstanding notes, requiring us to make offers to repurchase the
notes. $291.3 million of the 5.875% Dex Media West senior
notes due 2011, $0.3 million of the 9.875% Dex Media East
senior notes due 2009, $0.2 million of the 9.875% Dex Media
West senior subordinated notes due 2013 and $0.1 million of
the 9% Dex Media senior discount notes due 2013 were tendered in
the applicable change of control offer and repurchased by us.
For the three months ended March 31, 2008, we made
aggregate cash interest payments of $214.3 million. At
March 31, 2008, we had $29.9 million of cash and cash
equivalents before checks not yet presented for payment of
$14.9 million, and combined available borrowings under our
revolvers of $364.7 million. During the three months ended
March 31, 2008, we periodically utilized our revolvers as a
financing resource to balance the timing of our periodic
payments and our prepayments made under our credit facilities
and interest payments on our senior notes and our
subsidiaries senior notes and senior subordinated notes
with the timing of cash receipts from operations. Our present
intention is to repay borrowings under all revolvers in a timely
manner and keep any outstanding amounts to a minimum.
During the year ended December 31, 2007, we made scheduled
principal payments of $239.9 million and prepaid an
additional $1,434.2 million in principal under our credit
facilities, which includes prepayments associated with the
aforementioned 2007 refinancings, for total credit facility
repayments of $1,674.1 million, excluding revolver
repayments. During the year ended December 31, 2007, we
made revolver payments of $781.4 million, offset by
revolver borrowings of $722.6 million, resulting in a net
decrease of $58.8 million of the revolving portions under
our credit facilities.
For the year ended December 31, 2007, we made aggregate
cash interest payments of $721.5 million. At
December 31, 2007, we had $46.1 million of cash and
cash equivalents before checks not yet presented for payment of
$10.8 million, and combined available borrowings under our
revolvers of $347.6 million. In connection with the
aforementioned 2007 refinancings, we received approximately
$47.9 million for general corporate purposes. During 2007,
we periodically utilized our revolvers as a financing resource
to balance the timing of our periodic payments and our
prepayments made under our credit facilities and interest
payments on our and our subsidiaries senior notes and
senior subordinated notes with the timing of cash receipts from
operations. Our present intention is to repay borrowings under
all revolvers in a timely manner and keep any outstanding
amounts to a minimum.
Share
repurchases and other common stock transactions
In November 2007, our Board of Directors authorized a
$100.0 million 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.
On November 9, 2006, certain affiliates of The Carlyle
Group and Welsh, Carson, Anderson & Stowe sold
9,424,360 shares and 9,424,359 shares, respectively,
of RHD common stock. These selling shareholders were former
shareholders of Dex Media that became shareholders of RHD in
conjunction with the Dex Media merger. After this sale, these
selling shareholders no longer hold any shares of RHD common
stock that they acquired in connection with the Dex Media
merger. We did not receive any proceeds from this transaction.
87
Tax basis
of acquisitions
In connection with the AT&T Directory Acquisition and the
Embarq Directory Acquisition, we made an election under Code
Section 338(h)(10) to treat the applicable stock purchase
as an asset purchase, which, in each case, permitted us to
record the acquired intangible assets and goodwill at fair value
for tax purposes, rather than at the prior owners tax cost
basis, which we refer to as the carry-over basis and, which, in
all cases, was significantly less than fair value. Intangible
assets and goodwill acquired in the Dex Media merger were
recorded at their carry-over basis for tax purposes and are
being amortized using the straight-line method over
15 years from their inception. Such intangible assets and
goodwill previously benefited from the treatment of an asset
purchase for tax purposes by the prior owners of Dex Media.
Accordingly, our tax deductible amortization is substantially
higher than it would have been in a typical stock purchase
transaction since it is based upon the fair value of the
acquired intangible assets and goodwill using the straight-line
method generally over 15 years. Annual amortization of
goodwill and the other acquired intangible assets for tax
purposes is approximately $672.5 million. Goodwill is not
subject to amortization for book purposes. As a result of this
amortization expense which offsets taxable income, our cash tax
requirements are significantly reduced by the tax effect of
these amortization deductions.
Cash flow
activities
Cash provided by operating activities was $99.9 million for
the three months ended March 31, 2008. Key contributors to
operating cash flow include the following:
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$(1,623.1) million in net loss, which includes the impact
of the non-cash goodwill impairment charge.
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$1,651.5 million of net non-cash items consisting of the
non-cash goodwill impairment charge of $2,463.6 million,
offset by $(812.1) million in deferred income taxes, which
includes the tax impact of the non-cash goodwill impairment
charge.
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$150.5 million of other net non-cash items primarily
consisting of $118.3 million of depreciation and
amortization, $29.8 million in bad debt provision and
$10.8 million of stock-based compensation expense,
partially offset by $(8.4) million in other non-cash items,
primarily related to the amortization of deferred financing
costs and amortization of the fair value adjustments required by
GAAP as a result of the Dex Media merger, which reduced interest
expense.
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$39.3 million net use of cash from an increase in accounts
receivable of $65.7 million due to an increase in days
outstanding of customer balances and deterioration in accounts
receivable aging categories, which has been driven by weaker
economic conditions, as well as publication cycle seasonality,
offset by an increase in deferred directory revenues of
$26.4 million. The change in deferred revenues and accounts
receivable are analyzed together given the fact that when a
directory is published, the annual billable value of that
directory is initially deferred and unbilled accounts receivable
are established. Each month thereafter, typically one twelfth of
the billing value is recognized as revenues and billed to
customers.
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$21.6 million net source of cash from a decrease in other
assets, primarily consisting of a $34.3 million decrease in
prepaid directory costs resulting from publication seasonality,
offset by a $12.7 million increase in other current and
non-current assets, primarily relating to deferred commissions,
print, paper and delivery costs and changes in the fair value of
our interest rate swap agreements.
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$52.9 million net use of cash from a decrease in accounts
payable and accrued liabilities, primarily reflecting a
$41.9 million decrease in accrued interest payable on
outstanding debt resulting from interest payments of
$247.8 million, partially offset by $205.9 million in
accruals during the period, and a $41.0 million decrease in
trade accounts payable resulting from timing of invoice
processing versus payment thereon, offset by a
$30.0 million increase in accrued liabilities, which
include accrued salaries and related bonuses and accrued income
taxes.
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$8.4 million decrease in other non-current liabilities,
including pension and postretirement long-term liabilities.
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88
Cash used in investing activities for the three months ended
March 31, 2008 was $5.8 million and includes the
following:
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$10.1 million used to purchase fixed assets, primarily
computer equipment, software and leasehold improvements.
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$4.3 million in cash proceeds from the disposition of an
equity investment in the fourth quarter of 2007, which were
received in January 2008.
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Cash used in financing activities for the three months ended
March 31, 2008 was $110.3 million and includes the
following:
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$91.4 million in principal payments on term loans under our
credit facilities. Of this amount, $31.4 million represents
scheduled principal payments and $60.0 million represents
principal payments made on an accelerated basis, at our option,
from available cash flow generated from operations.
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$215.3 million in borrowings under our revolvers, used
primarily to fund temporary working capital requirements.
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$232.4 million in principal payments on our revolvers.
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$6.1 million used to repurchase our common stock. This use
of cash pertains to common stock repurchases made during 2007
that had not settled as of December 31, 2007.
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$4.2 million in the increased balance of checks not yet
presented for payment.
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$0.1 million in proceeds from the exercise of employee
stock options.
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Cash provided by operating activities was $143.8 million
for the three months ended March 31, 2007. Key contributors
to operating cash flow include the following:
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$16.0 million in net income.
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$159.5 million of net non-cash charges primarily consisting
of $103.0 million of depreciation and amortization,
$21.0 million in bad debt provision, $13.9 million of
stock-based compensation expense and $11.4 million in other
non-cash charges, primarily related to the amortization of
deferred financing costs and amortization of the fair value
adjustments required by GAAP as a result of the Dex Media
merger, and $10.2 million in deferred income taxes.
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$15.0 million net use of cash from an increase in accounts
receivable of $58.1 million offset by an increase in
deferred directory revenues of $43.1 million. The change in
deferred revenues and accounts receivable are analyzed together
given the fact that when a directory is published, the annual
billable value of that directory is initially deferred and
unbilled accounts receivable are established. Each month
thereafter, typically one twelfth of the billing value is
recognized as revenues and billed to customers.
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$31.5 million net source of cash from an decrease in other
assets, consisting of a $35.4 million decrease in prepaid
expenses and other current assets, offset by a $3.9 million
increase in other non-current assets, primarily relating to
changes in the fair value of our interest rate swap agreements.
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$56.4 million net use of cash from a decrease in accounts
payable and accrued liabilities, primarily reflecting a
$29.7 million decrease in accrued liabilities, including
accrued salaries and related bonuses, and a $32.6 million
decrease in accrued interest payable on outstanding debt, offset
by a $5.9 million increase in trade accounts payable.
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$8.2 million net source of cash from an increase in other
non-current liabilities, including pension and postretirement
long-term liabilities.
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89
Cash used in investing activities for the three months ended
March 31, 2007 was $15.6 million and includes the
following:
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$13.1 million used to purchase fixed assets, primarily
computer equipment, software and leasehold improvements.
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$2.5 million used to fund an equity investment.
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Cash used in financing activities for the three months ended
March 31, 2007 was $209.7 million and includes the
following:
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$419.9 million in principal payments on debt borrowed under
each of the credit facilities. Of this amount,
$73.5 million represents scheduled principal payments,
$120.0 million represents principal payments made on an
accelerated basis, at our option, from excess cash flow
generated from operations and $226.4 million represents
principal payments on the revolvers.
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$207.3 million source in borrowings under the revolvers.
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$9.1 million in proceeds from the exercise of employee
stock options.
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$6.2 million in the decreased balance of checks not yet
presented for payment.
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Cash provided by operating activities was $691.8 million
for the year ended December 31, 2007. Key contributors to
operating cash flow include the following:
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$46.9 million in net income.
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$666.1 million of net non-cash charges primarily consisting
of $463.1 million of depreciation and amortization,
$80.8 million in bad debt provision, $39.0 million of
stock-based compensation expense, $47.3 million in other
non-cash charges, primarily related to the amortization of
deferred financing costs and amortization of the fair value
adjustments required by GAAP as a result of the Dex Media
merger, $26.3 million loss on extinguishment of debt
related to the 2007 refinancing transactions noted above,
$8.7 million in deferred income taxes, and
$0.9 million loss on disposal of fixed assets.
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$122.2 million net use of cash from an increase in accounts
receivable of $95.8 million and a decrease in deferred
directory revenue of $26.4 million. The change in deferred
revenue and accounts receivable are analyzed together given the
fact that when a directory is published, the annual billable
value of that directory is initially deferred and unbilled
accounts receivable are established. Each month thereafter,
typically one twelfth of the billing value is recognized as
revenue and billed to customers.
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$6.0 million net use of cash from an increase in other
assets, consisting of a $5.1 million increase in other
current and non-current assets, primarily relating to deferred
commissions, print, paper and delivery costs and changes in the
fair value of our interest rate swap agreements, and a
$0.9 million increase in prepaid expenses.
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$66.1 million net source of cash from an increase in
accounts payable and accrued liabilities, primarily reflecting a
$47.9 million increase in trade accounts payable and a
$19.4 million increase in accrued interest payable on
outstanding debt, partially offset by a $1.2 million
decrease in accrued liabilities, which include accrued salaries
and related bonuses and accrued income taxes.
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$40.9 million increase in other non-current liabilities,
including pension and postretirement long-term liabilities.
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Cash used in investing activities for the year ended
December 31, 2007 was $409.1 million and includes the
following:
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$77.5 million used to purchase fixed assets, primarily
computer equipment, software and leasehold improvements.
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$329.1 million of net cash payments to acquire Business.com.
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$2.5 million used to fund an equity investment.
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90
Cash used in financing activities for the year ended
December 31, 2007 was $392.9 million and includes the
following:
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$1,468.7 million in proceeds, net of costs, from the
issuance of the notes, which were used to fund the repayment of
the RHD credit facility, the redemption of the RHDI senior
subordinated notes, partial repayment of the Term Loans under
the former Dex Media East credit facility and partial repayment
of Term Loans
A-4,
D-1 and
D-2 and the RHDI revolving credit facility under the RHDI credit
facility.
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$1,416.8 million in proceeds, net of costs, from borrowings
under our credit facilities. The new Dex Media East credit
facility was used to fund the repayment of the remaining Term
Loans and revolver under the former Dex Media East credit
facility and the redemption of Dex Media Easts
9.875% senior notes and 12.125% senior subordinated
notes. The RHD credit facility was used to fund the Business.com
Acquisition.
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$1,674.1 million in principal payments on term loans under
our credit facilities. Of this amount, $239.9 million
represents scheduled principal payments and
$1,434.2 million represents principal payments made on an
accelerated basis, at our option, from proceeds received with
the 2007 refinancing transactions and from available cash flow
generated from operations.
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$1,470.6 million in note repayments. Of this amount,
$1,398.9 million was used to redeem the RHDI senior notes
and the RHDI senior subordinated notes and Dex Media Easts
9.875% senior notes and 12.125% senior subordinated
notes. Tender and redemption premium payments of
$71.7 million were incurred in conjunction with these note
repayments.
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$722.6 million in borrowings under our revolvers, used
primarily to fund temporary working capital requirements, as
well as the repurchase of our common stock and the redemption of
the RHDI senior notes.
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$781.4 million in principal payments on our revolving
credit facilities.
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$89.6 million used to repurchase our common stock. Amount
represents the value of common stock repurchased actually
settled in cash as of December 31, 2007.
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$13.4 million in proceeds from the exercise of employee
stock options.
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$9.0 million in proceeds from the issuance of common stock
in connection with the Business.com Acquisition.
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$7.7 million in the decreased balance of checks not yet
presented for payment.
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Cash provided by operating activities was $768.3 million
for the year ended December 31, 2006. Key contributors to
operating cash flow include the following:
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$237.7 million in net loss.
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$392.2 million net source of cash from non-cash charges
primarily consisting of $323.6 million of depreciation and
amortization, $71.1 million in bad debt provision,
$43.3 million of stock-based compensation expense and
$39.4 million in other non-cash charges, which primarily
consists of amortization related to fair value adjustments
required by GAAP as a result of the Dex Media merger, offset by
a $85.2 million deferred tax benefit.
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$559.8 million net source of cash from a
$635.7 million increase in deferred directory revenue,
offset by an increase in accounts receivable of
$75.9 million. The change in deferred revenue and accounts
receivable are analyzed together given the fact that when a
directory is published, the annual billable value of that
directory is initially deferred and unbilled accounts receivable
are established. Each month thereafter, typically one twelfth of
the billing value is recognized as revenue and billed to
customers. Additionally, under purchase accounting rules,
deferred revenue was not recorded on directories that were
published prior to and in the month of the Dex Media merger,
however we retained all of the rights associated with the
collection of amounts due under the advertising contracts
executed prior to and in the month of the Dex Media merger.
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91
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$23.0 million net use of cash from an increase in other
assets, reflecting a $24.7 million increase in prepaid
expenses and other current and non-current assets, primarily
relating to changes in the fair value of our interest rate swap
agreements, offset by a decrease in deferred directory costs of
$1.7 million, consisting of a decrease in deferred
directory costs of $23.6 million offset by
$21.9 million in amortization of deferred directory costs
relating to directories that were scheduled to publish
subsequent to the Dex Media merger. Deferred directory costs
represent cash payments for certain costs associated with the
publication of directories. Since deferred directory costs are
initially deferred when incurred, the cash payments are made
prior to the expense being recognized.
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$63.0 million net source of cash from an increase in
accounts payable and accrued liabilities, primarily reflecting a
$69.3 million increase in accrued interest payable on
outstanding debt and a $0.4 million increase in trade
accounts payable, offset by a $6.7 million decrease in
accrued liabilities, including accrued salaries and related
bonuses.
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$14.0 million net source of cash from an increase in other
non-current liabilities, including pension and postretirement
long-term liabilities.
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Cash used by investing activities for the year ended
December 31, 2006 was $1,980.0 million and includes
the following:
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$78.5 million used to purchase fixed assets, primarily
computer equipment, software and leasehold improvements.
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$1,901.5 million in cash payments primarily in connection
with the Dex Media merger, including merger fees net of cash
received from Dex Media, as well as the Local Launch Acquisition.
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Cash provided by financing activities for the year ended
December 31, 2006 was $1,360.2 million and includes
the following:
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$2,514.4 million in net borrowings, consisting of
$2,142.5 million related to the
series A-2
senior discount notes and
series A-3
senior notes, which were used to fund the cash portion of the
Dex Media merger, and
series A-1
senior discount notes, which were used to fund the GS
Repurchase. Net borrowings also consist of $444.2 million
of the Dex Media West Term Loan B-1, $150.0 million of
which was used to fund the cash portion of the Dex Media merger
and $294.2 million of which was used to fund the purchase
of the 5.875% Dex Media West senior notes, 9.875% Dex Media West
senior subordinated notes and 9% Dex Media senior discount notes
in conjunction with change of control offers. These borrowings
were net of financing costs of $72.3 million.
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$1,738.0 million in principal payments on debt. Of this
amount, $282.1 million represents scheduled principal
payments, $295.0 million represents principal payments made
on an accelerated basis, at our option, from available cash flow
generated from operations, $291.9 million represents Dex
Media senior notes tendered for repurchase by Dex Media and
$869.0 million represents principal payments on the
revolving credit facilities.
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$336.8 million used for the GS Repurchase and redemption of
preferred stock purchase rights under our stockholder rights
plan.
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$934.9 million in borrowings under the revolving credit
facilities.
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$53.1 million used to repurchase all outstanding warrants
from the GS Funds.
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$31.6 million in proceeds from the exercise of employee
stock options.
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$7.2 million in the increased balance of checks not yet
presented for payment.
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Off-balance
sheet arrangements
We do not have any off-balance sheet arrangements that are
material to our results of operations, financial condition or
liquidity.
92
Contractual
obligations
The contractual obligations table presented below sets forth our
annual commitments as of December 31, 2007 for principal
and interest payments on our debt, as well as other cash
obligations for the next five years and thereafter. The debt
repayments as presented in this table include only the scheduled
principal payments under our current debt agreements and do not
include any anticipated prepayments. The debt repayments also
exclude fair value adjustments required under purchase
accounting, as these adjustments do not impact our payment
obligations.
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Payment Due by Period
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Less than
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1-3
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3-5
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More than 5
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Contractual Obligations
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Total
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1 Year
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Years
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Years
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Years
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(Amounts in millions)
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Long-Term Debt(1)
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$
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10,071.8
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$
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177.2
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$
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2,498.0
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$
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874.6
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$
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6,522.0
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Interest on Long-Term Debt(2)
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4,663.2
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722.5
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1,445.1
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1,151.7
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1,343.9
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Operating Leases(3)
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189.2
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26.0
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50.5
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38.2
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74.5
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Unconditional Purchase Obligations(4)
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162.4
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52.7
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64.7
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45.0
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Other Long-Term Liabilities(5)
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355.8
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32.0
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66.8
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|
|
|
69.3
|
|
|
|
187.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
15,442.4
|
|
|
$
|
1,010.4
|
|
|
$
|
4,125.1
|
|
|
$
|
2,178.8
|
|
|
$
|
8,128.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Included in long-term debt are principal amounts owed under our
credit facilities and our senior notes and senior subordinated
notes, including the current portion of long-term debt.
|
|
(2)
|
|
Interest on debt represents cash interest payment obligations
assuming all indebtedness at December 31, 2007 will be paid
in accordance with its contractual maturity and assumes interest
rates on variable interest debt as of December 31, 2007
will remain unchanged in future periods. The weighted average
interest rates under the RHDI, Dex Media East and Dex Media West
credit facilities were 6.50%, 6.87% and 6.51%, respectively, at
December 31, 2007. Please refer to Liquidity and
Capital Resources for interest rates on our senior notes
and our senior subordinated notes.
|
|
(3)
|
|
We enter into operating leases in the normal course of business.
Substantially all lease agreements have fixed payment terms.
Some lease agreements provide us with renewal or early
termination options. Our future operating lease obligations
would change if we exercised these renewal or early termination
options and if we entered into additional operating lease
agreements. The amounts in the table assume we do not exercise
any such renewal or early termination options.
|
|
(4)
|
|
In connection with our software system modernization and
on-going support services related to the Amdocs software system,
we are obligated to pay Amdocs approximately $128.2 million
over the years 2008 through 2012. In connection with the
AT&T Directory Acquisition, we entered into an Internet
Yellow Pages reseller agreement whereby we are obligated to pay
to AT&T $7.2 million over the years 2008 and 2009. In
conjunction with the Dex Media merger, we are obligated to pay
Qwest approximately $8.3 million over the years 2008 and
2009 for certain information technology, communications and
billing and collection services. We have entered into agreements
with Yahoo!, whereby Yahoo! will serve and maintain our local
search listings for placement on its web-based electronic local
information directory and electronic mapping products. We are
obligated to pay Yahoo! up to $18.8 million over the years
2008 through 2010.
|
|
(5)
|
|
We have defined benefit plans covering substantially all
employees. Our funding policy is to contribute an amount at
least equal to the minimum legal funding requirement. Based on
past performance and the uncertainty of the dollar amounts to be
paid, if any, we have excluded such amounts from the above
table. We also have unfunded postretirement plans that provide
certain healthcare and life insurance benefits to those
full-time employees who reach retirement age while working for
us. Those expected future benefit payments, including
administrative expenses, net of employee contributions, are
included in the table above. We expect to make contributions of
approximately $15.8 million and $6.8 million to our
pension plans and postretirement plan, respectively, in 2008.
|
93
In addition to amounts presented in the table above, our
unrecognized tax benefits as of December 31, 2007 total
$14.0 million, including accrued interest and penalties. It
is reasonably possible that this amount of unrecognized tax
benefits could decrease within the next twelve months. We are
currently under audit in New York State and New York City
for taxable years 2000 through 2003 and North Carolina for
taxable years 2003 through 2006. If the New York State, New York
City or North Carolina audits are resolved within the next
twelve months, the total amount of unrecognized tax benefits
could decrease by approximately $14.0 million. The
unrecognized tax benefits related to the New York State,
New York City and North Carolina audits relate to
apportionment and allocation of income among our various legal
entities.
Interest
rate risk and risk management
The RHDI credit facility, the Dex Media West credit facility,
and the Dex Media East credit facility bear interest at variable
rates and, accordingly, our earnings and cash flow are affected
by changes in interest rates. The RHDI credit facility requires
that we maintain hedge agreements to provide either a fixed
interest rate or interest rate protection on at least 50% of
RHDIs total outstanding debt. The Dex Media West and Dex
Media East credit facilities require that we maintain hedge
agreements to provide a fixed rate on at least 33% of their
respective indebtedness. We have entered into the following
interest rate swaps that effectively convert approximately
$2.6 billion, or 69% of our variable rate debt, and
$2.7 billion, or 73% of our variable rate debt, to fixed
rate debt as of December 31, 2007 and March 31, 2008,
respectively. At December 31, 2007 and March 31, 2008,
approximately 37% and 36%, respectively, of our total debt
outstanding consists of variable rate debt, excluding the effect
of our interest rate swaps. Including the effect of our interest
rate swaps, total fixed rate debt comprised approximately 89%
and 90% of our total debt portfolio as of December 31, 2007
and March 31, 2008, respectively. Under the terms of the
agreements, we receive variable interest based on three-month
LIBOR and pays a fixed rate of interest.
|
|
|
|
|
|
|
|
|
Effective Dates
|
|
Notional Amount
|
|
Pay Rates
|
|
Maturity Dates
|
|
|
(Amounts in millions)
|
|
|
|
|
|
September 7, 2004
|
|
$
|
200
|
(3)
|
|
3.490%-3.750%
|
|
September 8, 2008 September 7, 2009
|
September 15, 2004
|
|
|
200
|
(3)
|
|
3.500%-3.910%
|
|
September 15, 2008 September 15, 2009
|
September 17, 2004
|
|
|
100
|
(2)
|
|
3.510%-3.740%
|
|
September 17, 2008 September 17, 2009
|
September 23, 2004
|
|
|
100
|
(2)
|
|
3.4335%-3.438%
|
|
September 23, 2008
|
December 20, 2005
|
|
|
150
|
(3)
|
|
4.74%-4.752%
|
|
June 20, 2008 December 22, 2008
|
February 14, 2006
|
|
|
200
|
(2)
|
|
4.925%-4.93%
|
|
February 14, 2009
|
February 28, 2006
|
|
|
50
|
(1)
|
|
4.93275%
|
|
August 28, 2008
|
May 25, 2006
|
|
|
300
|
(3)
|
|
5.326%
|
|
May 25, 2009 -- May 26, 2009
|
May 26, 2006
|
|
|
200
|
(2)
|
|
5.2725%-5.275%
|
|
May 26, 2009
|
May 31, 2006
|
|
|
100
|
(2)
|
|
5.295%-5.312%
|
|
May 31, 2008 May 31, 2009
|
June 12, 2006
|
|
|
150
|
(2)
|
|
5.27%-5.279%
|
|
June 12, 2009
|
November 26, 2007
|
|
|
600
|
(4)
|
|
4.1852%-4.604%
|
|
November 26, 2010 November 26, 2012
|
February 28, 2008
|
|
|
100
|
(1)
|
|
3.21%
|
|
February 28, 2011
|
March 20, 2008
|
|
|
100
|
(1)
|
|
2.5019%
|
|
March 21, 2011
|
March 31, 2008
|
|
|
100
|
(1)
|
|
3.50%
|
|
March 29, 2013
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Consists of one swap.
|
|
(2)
|
|
Consists of two swaps.
|
|
(3)
|
|
Consists of three swaps.
|
|
(4)
|
|
Consists of four swaps.
|
Under the terms of the agreements, we receive variable interest
based on three-month LIBOR and pay a weighted average fixed rate
of 4.4%. The weighted average variable rate received on our
interest rate swaps
94
was 3.0% for the three months ended March 31, 2008. These
periodic payments and receipts are recorded as interest expense.
We use derivative financial instruments for hedging purposes
only and not for trading or speculative purposes. By using
derivative financial instruments to hedge exposures to changes
in interest rates, we are exposed to credit risk and market
risk. Credit risk is the possible failure of the counterparty to
perform under the terms of the derivative contract. When the
fair value of a derivative contract is positive, the
counterparty owes us, which creates credit risk for us. When the
fair value of a derivative contract is negative, we owe the
counterparty and, therefore, it is not subject to credit risk.
We minimize the credit risk in derivative financial instruments
by entering into transactions with major financial institutions
with credit ratings of AA- or higher.
Market risk is the adverse effect on the value of a financial
instrument that results from a change in interest rates. The
market risk associated with interest-rate contracts is managed
by establishing and monitoring parameters that limit the types
and degree of market risk that may be undertaken.
Interest rate swaps with a notional value of $2.7 billion
have been designated as cash flow hedges to hedge three-month
LIBOR-based interest payments on $2.7 billion of bank debt.
As of March 31, 2008, these respective interest rate swaps
provided an effective hedge of the three-month LIBOR-based
interest payments on $2.7 billion of bank debt.
Certain interest rate swaps acquired as a result of the Dex
Media merger with a notional amount of $125.0 million
remained undesignated as cash flow hedges at March 31,
2007. For the three months ended March 31, 2007, we
recorded additional interest expense of $0.4 million as a
result of the change in fair value of the acquired undesignated
interest rate swaps. All undesignated interest rate swaps
acquired as a result of the Dex Media merger were settled as of
December 31, 2007.
As a result of the amendment to the RHDI credit facility and the
refinancing of the Dex Media West credit facility on
June 6, 2008, the existing interest rate swaps associated
with the previous debt agreements are no longer highly effective
in offsetting changes in cash flows under the new agreements.
Accordingly, prospective gains and losses on the change in the
fair values of these interest rate swaps will be recognized in
earnings as a component of interest expense. Additionally, at
the time these interest rate swaps became ineffective on
June 6, 2008, the cumulative amount of prior changes to the
fair values of these swap agreements totaling approximately
$42.9 million, previously recorded to accumulated other
comprehensive income, will be reported in earnings as a non-cash
component of interest expense immediately.
The notional amount of our interest rate swaps is used to
measure interest to be paid or received and does not represent
the amount of exposure to credit loss. Assuming a 0.125%
increase in the interest rate associated with the floating rate
borrowings under our credit facilities (after giving effect to
the interest rate swaps), interest expense would increase
$1.4 million on an annual basis.
Please refer to Note 2, Summary of Significant
Accounting Policies and Note 6, Derivative
Financial Instruments, of the notes to the consolidated
financial statements included herein for additional information
regarding our derivative financial instruments and hedging
activities.
Market
risk sensitive instruments
We utilize a combination of fixed-rate and variable-rate debt to
finance our operations. The variable-rate debt exposes us to
variability in interest payments due to changes in interest
rates. Management believes that it is prudent to mitigate the
interest rate risk on a portion of its variable-rate borrowings.
To satisfy this objective, we have entered into fixed interest
rate swap agreements to manage fluctuations in cash flows
resulting from changes in interest rates on variable-rate debt.
Certain interest rate swap agreements have been designated as
cash flow hedges. In accordance with the provisions of
SFAS No. 133,
Accounting for Derivative Instruments
and Hedging Activities
, as amended by
SFAS No. 138,
Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of
FAS 133
and SFAS No. 149,
Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities,
the swaps are recorded at fair value. On a
quarterly basis, the fair values of the swaps are determined
based on quoted market prices and, assuming effectiveness, the
differences between the fair value and the book value of the
swaps are recognized in
95
accumulated other comprehensive loss, a component of
shareholders equity. The swaps and the hedged item
(three-month LIBOR-based interest payments on $2.7 billion
of bank debt) have been designed so that the critical terms
(interest reset dates, duration and index) coincide. Assuming
the critical terms continue to coincide, the cash flows from the
swaps will exactly offset the cash flows of the hedged item and
no ineffectiveness will exist.
For derivative instruments that are not designated or do not
qualify as hedged transactions, the initial fair value, if any,
and any subsequent gains or losses on the change in the fair
value are reported in earnings as a component of interest
expense. During May 2006, we entered into $1.0 billion
notional value of interest rate swaps, which were not designated
as cash flow hedges until July 2006. In addition, certain
interest rate swaps acquired as a result of the Dex Media merger
with a notional amount of $425 million were not designated
as cash flow hedges. As of December 31, 2007, all of the
undesignated interest rate swaps acquired as a result of the Dex
Media merger were settled. Resulting gains or losses on the
change in the fair value of these interest rate swaps have been
recognized in earnings as a component of interest expense.
96
Industry
overview and outlook
Industry
overview
According to Veronis Suhler Stevenson, the U.S. print
directory advertising industry accounted for $15.7 billion
in revenues in 2006 (including the online versions of those
print directories). According to the Yellow Pages Association,
the U.S. directory advertising industry is the sixth
largest advertising medium, serving approximately
3.2 million customers. Incumbents consist of the publishing
businesses of regional Bell operating companies, which we refer
to as RBOCs, ILECs, and third-party publishers, such as us,
which operate under exclusive agreements with RBOCs and ILECs.
These incumbents, including us, enjoy advantages over other
competitors such as higher usage, greater market share, more
accurate content and stronger relationships with advertisers.
Based on our experience, we believe that more than 90% of
incumbents revenue is generated from recurring sources.
The reach and affordability of the Yellow Pages attract a
diversified set of advertisers, the majority of whom are SMEs.
In addition, Yellow Pages represent the primary, and in many
cases, sole, form of advertising for these SMEs.
According to Veronis Suhler Stevenson, IYP is expected to grow
in the U.S. at a 19.8% compound annual growth rate, or
CAGR, during 2006 to 2011. Veronis Suhler Stevenson also
projects local search will grow at a 34.5% CAGR during 2006 to
2011. As consumers continue to utilize various digital media
more frequently, we believe that the U.S. directory
publishers will be able to capitalize on their robust content,
long-term advertiser relationships, local market knowledge and
existing presence in most consumers homes to expand their
customers reach and generate additional revenue
opportunities.
Attractive
financial characteristics
While overall advertising tends to track the performance of the
economy, directory advertising tends to be more stable and is
less affected by economic downturns due in part to its frequent
use by SMEs, often as their principal or only form of
advertising. In addition, the annual nature of most print
directory campaigns tends to aid advertiser retention as small
businesses do not want to miss out on an entire year of
advertising. Moreover, most directory publishers, including us,
give priority placement within a directory classification to
their longest-tenured advertisers. As a result, advertisers have
a strong incentive to renew their directory advertising
purchases from year-to-year to keep their beneficial placement.
Incumbent
advantages
There are two types of print Yellow Pages publishers, the
incumbents, which consist of the publishing businesses of RBOCs
and ILECs and third-party publishers, which operate under
exclusive agreements with RBOCs and ILECs, and the independents,
which include companies who are not affiliated with the local
RBOC or ILEC. The incumbent category also includes companies,
such as us, who blend the content and brand advantages of an
incumbent with the execution focus of an independent.
In general, incumbents enjoy a significant market share lead
over independents, 79% for incumbents and 21% for independent
publishers in 2006, according to Simbas 2007 Yellow Pages
Forecast. The difference in market share can be explained by a
number of advantages that incumbents have over independents,
including:
|
|
|
|
|
Greater brand recognition.
Many consumers view
the incumbents publication as the official or trusted
source which leads to greater usage;
|
|
|
|
More content.
Provides a single source
solution for consumers which leads to greater book retention;
|
|
|
|
Broader distribution.
Our obligation on behalf
of the RBOCs and the ILECs to deliver our books to new
residences provides a greatly needed resource for finding local
products and services to people at a time when they often have
the greatest need for the information; and
|
|
|
|
Long-term relationships with
advertisers.
Working with advertisers year after
year allows the sales force to serve as a trusted advisor
because they understand the local market and their
customers unique
|
97
|
|
|
|
|
business advertising needs. As a result, this creates
significant value for advertisers and provides more rich content
for consumers.
|
Given their market position, incumbents on average are able to
generate more calls per dollar spent on advertising than
independents. In other words, incumbents deliver more calls at a
lower cost per call than the independents. Furthermore,
advertisers often have greater trust that incumbents will
accurately publish and deliver books in addition to valuing
incumbents increased focus on customer service and support.
Nevertheless, independents have increased their market share in
part due to the Telecommunications Act, which assured access to
telephone subscriber listings at nominal rates, and significant
private equity investment. However, the three major incumbents,
which include us, are still the top three U.S. directory
publishers in terms of total revenue.
Strong
customer base
Domestic Yellow Pages publishers enjoy a diversified, loyal
customer base. Approximately 85% of revenue is derived from
local advertisers, the majority of whom are SMEs in service
businesses. We believe that SMEs often rely on the Yellow Pages
as their principal or sole form of advertising because they are
affordable, easy to buy and effective. This, in combination with
the value created from their advertisements, leads to strong,
long-term relationships.
National advertisers, who frequently utilize agencies to act as
intermediaries, comprise approximately 15% of industry revenue.
The largest national advertisers total industry spending
accounts for less than 3% of industry revenue from national
advertisers and less than 1% of total industry revenue.
Advantages
of sales force
The directory advertising industrys more than 20,000
highly qualified salespersons create a large advantage for the
directory advertising industry. The sales forces long-term
relationships, knowledge of the local market and marketing
expertise give publishers an edge over national advertising
players and Internet only firms. They are responsible for
maintaining high customer retention rates, encouraging existing
customers to increase advertising across appropriate platforms
and attracting new advertisers. SMEs, who make up the majority
of industry revenue, have limited marketing experience, time and
resources. As a result, external marketing advisors are crucial
to their success. Selling advertising to SMEs is a time
consuming and intensive process. A well-trained sales force can
educate the advertiser, build trust and utilize deep market
knowledge to convince new advertisers to make a purchase or an
existing advertiser to grow. Most of the industry provides
substantial sales training and has made significant investments
in technology to improve the productivity of its salespeople.
Digital
opportunities
Digital expansion, including the Internet, represents a
significant opportunity for the directory advertising industry
to extend its advertisers reach and provide its customers
with increased value. IYP not only transfers the content of
print Yellow Pages to a digital, searchable format, but it also
allows for more advanced functionality, flexibility for updating
advertiser content and more personalized search results.
According to Veronis Suhler Stevenson, the U.S. IYP
represented only a small portion of the total
U.S. directory advertising market in 2006 with total
revenue of approximately $1.03 billion, having grown from
$164 million in 2001. Most major directory publishers
operate an Internet-based directory business and publishers have
increasingly bundled online advertising with their traditional
print offerings in order to enhance total usage and advertiser
value.
Increasing distribution of advertiser content online is
beneficial due to:
|
|
|
|
|
Attractive consumer demographics.
IYP users
are typically
25-49 years
old with higher education and higher incomes than the national
average;
|
98
|
|
|
|
|
Complementary usage.
Eight out of ten Internet
shoppers also refer to the print Yellow Pages in an average
month, and 76% of IYP users continue to use print Yellow Pages
according to the 2006 Yellow Pages Association Facts and Media
Guide; and
|
|
|
|
High value-added.
Reach is extended to an
additional platform with minimal incremental cost.
|
We believe robust content, long-term advertiser relationships,
local market knowledge and existing presence in most
consumers homes position U.S. directory publishers
well to take advantage of opportunities in digital local search.
99
Business
Corporate
overview
We are one of the nations 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 and
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 countrys 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
affordable 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
search engine 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 that host our local business listings and content
and through Internet marketing.
This compelling set of Triple Play products and services, in
turn, generates among the strongest returns for advertisers of
any advertising media available today. 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.
Business
strengths
Strong
brand names and leading incumbent position
We are the third largest directory publisher in the United
States based on revenue. We have acquired incumbent directory
publishers over the past five years, which has increased our
scale and reach within the directory advertising industry and
provide us the exclusive right to provide directory services in
many of our markets. We also acquired the exclusive right to use
the highly recognizable brand names of AT&T, Embarq and
Qwest in our markets, which gives us a substantial competitive
advantage over independent directory publishers and many online
local search providers. We leverage this brand recognition and
co-brand our print products with the Dex brand name. During
2007, we launched the Dex brand across all of our markets as one
unified brand for all of our products and services. We believe
the Dex brand complements the highly recognizable brands of
AT&T, Embarq and Qwest of our print products. The Dex brand
already enjoys strong awareness and is recognized as a leader in
the Qwest markets for directional media services.
100
The benefits of incumbent branding generally include the
following:
|
|
|
|
|
being the official telephone directory for a given
market;
|
|
|
|
high brand recognition;
|
|
|
|
long-term relationships with advertisers;
|
|
|
|
broader distribution;
|
|
|
|
more accurate and complete content; and
|
|
|
|
higher usage.
|
These benefits provide opportunities for higher advertiser
penetration and retention and revenue growth.
We also own and operate attractive Internet properties including
DexKnows.com, Business.com and Work.com. According to comScore,
DexKnows.com, and its predecessor Dexonline.com, has been the
most used IYP search site in the Dex Media states for 14
consecutive quarters. In addition, Business.com is a leading
business-to-business search engine and directory in the
U.S. with over six million unique users monthly.
Based on our position as an incumbent publisher and our ILEC
partners recognizable brand names, as well as our other
business strengths, we presently are and expect to remain a
leader in terms of usage and market share of directory
advertising in most of the AT&T, Embarq and Qwest markets
where we publish directories.
Product
offerings and development
We have expanded our product line and developed new products
over the years, which has supported our revenue growth. In
particular, our broad range of specialty products has been used
by our advertisers to differentiate and enhance the display of
their business information. These specialty products typically
include the following:
|
|
|
|
|
companion directories that extend the distribution of our
advertisers messages;
|
|
|
|
awareness advertising options that include:
|
|
|
|
|
|
new cover products,
|
|
|
|
advertisements placed on easy-to-find advertiser section
tabs within directories for frequently-used categories
such as physicians, auto dealerships and plumbers, and
|
|
|
|
delivery ride-along inserts; and
|
|
|
|
|
|
two- and three-page advertisements placed at frequently
referenced sections of the directory.
|
We have historically focused and continue to focus on our core
mission: to help local businesses grow by delivering
ready-to-buy customers to them. We look for trends and
opportunities to serve this mission. In recent years, some
consumer usage has shifted away from print Yellow Pages toward
the Internet. This trend varies significantly by category, and
print Yellow Pages still enjoy far greater usage than the
Internet in many categories, such as heating and air
conditioning service, beauty salons, locksmiths and general
contractors. This trend, along with the increasing use of the
Internet, has led to our triple play service
offering of print Yellow Pages, IYP and local search products
and services. This combination of different media significantly
extends our reach to the consumer, and, in doing so, increases
the potential value of our products to our advertisers.
101
To respond to the changing ways in which the public uses our
products, and to fully capture the revenue opportunity, during
2007, we:
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launched a unified, national URL and IYP site known as
DexKnows.com, a leading consumer site that utilizes
Internet-based directory advertising products, such as extra
lines, replica advertisements, website and email link products,
pop-up
windows, banners and pay-for-placement offerings.
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launched an internally managed SEM solution through Local
Launch, a leading local search products, platform and
fulfillment provider; and
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acquired critical technology that will ultimately allow us to
compete more effectively and profitably in the SEM space in the
future through the Business.com platform and advertising network.
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Positive
industry fundamentals
According to Veronis Suhler Stevenson, the U.S. directory
advertising industry (both print Yellow Pages and IYP) accounted
for $16.1 billion in revenues in 2006. There are several
reasons why the directory advertising industry is attractive,
especially for incumbents:
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in many of our markets, we have more than twice the market share
(based on usage) of our largest competitor;
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in many cases Yellow Pages are the primary advertising medium
for SMEs;
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it is an influential form of major media with approximately 22%
of consumers making purchases having considered the Yellow Pages
prior to the decision to purchase; and
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Yellow Pages have very little customer concentration risk, with
the top ten advertising categories comprising less than 27% of
the directory advertising industry.
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Stable
and consistent operating profile
Our incumbent position, expanded product portfolio and strong
customer relationships generate stable and consistent revenue
and strong operating cash flow. The vast majority of our
revenues come from products already established in our markets,
and our strong relationships with advertisers are evidenced by
revenue from recurring advertisers. We also have a diversified
revenue stream. For the year ended December 31, 2007, no
advertiser represented more than 1% of our total revenues. This
stable and consistent operating profile has enabled us to repay
approximately $3.2 billion of debt since the Embarq
Directory Acquisition on January 3, 2003 to
December 31, 2007.
Experienced
management with proven track record of success
Management has achieved several significant accomplishments in
the past five years and has established a track record of
successfully:
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managing directory publishing assets,
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launching and managing IYP and other local search sites,
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selling interactive products,
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integrating acquisitions,
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generating strong positive cash flow from operations and using
it to repay outstanding debt, and
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delivering strong financial performance.
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In addition, our management team has a strong mix of
long-tenured company experience and long-tenured industry
experience, as well as more recent additions of broader media,
marketing and online experience. The acquisitions of Local
Launch in 2006 and Business.com in 2007 strengthened our
management team by adding
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senior executives with significant experience managing Internet
ventures. Executives from Local Launch and Business.com are
recognized leaders in Internet search and advertising and SEM
and SEO services.
Business
strategy
We have an annual distribution of approximately 80 million
directories in 28 states and eight of the top 40
metropolitan statistical areas, or MSAs. We are continuing to
extend our usage and reach by, among other things, leveraging
Dex Medias distribution agreements with
Google
®
,
Yahoo!
®
and other search engines.
We have identified three sources of potential growth and have
developed a business strategy utilizing our triple
play strategy to capitalize on these opportunities. The
main elements of this strategy include:
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maintaining strong levels of recurring revenue through the
retention of existing customers;
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achieving new revenue from existing customers; and
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attracting new customers and sources of revenue through new
business initiatives through the Internet and our other
interactive platforms.
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The principal elements of this business strategy include the
following initiatives:
Strengthen
current market positions and grow advertiser base
We intend to increase customer retention and add to our
advertiser base by utilizing our core expertise in managing
local advertising sales forces. In addition, we plan to increase
the number of new advertisers by developing marketing
initiatives and obtaining new lead data on businesses that have
not previously advertised with us, as well as continuing to
build awareness of our products and services. Further, we will
continue to focus on increasing both the number of advertisers
and revenue per existing customer with the following:
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striving to increase advertiser value across multiple platforms
while increasing investment in platforms that are most effective
at reaching the advertisers target audience;
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increasing the number of advertising products purchased in print
and online directories;
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using our larger scale to attract more national advertising to
our print and our local search products;
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reaching non-traditional advertisers through new interactive
advertising solutions; and
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offering new Internet related services to businesses in our
local markets.
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Expand
product offerings and implement value added
services
Our interactive strategy supports our overall mission of helping
SMEs grow by providing them end-to-end local search solutions
that leverage our proprietary online and print products as well
as a network of partner sites and platforms to drive leads to
our advertisers whenever, wherever or however a consumer might
choose to search.
Our interactive strategy leverages our core assets, which our
sales force and the relationships they have with hundreds of
thousands of SMEs, as well as the advertising content generated
through those relationships, and is built on the following key
strategies:
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provide a compelling, relevant and differentiated consumer
experience to our DexKnows.com users that will drive repeat
usage and grow organic usage;
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establish distribution relationships with major search engines
and a local advertising network so that we can deliver our
advertisers messages to consumers wherever and whenever
they are searching for local products and services;
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provide our advertisers with a powerful full-service solution to
generating leads from across the Internet so that they can focus
their attention on running their business instead of managing
multiple SEM and SEO campaigns; and
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convert our advertiser base predominantly to performance-based
advertising so that we:
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provide our advertisers with greater transparency with regard to
their return on investment; and
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increase direct traffic to our sites from consumers previously
referred by third-party websites, such as Google and Yahoo!,
with whom we have distribution agreement.
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Implement
best sales and marketing strategies
Our sales training process will continue to serve as the
catalyst and foundation for sales performance and employee
retention through four core strategies:
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recruiting talent we will continue to aggressively
recruit and attract sales talent in our markets;
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sales trainer talent only our sales elite are
selected to join the training team to teach proven skills,
habits and cultures to our sales professionals;
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accelerated training practices we will continue to
accelerate training practices through tested performance based
on classroom and field sales training curriculum; and
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leadership/management development we are committed
to developing talented leaders and managers.
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We believe that a bifurcated marketing process comprised of both
centralized and decentralized strategies best suits our needs.
Our marketing group creates marketing investment plans, or MIPs,
that provide detailed information regarding a particular market.
MIPs are put in place prior to the start of the annual marketing
campaign in many of our largest markets. The purpose of the MIPs
is to provide the marketing and sales teams with a locally based
market plan to improve results in their markets.
Significant
business developments
Acquisition
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. The purchase price determined in accordance
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 RHDs 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.
2008 Debt
refinancing
We have recently undertaken certain refinancing activities.
These refinancing activities include the RHDI exchange offers
pursuant to which RHDI issued the 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
RHDIs 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
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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 revolver 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
$250.0 million of senior subordinated notes of Dex Media
West are outstanding, then the term loans and revolver 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 million 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 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 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 revolving credit facility. 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 Easts outstanding
9.875% senior notes due 2009 and $341.3 million of Dex
Media Easts outstanding 12.125% senior subordinated
notes due 2012.
In December 2007, we redeemed the remaining 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 the
Repurchase Plan. This authorization permits us to purchase
$100.0 million of 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
105
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.
Historical
overview
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 include 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.
On September 6, 2006, we acquired Local Launch, a local
search products, platform and fulfillment provider. 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 Dex Media Business now operates through Dex Media, one of
RHDs direct, wholly-owned subsidiaries.
On September 1, 2004, we completed the acquisition of the
AT&T Directory Business of AT&T in Illinois and
Northwest Indiana, including AT&Ts 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.
On January 3, 2003, we completed the acquisition of the
Embarq Directory Business of Sprint 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.
The purposes of our acquisitions included the following:
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Building RHD into a leading publisher of yellow pages
directories and provider of online commercial search services;
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Adding leading Internet advertising talent and technology, to
strengthen RHDs position in the expanding local commercial
search market and to develop an online performance based
advertising network;
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Enhancing our local Internet marketing capabilities and
offerings.
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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. See Managements
discussion and analysis of
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financial condition and results of operations for more
information regarding the financing and financial implications
of these acquisitions.
Prior to the Dex Media merger, we were the sixth largest print
directory publisher in the United States, producing
384 directories in 19 states with an annual
distribution of more than 28 million directories.
Previously, all of our operations were conducted through RHDI,
which was then our only direct wholly-owned subsidiary. Our
advertiser base included approximately 260,000 local and
national advertisers with local businesses representing
approximately 85% of gross revenues. Our directory coverage
areas included a number of states with attractive demographics
and rapidly growing populations, including Florida, Nevada,
North Carolina and Virginia, as well as Illinois, including the
large metropolitan area of Chicago.
Prior to the Embarq Directory Acquisition in January 2003, we
were one of the largest independent sales agents and pre-press
vendors for yellow pages advertising in the United States.
Commencing in 2003 following the Embarq Directory Acquisition,
our operating and financial results reflected our yellow pages
publishing business, rather than our former business as a sales
agent and pre-press vendor for yellow pages advertising on
behalf of other publishers. As a publisher, we report the full
value of advertising sales and certain direct costs under the
deferral and amortization method. DonTechs business
remained unchanged following the Embarq Directory Acquisition,
but our investment in DonTech was eliminated in connection with
the AT&T Directory Acquisition on September 1, 2004.
During 2003 and in 2004 until the AT&T Directory
Acquisition, we continued to earn revenue from pre-press
publishing and other ancillary services related to the AT&T
Directory Business and we continued to report partnership income
from our investment in DonTech. As a result of the AT&T
Directory Acquisition, AT&T ceased paying us revenue
participation income, we began consolidating all net profits
from DonTech and our DonTech partnership investment was
eliminated. Consequently, partnership income was no longer
reported commencing September 1, 2004 and accordingly, the
previously reported DonTech operating segment was no longer
applicable.
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. See
Note 13, Business Segments of the notes to the
consolidated financial statements included herein for additional
information.
Business
overview
During 2007, we published and distributed print directories that
provide comprehensive local information to consumers, enabling
them to efficiently search for and find products and services
offered by local businesses. Our print advertising continues to
offer a strong return for advertisers, as ready to buy consumers
across the United States referred to the Yellow Pages
approximately 13.4 billion times in 2006 according to the
YPA Industry Usage Study, resulting in a high conversion of
advertising impressions to actual transactions for our
customers. Our advertising customers enjoy this demonstrated
value as they receive a large volume of qualified leads from
ready to buy consumers. Consumers value our advertising products
and services as they can access comprehensive, up-to-date
information for what they want to buy.
The directional advertising we provide with our print products
is complemented with our online products and services through
our Triple Play service offering. Our Triple Play integrated
marketing solutions suite encompasses an increasing number of
tools consumers use to find businesses that sell the products
and services they need: print Yellow Pages directories, our
proprietary DexKnows.com search site and the rest of the
Internet via Dex Search
Marketing
®
tools. Our online products and services provide merchants with
additional methods to connect with consumers and businesses who
are actively seeking to purchase products and services using the
Internet.
Products
and services
In every market that we serve, we offer an integrated solution
of print and online products and services.
107
Print
products
We publish both a white pages section and a yellow pages section
in our print directory products. Whenever practicable, we
combine the two sections into one directory. In large markets
where it is impractical to combine the two sections into one
volume, separate stand-alone white and yellow pages print
directories are normally published at about the same time.
These directories are designed to meet the advertising needs of
local and national businesses and the informational needs of
local consumers. The diversity of advertising options available
enables us to create customized advertising programs that are
responsive to specific advertiser needs and financial resources.
The yellow pages and white pages print directories are also
efficient sources of information for consumers, featuring a
comprehensive list of businesses in the local market that are
conveniently organized under thousands of directory headings.
We have three primary types of printed directories: core
directories, community directories and Plus companion
directories. Core directories generally cover large population
or regional areas, whereas community directories typically focus
on a sub-section of the areas addressed by corresponding core
directories. The Plus companion directory is a small format
directory used in addition to the core and community
directories. It is complementary to the core directory, with
replicated advertising from the core directory available for an
additional charge. These print directory advertising products
can be broken down into three basic categories: Yellow Pages,
White Pages and Specialty/Awareness Products. Additionally, we
offer Hispanic yellow pages in select markets, either on a
standalone basis or as a separate section in the core or
community directory.
Yellow
pages
We offer businesses a basic listing at no charge in the relevant
edition of our yellow pages directories. This listing includes
the name, address and telephone number of the business and is
included in alphabetical order in the relevant classification.
A range of paid advertising options is available in our yellow
pages directories, as set forth below:
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Listing options
Advertisers may enhance
their complimentary listing in several ways. They may pay to
have a listing highlighted or set in a bolder typeface, both of
which increase the visibility of the listing. Advertisers may
also purchase extra lines of text to convey information, such as
hours of operation or a more detailed description of their
business.
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In-column advertising options
For greater
prominence on a page, an advertiser may expand a basic
alphabetical listing by purchasing advertising space in the
column in which the listing appears. The cost of in-column
advertising depends on the size and type of the advertisement
purchased. In-column advertisements may include such features as
bolding, special fonts, color, trademarks and graphics.
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Display advertising options
A display
advertisement allows businesses to include a wide range of
information, illustrations, photographs and logos. The cost of
display advertisements depends on the size and type of the
advertisement purchased and the market. Display advertisements
are placed usually at the front of a classification, and are
ordered first by size and then by advertiser seniority. This
process of ordering provides a strong incentive for advertisers
to renew their advertising purchases from year to year and to
increase the size of their advertisements to ensure that their
advertisements continue to receive priority placement. Display
advertisements range in size from a quarter column to as large
as two pages, referred to as a double truck
advertisement. Display advertisers are offered various levels of
color including spot-four color, enhanced color, process photo
and high-impact.
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White
pages
State public utilities commissions require the local exchange
carriers, or LEC, affiliated with us, Qwest, Embarq and
AT&T, to produce white pages directories to serve their
local service areas. Through the publishing agreements held by
us separately with Qwest, Embarq and AT&T, the LECs have
contracted with us to publish these directories for decades to
come. Our publishing agreements with Qwest and Embarq each
108
run through 2052 and our publishing agreement with AT&T
runs through 2054. By virtue of these agreements, we provide a
white pages listing to every residence and business in a given
area that sets forth the name, address and phone number of each
residence or business unless they have requested not to be
listed.
Advertising options in white pages include bolding and
highlighting for added visibility, extra lines for the inclusion
of supplemental information and in-column and display
advertisements. In certain cases, the relevant LEC can sell
various forms of enhanced white pages listings.
Specialty/Awareness
products
In addition to these primary products, we offer awareness
products which allow businesses to advertise in a variety
of high-visibility locations on or in a directory. Each
directory has a limited inventory of awareness products, which
provide high value to advertisers and are priced at a premium to
in-column and display advertisements. Awareness products include
placement of customers advertising on the inside and outside of
the front and back cover, on tabs within the directory, on the
edges of the directory, on delivery bags and on card stock
inserted in the directory and delivery bags.
Online
products and services
The Internet continues to emerge as an attractive medium for
advertisers. Internet Yellow Pages references have increased as
a percentage of Yellow Pages references from 7% in 2003 to 14%
in 2007, according to The Kelsey Group. Additionally, online
Yellow Pages marketing is expected to grow at a compounded
average growth rate of 24% from 2007 to 2012, according to The
Kelsey Group.
To address this emerging trend, we complement our print
directory portfolio with the following online products and
services:
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Internet Yellow Pages DexKnows.com;
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Internet marketing Dex Search Marketing;
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Business Search Engine and directory and performance based
advertising Business.com,
Work.com and the Business.com Advertising
Network.
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DexKnows.com
During 2007, we consolidated all of our IYP platforms onto
DexKnows.com to both generate scale efficiencies as well as
provide a consistent solution across our markets.
Advertisers content is placed on the DexKnows.com platform
through basic text listings and business profiles and through
sales of a variety of Internet products, including enhanced
business profiles,
e-mail
links, website link and video advertisements. In many cases,
print advertisers content is largely replicated to
DexKnows.com. In some of our markets, advertisers are able to
purchase priority inclusion products that include fully featured
listings and provide the opportunity to be ranked closer to the
top of search results pages.
We purchase information from other national databases to enhance
in-region listings and supply out-of-region listings (although
these out-of-region listings are not as comprehensive as our
in-region information). DexKnows.com includes approximately
16 million business listings and more than 140 million
residential listings from across the United States. DexKnows.com
was the number one IYP site within the Qwest 14-state region for
the past 15 quarters, as measured by comScore, a market research
firm.
DexKnows.com allows the user to search based on a category,
business name, or set of keyword terms within a geographic
region. In addition, DexKnows.com providers users with the
ability to refine their searches using criteria that include
such things as specific product and brand names, hours of
operation, payment options and locations.
In June 2007, we introduced the next-generation DexKnows.com
destination site in the Qwest markets. The new site provides a
more relevant search experience for consumers, plus features
such as draggable maps and map-based search, comparison
shopping, user-generated itineraries for multi-stop shopping and
personal
109
contact lists to help consumers build personalized online yellow
pages. The site has undergone continuous refinements and
enhancements, including the introduction of user generated
content, such as business ratings and reviews, and this new site
serves as the foundation for a common IYP site across all of our
markets.
In connection with the Dex Media merger, we acquired certain
content agreements and distribution agreements with various
search engines, portals and local community destination
websites. These agreements are intended to provide additional
distribution of advertising content, thereby enhancing the value
proposition offered to advertisers. In addition, in August 2007
we announced an expanded distribution agreement with
Yahoo!
®
in which Qwest region advertisers will benefit from inclusion
within the following Yahoo! Local and Yahoo! Yellow Pages
advertising products:
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Featured Listings
sponsored listings with
guaranteed placement on the first or second results pages for
broader exposure in a specific geography or category.
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Enhanced Listings
sponsored listings that
offer the ability to add a detailed description of their
business, photos, a tagline and coupons to create greater online
visibility for businesses and enhance their appearance within
organic results.
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Yahoo! Maps Business Listings
sponsored
listings within the context of a map-based view.
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Yahoo! Yellow Pages
DexKnows.com advertisers
are given a presence in the search results for Yahoo! Yellow
Pages search.
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Dex
Search Marketing
In September 2006, we acquired Local Launch, a local search
products, platform and fulfillment provider. Local Launch serves
as the foundation for Dex Search Marketing, a new business unit
within RHD Interactive, which includes all of our Internet
marketing services, that is focused exclusively on the delivery
of local advertisements through Internet marketing across
multiple local search directories and major search engines such
as Google, Yahoo, and MSN. Products and services offered by Dex
Search Marketing support the expansion of our current local
Internet marketing offerings and provide new, innovative
solutions to enhance our local Internet marketing capabilities.
We began rolling out Dex Search Marketing products in the
AT&T Illinois footprint in late March 2007 and completed
the roll out to our entire footprint in October 2007.
Dex Search Marketing provides a comprehensive approach to
serving the Internet marketing needs of small businesses through
four major product and service elements:
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Storefront Profile
constructs a simple but
content rich presence on the web for the advertiser that is
highly optimized to rank well within the organic portion of
search engine results pages.
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Distribution
provides the advertisers
information and business information to multiple local search
platforms including Yahoo! Local, Google Local, and Local.com.
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Paid Search
develops, deploys and manages
effective search marketing campaigns across major search
platforms, such as Google and Yahoo!, on behalf of the
advertiser.
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Reporting
provides transparent, real-time
results, such as click and call activity that occurs on the
advertisers Storefront Profile.
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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.
As we acquired certain businesses at various times, our online
product and service offerings are at different stages of
implementation based on the geographic region of the acquired
businesses. Various differences of our service offering by
region are noted below.
110
Qwest
Throughout the Dex Media states, we have assumed distribution
agreements with various local community websites to make the
structured database of content available to local users of those
websites. These agreements provide us with access to important
channels to enhance our distribution network on behalf of our
advertisers. This enhanced distribution typically leads to
increased usage among consumers and greater value and return on
investment for our advertisers.
Sales of Internet marketing services continued in 2007 in our
Qwest markets with a focus on migrating the product from the
former Dex Web Clicks, which involved guaranteed clicks
packages, to the Local Launch product, which involves
value-based packages. This Internet marketing product has been
designed as an affordable solution for SMEs and allows
advertisers to participate in auction-based, paid search
Internet advertising across multiple search engines and portals
at fixed monthly prices. In addition, it provides advertisers
with a projected number of references, or clicks, to
their website or storefront profile landing page over the
contract term. In addition, our Internet marketing program
offers website design and hosting services to advertisers, in
the event they do not have an existing website. A network of
search engines and portals provides the infrastructure for the
provisioning of online references.
AT&T
and Embarq
During the latter part of 2007, we incorporated all of our
AT&T and Embarq listings and advertiser content onto
DexKnows.com, which is now RHDs uniform IYP platform
across its entire footprint. Prior to this change, our
Internet-based directory product in the AT&T and Embarq
footprints was an online version of the print product rather
than a local destination search site. We offer a suite of
Internet-based directory services targeted at specific
geographies. We expect to retire legacy AT&T and Embarq IYP
sites by the end of 2008.
During 2007, RHDs chicagolandyp.com (and similar URLs in
Illinois and Northwest Indiana) and bestredyp.com sites allowed
users to search deep into the content of local yellow pages
advertisements to return more relevant results for their local
directional searches. For each of the online directory sites, we
provide a city portal with information about the targeted
market, along with electronic versions of the white pages and
yellow pages directories. In addition, each site provides users
with national yellow pages and white pages search capability,
allowing users to conduct searches for content outside of our
footprint.
In 2006, we introduced RHD branded Internet marketing products
into markets across the AT&T and Embarq footprints. In
these markets, RHD used several different Internet marketing
business models in order to determine which model would serve
customers most effectively for the long term. We determined that
Local Launch value-based Internet marketing services best met
customers needs for Internet marketing services and was
our primary product for SMEs in 2007.
During 2007, we have continued to sell products associated with
our 2004 reseller agreement with AT&T, which expires in
2009, onto the YellowPages.com platform. This agreement grants
us the (a) exclusive right to sell to local advertisers
within Illinois and Northwest Indiana 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
Illinois and Northwest Indiana Internet Yellow Pages advertising
focused upon products and services to be offered outside of that
territory, in each case, onto the YellowPages.com platform.
Business.com
On August 23, 2007, we acquired Business.com, a leading
business search engine and directory and performance based
advertising, or PBA, network. Under the PBA model, advertisers
effectively bid on a
cost-per-click
basis against other advertisers for priority placement within
search results. The Business.com PBA platform enables this by
providing for flexible advertising provisioning and bid
management capabilities. In addition, its PBA technology also
incorporates a yield management system to allow us to let
demand, in
111
this case the price, and performance, which is the click-through
rate, determine advertising display, thus increasing our
financial gain while promoting search relevancy.
Through this transaction, we added to our existing interactive
portfolio a rapidly growing and profitable business-to-business
company, with online properties that include Business.com,
Work.com and the Business.com Advertising Network. The
Business.com Advertising Network serves advertising on
non-proprietary websites such as
Businessweek.com,
Forbes.com and AllBusiness.com, and shares advertiser revenue
with third-party sites for qualified clicks each time a visitor
clicks on our advertisers listings. This network provides
a way for media buyers of various types to coordinate
advertising campaigns across various sites in an efficient
manner. The Business.com and Work.com properties attract an
audience of highly qualified and motivated business decision
makers. Business.com increases the revenues from these
properties through the use of its PBA platform.
Business
cycle overview
Our print directories usually have a
12-month
directory cycle period. A publication process generally takes 15
to 20 months from the beginning of the sales cycle to the
end of a directorys life and the sales stage closes
approximately 70 days prior to publication. Consistent with
our print directories, our online products and services usually
have a
12-month
cycle period.
Sales
Our print and online local marketing consultant team is
comprised of approximately 1,900 members.
We assign our print and online customers among premise local
marketing consultants and telephone local marketing consultants
based on a careful assessment of a customers expected
advertising expenditures. This practice allows us to deploy our
local marketing consultants in an effective manner. Our local
marketing consultants are decentralized and locally based,
operating throughout the country in local service areas.
Management believes that our local marketing consultants
facilitate the establishment of personal, long-term
relationships with local print and online advertisers that are
necessary to maintain a high rate of customer renewal.
The local print and online sales channel is divided into three
sales sub-channels: premise sales, telephone sales and locally
centralized sales.
Premise local marketing consultants
conduct
sales meetings face to face at customers business
locations and typically handle higher dollar and more complex
accounts.
Telephone local marketing consultants
handle
lower dollar value accounts and conduct their sales over the
phone.
Locally centralized sales
includes multiple
types of sales efforts, including centralized local marketing
consultants, prospector local marketing consultants and a letter
renewal effort. These sales mechanisms are used to contact
non-advertisers or very low dollar value customers that in many
cases have renewed their account for the same product for
several years. Some of these centralized efforts are also
focused on initiatives to recover former customers.
Management believes that formal training is important to
maintaining a highly productive sales force. Our local marketing
consultants undergo ongoing training, with new local marketing
consultants receiving approximately eight weeks of training in
their first year, including classroom training on sales
techniques, product portfolio, customer care and administration,
standards and ethics. Following classroom training, they are
accompanied on sales calls by experienced local marketing
consultants for further training. Our commitment to developing
best sales practices across RHD are intended to ensure that our
local marketing consultants are able to give advertisers
high-quality service and advice on appropriate advertising
products and services.
In addition to our locally based marketing consultants, we
utilize a separate sales channel to serve our national
advertisers. In 2007, national advertisers accounted for about
15% of revenue. National advertisers are typically national or
large regional chains such as rental car companies, insurance
companies and pizza
112
businesses that purchase advertisements in many yellow pages
directories in multiple geographic regions. In order to sell to
national advertisers, we contract with third party CMRs. CMRs
design and create advertisements for national companies and
place those advertisements in relevant yellow pages directories
nationwide. Some CMRs are departments of general advertising
agencies, while others are specialized agencies that focus
solely on directory advertising. The national advertiser pays
the CMR, which then pays us after deducting its commission. We
accept orders from approximately 160 CMRs and employ
approximately 30 associates to manage our selling efforts to
national customers and our CMR relationships.
Marketing
Our print and online sales and marketing processes are closely
related and managed in an integrated manner. We believe that our
marketing process, composed of both centralized and
decentralized strategies and responsibilities, best suits our
needs.
Our marketing process includes the functions of market
management, product development and management, market research,
pricing, advertising and public relations. The market management
function is decentralized and coordinates with local sales
management to develop market plans and products that address the
needs of individual local markets. The other marketing functions
are centralized and provide support to all markets as needed.
RHD promotes its value through advertising campaigns that are
targeted to both advertisers and consumers. Our advertising is
managed by specific market and includes television, radio,
newspaper and outdoor advertising placements.
Publishing
and information services
Pre-press publishing activities include canvass and assignment
preparation, sales order processing, graphics and ad
composition, contract processing, white and yellow pages
processing, database management and pagination. We provide
comprehensive tools and information to effectively conduct sales
and marketing planning, sales management, sales compensation and
customer service activities. Once an individual sales campaign
is complete and final advertisements have been produced, white
and yellow pages are paginated, proofed and prepared for
printing. Most of these functions are accomplished through an
Amdocs
®
publishing system, a leading industry system considered to be
the standard.
Printing
and distribution
Our directories are printed through our long-standing
relationship with printing vendor R.R. Donnelley, as well as
with Quebecor. Although RHD and R.R. Donnelley share a common
heritage, there is presently no other common ownership or
business affiliation between us. 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 of our directories extend through 2014.
The physical delivery of directories is facilitated through
several outsourcing relationships. Delivery methods utilized to
distribute directories to consumers are selected based on
factors such as cost, quality, geography and market need.
Primary delivery methods include U.S. Postal Service and
hand delivery. We have contracts with three companies for the
distribution of our directories. These contracts are scheduled
to expire at various times from May 2009 through May 2010.
Occasionally, we use United Parcel Service or other types of
expedited delivery methods. Frequently, a combination of these
methods is required to meet the needs of the marketplace.
Printing, paper and distribution costs represented approximately
10.4% of our net revenue for the year ended December 31,
2007.
Credit,
collections and bad debt expense
Since most of our print and online products and services have
12-month
cycles and most advertising customers are billed over the course
of that
12-month
period, we effectively extend credit to our customers.
113
Many of these customers are small and medium-sized businesses
with default rates that usually exceed those of larger
companies. Our policies toward the extension of credit and
collection activities are market specific and designed to manage
the expected level of bad debt while accommodating reasonable
sales growth.
Local print and online advertising customers spending above
identified levels as determined appropriate by management for a
particular market may be subject to a credit review that
includes, among other criteria, evaluation of credit or payment
history with us, third party credit scoring, credit checks with
other vendors along with consideration of credit risks
associated with particular headings. Where appropriate, advance
payments (in whole or in part)
and/or
personal guarantees from business owners may be required.
Beyond efforts to assess credit risk prior to extending credit
to advertising customers, we employ well-developed collection
strategies utilizing an integrated system of internal, external
and automated means to engage customers concerning payment
obligations.
Fees for national customers are generally billed upon
publication of each issue of the directory in which the
advertising is placed by CMRs. Because we do not usually enter
into contracts with national advertisers directly, we are
subject to the credit risk of CMRs on sales to those
advertisers, to the extent we do not receive fees in advance. We
have historically experienced favorable credit experience with
CMRs.
Competition
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, 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.
We believe that in markets where there were already two or more
competitors, new publications from independents have a greater
impact on other publishers than on us. This is primarily due to
the fact that virtually all independents compete on price. With
a differentiated strategy designed to provide the highest value
to advertisers, we tend to be less affected by the incremental
fragmentation of price sensitive advertisers resulting from new
independent entry, but no assurance can be given that will
continue to be the case in the future.
We also compete with other types of media, including television
broadcasting, newspaper, radio
,
direct mail, search
engines, Internet yellow pages and emerging technologies.
We believe that advertiser preference for directory advertising
is due to its relatively low cost, broad demographic and
geographic distribution and high consumer usage rates. Also,
while overall advertising tends to track a local economys
business cycle, directory advertising historically tends to be
more stable and does not fluctuate as widely with economic
cycles due to this preference by small to medium-sized
businesses. Given the mature state of the directory advertising
industry and our position in most of our markets, most
independent competitors are focused on aggressive pricing to
gain market share. Others focus on niche opportunities such as
community or ethnic directories. Our Plus companion directories
have proven capable of recapturing and even growing usage share
in highly competitive markets. Moreover, we believe the
preference for directory advertising by consumers is its
directional and permission-based nature, ease of use and its
broad coverage of relevant businesses in the local markets.
Directory advertising is attractive because consumers view
directories as a free, comprehensive, non-intrusive single
source of locally relevant information.
The Internet has also emerged as an attractive medium for
advertisers. Historically, advertising on the Internet
represented only a small part of the total U.S. advertising
market, however as the Internet grows and
114
high-speed Internet access becomes more mainstream, it has
increasingly become prevalent as an advertising medium. Most
major yellow pages publishers operate an Internet-based
directory business. Overall references to print yellow pages
directories in the United States have gradually declined from
2002 through 2006. 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 gradually decline as users may
increasingly turn to digital and interactive media delivery
devices for local commercial search information. We expect
overall directory usage to grow, largely due to growth of
Internet directory usage.
Directory publishers, including us, have increasingly sold
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 compete with all of these online competitors
based on value, local relevance and features. We also partner
with some of these online businesses where it makes strategic
sense to do so to expand the reach of our advertisers to a broad
online consumer base.
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 may result in new technologies being
developed and services being provided that could 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 create 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 believe RHD is well positioned against emerging
competition due to our deep local content, existing advertiser
relationships, our extensive local sales force, and our ability
to offer our customers complete directional advertising
solutions including print directories, online directories, and
Internet marketing services.
Raw
materials
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, Kruger, Abitibi,
Nippon and 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. 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.
Intellectual
property
We own and control confidential information as well as a number
of trade secrets, trademarks, service marks, trade names,
copyrights and other intellectual property rights that, in the
aggregate, are of material importance to our business. We
believe that Donnelley, Dex,
Business.com, Work.com, Local
115
Launch!, Triple Play, DexKnows.com
and Dex Search Marketing and related names, marks
and logos are, in the aggregate, material to our business. We
are licensed to use certain technology and other intellectual
property rights owned and controlled by others, and, similarly,
other companies are licensed to use certain technology and other
intellectual property rights owned and controlled by us.
We are the exclusive official directory publisher of listings
and classified advertisements for Qwest (and its successors)
telephone customers in the geographic areas in the Dex Media
states in which Qwest provided local telephone service as of
November 8, 2002 (subject to limited extensions), as well
as having the exclusive right to use certain Qwest branding on
directories in those markets. In addition, Qwest assigned and/or
licensed to us certain intellectual property used in the Qwest
directory business prior to November 8, 2002. These rights
generally expire in 2052.
We have the exclusive license to produce, publish and distribute
directories for Embarq (and its successors) in the markets where
Sprint provided local telephone service as of September 21,
2002 (subject to limited extensions), as well as the exclusive
license to use Embarqs name and logo on directories in
those markets. These rights generally expire in 2052.
We have the exclusive license to provide yellow pages directory
services for AT&T (and its successors) and to produce,
publish and distribute white pages directories on behalf of
AT&T in Illinois and Northwest Indiana, as well as the
exclusive right to use the AT&T brand and logo on print
directories in that territory. These rights generally expire in
2054.
We own the Local Launch brand and logo and certain core
technology developed by Local Launch, which has been deployed
for our IYP and Internet marketing online services.
The acquisition of Business.com provides us with a leading
business-to-business online property supplemented with the
attractive Work.com expert- and user-generated content site. We
have begun integration of certain elements of
Business.coms technology with DexKnows.com to:
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improve the consumer experience on DexKnows.com;
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implement PBA on DexKnows.com; and
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implement an advertising network for DexKnows.com.
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We believe that leveraging Business.coms existing
technology platform will accelerate our time to market for these
three areas by 12 to 15 months.
Under license agreements for subscriber listings and directory
delivery lists, each of Qwest, Embarq and AT&T have granted
to us a non-exclusive, non-transferable restricted license of
listing and delivery information for persons and businesses that
order
and/or
receive local exchange telephone services in the relevant
service areas at the prices set forth in the respective
agreements. Generally, we may use the listing information solely
for publishing directories (in any format) and the delivery
information solely for delivering directories, although in the
case of Qwest, we may also resell the information to third
parties solely for direct marketing activities, database
marketing, telemarketing, market analysis purposes and internal
marketing purposes, and use it ourselves in direct marketing
activities undertaken on behalf of third parties. The term of
these license agreements are generally consistent with the term
of the respective publishing agreements described above.
Although we do not consider any individual trademark or other
intellectual property to be material to our operations, we
believe that, taken as a whole, the licenses, marks and other
intellectual property rights that we acquired in conjunction
with the Dex Media merger, Embarq Directory Acquisition,
AT&T Directory Acquisition, Local Launch Acquisition and
Business.com Acquisition are material to our business. We
consider our trademarks, service marks, databases, software and
other intellectual property to be proprietary, and we rely on a
combination of copyright, trademark, trade secret,
non-disclosure and contract safeguards for protection. We also
benefit from the use of the phrase yellow pages and
the walking fingers logo, both of which we believe to be in the
public domain in the United States.
116
Employees
As of June 2, 2008, we have approximately
4,400 employees of which approximately 1,500 are
represented by labor unions covered by two collective bargaining
agreements with Dex Media in the Qwest States. We consider
relations with our employees to be good. The unionized employees
are represented by either the IBEW, which represents
approximately 500 of the unionized workforce, or the CWA, which
represents approximately 1,000 of the unionized workforce. Dex
Medias collective bargaining agreement with the IBEW
expires in May 2009 and Dex Medias collective bargaining
agreement with the CWA expires in October 2009. We consider our
relationship with both unions to be good.
Properties
The following table details the location and general character
of the material properties used by us to conduct our business:
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Approximate Square
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Lease
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Property Location
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Footage
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Purpose
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|
Expiration
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Aurora, CO(1)(3)
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200,000
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|
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Sales and Operations
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2008
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Englewood, CO(1)(4)
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161,000
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Sales and Administration
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|
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2008
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Cary, NC
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122,000
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Corporate Headquarters
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2015
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Omaha, NE(1)
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103,000
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Sales and Operations
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2010
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Chicago, IL(2)
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100,000
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|
|
Sales and Operations
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|
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2012
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Phoenix, AZ(1)
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58,000
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Sales and Operations
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2017
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Morrisville, NC(2)
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55,000
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Pre-Press Publishing
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2011
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Maple Grove, MN(1)
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53,000
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|
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Sales and Operations
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2017
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Overland Park, KS(2)
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52,000
|
|
|
Sales and Operations
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|
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2009
|
|
Beaverton, OR(1)
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44,000
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|
|
Sales and Operations
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2016
|
|
Bellevue, WA(1)
|
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42,000
|
|
|
Sales and Operations
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|
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2018
|
|
Bristol, TN(2)
|
|
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25,000
|
|
|
Graphics Operations
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|
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Owned
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Murray, UT(1)
|
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25,000
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|
|
Sales and Operations
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|
|
2009
|
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Fort Myers, FL(2)
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21,000
|
|
|
Sales and Operations
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|
|
2016
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Tinley Park, IL(2)
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21,000
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|
|
Sales and Operations
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|
|
2017
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Dunmore, PA(2)
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|
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20,000
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|
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Graphics Operations
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|
|
2009
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|
Lombard, IL(2)
|
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20,000
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Sales and Operations
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2010
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(1)
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Represents facilities utilized by Dex Media, our direct
wholly-owned subsidiary, and its direct and indirect
subsidiaries, to conduct their operations
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(2)
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Represents facilities utilized by RHDI, our direct wholly-owned
subsidiary, and its direct subsidiaries, to conduct their
operations.
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(3)
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We have entered into a new lease agreement in Englewood, CO,
which will become effective upon the expiration of the existing
lease in November 2008. The new lease expires in October 2018
and includes approximately 137,000 square feet of office
space.
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(4)
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We have entered into a new lease agreement in Lone Tree, CO,
which will become effective upon the expiration of the existing
lease in October 2008. The new lease expires in September 2019
and includes approximately 143,000 square feet of office
space.
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We also lease space for additional operations, administrative
and sales offices.
We believe that our current facilities are adequate for our
current and future operations.
117
Legal
proceedings
We are involved in various legal proceedings arising in the
ordinary course of our business, as well as certain litigation
and tax matters. In many of these matters, plaintiffs allege
that they have suffered damages from errors or omissions in
their advertising or improper listings, in each case, contained
in directories published by us.
We are also exposed to potential defamation and breach of
privacy claims arising from our publication of directories and
our methods of collecting, processing and using advertiser and
telephone subscriber data. If such data were determined to be
inaccurate or if data stored by us were improperly accessed and
disseminated by us or by unauthorized persons, the subjects of
our data and users of the data we collect and publish could
submit claims against us. Although to date we have not
experienced any material claims relating to defamation or breach
of privacy, we may be party to such proceedings in the future
that could have a material adverse effect on our business.
We periodically assess our liabilities and contingencies in
connection with these matters based upon the latest information
available to us. For those matters where it is probable that we
have incurred a loss and the loss or range of loss can be
reasonably estimated, we record a liability in our consolidated
financial statements. In other instances, we are unable to make
a reasonable estimate of any liability because of the
uncertainties related to both the probable outcome and amount or
range of loss. As additional information becomes available, we
adjust our assessment and estimates of such liabilities
accordingly.
Based on our review of the latest information available, we
believe our ultimate liability in connection with pending or
threatened legal proceedings will not have a material adverse
effect on our results of operations, cash flows or financial
position. No material amounts have been accrued in our
consolidated financial statements with respect to any of such
matters.
118
Management
Exceptions otherwise indicated, the following table sets forth
our current executive officers and directors, as well as their
respective positions and ages.
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Name
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Age
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Position(s)
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Executive Officers
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David C. Swanson
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53
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Chairman of the Board and Chief Executive Officer
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Peter J. McDonald
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57
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President and Chief Operating Officer
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Steven M. Blondy
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48
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Executive Vice President and Chief Financial Officer
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George F. Bednarz
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54
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Executive Vice President Enterprise Sales and
Operations
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Mark W. Hianik
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48
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Senior Vice President, General Counsel and
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Corporate Secretary
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Margaret LeBeau
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49
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Senior Vice President and Chief Marketing Officer
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Gretchen Zech
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39
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Senior Vice President Human Resources
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Jenny L. Apker
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50
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Vice President and Treasurer
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R. Barry Sauder
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48
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Vice President, Corporate Controller and Chief Accounting Officer
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Directors
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David C. Swanson
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53
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Chairman of the Board and Chief Executive Officer
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Michael P. Connors
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53
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Director
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Nancy E. Cooper
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54
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Director
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Robert Kamerschen
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72
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Director
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Thomas E. Reddin
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47
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Director
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Alan F. Schultz
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49
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Director
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David M. Veit
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69
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Director
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Barry Lawson Williams
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63
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Director
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Edwina Woodbury
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56
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Director
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The executive officers serve at the pleasure of the Board of
Directors. We have been advised that there are no family
relationships among any of the officers listed, and there is no
arrangement or understanding among any of them and any other
persons pursuant to which they were elected as an officer.
David C. Swanson
has been Chief Executive Officer since
May 2002. He had served as Chairman of the Board from December
2002 through January 2006 and was re-elected as Chairman of the
Board in May 2006. He was first elected to the Board of
Directors in December 2001. He served as President and Chief
Operating Officer from December 2000 until May 2002.
Mr. Swanson joined us an Account Executive in 1985 and has
held increasingly senior management positions over the next
20 years. Mr. Swanson also serves as the Chairman of
the Yellow Pages Association.
Peter J. McDonald
has served as President and Chief
Operating Officer since October 2004. Prior to that,
Mr. McDonald served as Senior Vice President and President
of Donnelley Media from September 2002. Mr. McDonald was a
director of RHD between May 2001 and September 2002. Previously,
Mr. McDonald served as President and Chief Executive
Officer of SBC Directory Operations, a publisher of Yellow Pages
directories, from October 1999 to April 2000. He was President
and Chief Executive Officer of Ameritech Publishings
Yellow Pages business from 1994 to 1999, when Ameritech was
acquired by SBC. As previously disclosed, Mr. McDonald has
notified us that his employment with RHD will terminate
effective September 1, 2008.
Steven M. Blondy
has served as Executive Vice President
and Chief Financial Officer since January 2006. Prior to that,
Mr. Blondy served as Senior Vice President and Chief
Financial Officer since March 2002. Prior to joining RHD,
Mr. Blondy served as Senior Vice President
Corporate Development for Young &
119
Rubicam, Inc., a global marketing and communications company,
from February 1998 to October 2000. Prior to that,
Mr. Blondy served as Executive Vice President and Chief
Financial Officer for Poppe Tyson, a leading Internet and
integrated marketing communications agency, from 1996 to 1997
and as Chief Financial Officer for Grundy Worldwide, an
independent producer of television programs in Europe and
Australia. Prior to that, he spent 12 years in the
investment banking industry with Chase Manhattan Bank and
Merrill Lynch.
George F. Bednarz
has served as Executive Vice
President Enterprise Sales and Operations since June
2008. Prior to that, he served as Senior Vice
President Operations since January 2008. Prior to
that, Mr. Bednarz served as Senior Vice
President RHD Interactive since January 2007. Prior
to that, Mr. Bednarz served as Senior Vice
President Integration, Corporate Planning,
Administration and Communications since January 2006. Prior to
that, Mr. Bednarz served as Vice President
Corporate Planning and Information Technology since October
2004. Prior to that, Mr. Bednarz served as Vice President,
Publishing, Information Technology and Corporate Planning, from
January 2003 and Vice President, Publishing and Information
Technology, from April 2001. Mr. Bednarz joined us in
November 1995 to lead the
start-up
implementation of our Morrisville, North Carolina Publishing and
Information Center. Prior to joining us, Mr. Bednarz spent
19 years at The Dun & Bradstreet Corporation, our
former parent, where he held executive positions of increasing
responsibility in various functions.
Mark W. Hianik
has served as Senior Vice President,
General Counsel and Corporate Secretary since April 2008. From
December 1997 to March 2008, Mr. Hianik was at the
Tribune Company, a media company, most recently as Vice
President and Assistant General Counsel. Prior to joining the
Tribune Company, Mr. Hianik was a partner with the law firm
of Wildman Harrold Allen & Dixon in Chicago.
Margaret LeBeau
has served as Senior Vice President and
Chief Marketing Officer since January 2006. Prior to the Dex
Media merger, Ms. LeBeau served as Senior Vice President of
Marketing for Dex Media from November 2002 to January 2006.
Ms. LeBeau served as Vice President of
Marketing & Growth Ventures of Qwest Dex from November
1999 until September 2003. Prior to that, she served in other
capacities within Qwest Dex, including Director of Product
Management and Pricing. Prior to joining Qwest Dex,
Ms. LeBeau was a Senior Director in the marketing
department at the American Express Company, a diversified
financial services company.
Gretchen Zech
has served as Senior Vice
President Human Resources since June 2006.
Ms. Zech served as Group Vice President Human
Resources at Gartner, Inc., a technology research and consulting
firm, from 2004 to 2006. Prior to that, Ms. Zech served as
Vice President Human Resources for The Great
Atlantic and Pacific Tea Company, Inc., one of the largest
supermarket chains in the United States, from 2002 to 2004. She
also served as Vice President Human Resources for
the Bloomingdales division of Federated Department Stores,
Inc., a leading department store retailer, from 2001 to 2002.
Prior to that, Ms. Zech served in several Human Resources
leadership positions with Best Buy Company, Inc., a leading
electronics and entertainment retailer.
Jenny L. Apker
has served as Vice President and Treasurer
since May 2003. Prior to that, she was Assistant Treasurer at
Allied Waste Industries, a waste services company, since 1998.
Before joining Allied Waste Industries, Ms. Apker was Vice
President at First Interstate Bank of Arizona, a banking
institution that was subsequently acquired by Wells Fargo. Prior
to joining First Interstate Bank of Arizona, Ms. Apker
spent 11 years at Greyhound Financial Corporation, a
financial services company.
R. Barry Sauder
has served as Vice President,
Corporate Controller and Chief Accounting Officer since January
2008. Prior to joining RHD, Mr. Sauder served as Vice
President, Corporate Controller and Chief Accounting Officer of
InfraSource Services, Inc., a specialty contractor servicing
electric, natural gas and telecommunications infrastructure,
from April 2004 to October 2007. Prior to that, Mr. Sauder
served as Vice President and Principal Accounting Officer of GSI
Commerce, Inc., a provider of
e-commerce
solutions, from January 2001 to April 2004 and Director of
Finance from August 1999 to August 2000. Mr. Sauder is a
certified public accountant.
Each director is elected for a three-year term and continues in
office until his or her successor has been elected and
qualified, or until his or her earlier death, resignation or
retirement.
Michael P. Connors
has been a director since January 2006
and his term expires at the 2008 annual meeting.
Mr. Connors served as Chairman and Chief Executive Officer
of Information Services Group Inc., a
120
special purpose acquisition company focused on the information
services industry, since July 2006. Prior to that, he served as
Chairman and Chief Executive Officer of VNU Media Measurement
and Information Group, in information and media company, which
he created in 2001 by combining VNUs media information,
Internet, software and entertainment businesses, including
Nielsen Media Research, Nielsen Entertainment and NetRatings,
until June 2005. In addition to heading this unit,
Mr. Connors served during 2003 and 2004 as Chairman of VNU
World Directories, which included VNUs Yellow Pages and
directory businesses. Prior to joining VNU, Mr. Connors
served as Vice Chairman of ACNielsen Corporation, a leading
marketing information services company. Mr. Connors joined
the Dex Media board as a director in May 2005 and became a
director of RHD upon consummation of the Dex Media merger in
January 2006. He presently serves on the board of Eastman
Chemical Company and Information Services Group.
Nancy E. Cooper
has been a director since February 2003
and her term expires at the 2009 annual meeting. Ms. Cooper
has served as Executive Vice President and Chief Financial
Officer of CA, Inc., a leading information technology management
software company, since August 2006. Prior to that, she served
as Senior Vice President and Chief Financial Officer of IMS
Health Incorporated, which is a leading provider of information
solutions to the pharmaceutical and healthcare industries and
which we refer to as IMS, since December 2001. Prior to that,
she served as Chief Financial Officer at Reciprocal, Inc., a
leading digital distribution infrastructure enabler, from July
2000 to October 2001.
Robert Kamerschen
has been a director since June 1998 and
his term expires at the 2009 annual meeting. Mr. Kamerschen
has served as the Non-Executive Chairman of Survey Sampling
International LLC since 2005, and is a private investor. In
1999, he retired as Chairman of ADVO, Inc., a leading
full-service targeted direct mail marketing services company, a
position he had held since 1989. He had been Chairman and Chief
Executive Officer of DIMAC Corporation, a direct marketing
services company, from October 1999 to January 2002. In July
1999, he retired as Chairman of ADVO, Inc., a position he had
held since 1989, and has served as Senior Consultant to ADVO,
Inc. since July 1999. Mr. Kamerschen currently serves on
the boards of IMS and MDC Partners Corporation.
Thomas E. Reddin
has been a director since July 2007 and
his term expires at the 2008 annual meeting. Mr. Reddin is
Chief Executive Officer of Gillette Evernham Motorsports, a
NASCAR racing team, since February 2008. From 2005 until 2007,
he was Chief Executive Officer of Lending Tree, LLC, a unit of
InterActive Corp. that operates Home Loan Center, GetSmart.com,
RealEstate.com, iNest and Domania. Before it was acquired by
InterActive Corp., he served as President and Chief Operating
Officer of Lending Tree and also as the companys Chief
Marketing Officer since 1999.
Alan F. Schultz
has been a director since May 2005 and
his term expires at the 2010 annual meeting. Mr. Schultz
has served as Chairman, President and Chief Executive Officer of
Valassis Communications, Inc., a marketing services company,
since June 1998. Mr. Schultz currently serves on the board
of Valassis Communications, Inc.
David M. Veit
has been a director since February 2003 and
his term expires at the 2008 annual meeting. Mr. Veit is
retired Executive Director of Pearson plc, an international
media and publishing company, a position he held from January
1981 to May 1998. He most recently served as Senior Advisor to
Bain Capital, Inc., a leading private investment firm, from May
1998 to December 2001. During that time, he served as Chief
Executive Officer of two portfolio companies of Bain Capital,
Bentleys Luggage and Gifts and Jostens Learning
Corporation. Mr. Veit serves as an independent Governor of
The American Stock Exchange.
Barry Lawson Williams
has been a director since June 1998
and his term expires at the 2010 annual meeting.
Mr. Williams is retired General Managing Partner of
Williams Pacific Ventures, Inc., a venture capital and real
estate investment and consulting firm, at which he had served as
President and a director between 1987 and 2007. Previously, he
served as Interim President and Chief Executive Officer of the
American Management Association International, a leading
membership-based management development organization, from
November 2000 to June 2001. Mr. Williams serves on the
boards of CH2M Hill Companies, Ltd., Northwestern Mutual Life
Insurance Company, PG&E Corp., Simpson Manufacturing
Company and SLM Corporation.
121
Edwina Woodbury
has been a director since November 2004
and her term expires at the 2010 annual meeting.
Ms. Woodbury has served as Chief Executive Officer and
President of The Chapel Hill Press, Inc., a local publishing
company, since 1999. Previously, she held various positions at
Avon Products, Inc., a cosmetics marketer, including Chief
Financial and Administrative Officer. Ms. Woodbury also
sits on the board at Radio Shack Corporation.
Executive
compensation
Compensation
discussion and analysis
This discussion and analysis of our compensation program for
named executive officers should be read in conjunction with the
accompanying tables and text disclosing the compensation awarded
to, earned by or paid to the named executive officers.
Compensation of our named executive officers is determined under
our compensation program for senior executives. This program is
governed by the Compensation and Benefits Committee of the Board
of Directors, which we refer to as the Committee. Currently, the
Committee determines the compensation of all eleven of our
executive officers. This discussion and analysis focuses on our
named executive officers, to whom we refer as the NEOs, listed
in the Summary Compensation Table and other compensation tables
in this prospectus.
Objectives
of our compensation program for named executive
officers
In 2002, four years after we were spun off from The
Dun & Bradstreet Corporation, our management team
initiated a major transformation of RHD with the encouragement
and support of our Board of Directors. Led by our
then-newly-promoted Chief Executive Officer, Dave Swanson, the
key element of this transformation was a change in our strategic
direction from a sales agent for hard-copy yellow pages
directories to an owner-operator of an integrated local
commercial search business with a strong growth orientation.
Since 2002, our management team has engineered, executed and
integrated a series of major, transformative acquisitions,
including our acquisition of the Embarq Directory Business in
January 2003 and the AT&T Directory Business in September
2004, our merger with Dex Media, Inc. in January 2006, and our
acquisitions of LocalLaunch, Inc. in September 2006 and
Business.com in August 2007. Propelled by this dramatic
transformation, we remain committed to a strong growth
orientation. Our management team now comprises
internally-promoted executives, executives joining us with our
acquisitions and selectively-recruited, high-performing,
experienced executives.
We intend that our executive compensation program support this
transformational, growth-oriented business strategy by
motivating and rewarding management activities that create
sustainable shareholder value over time. Our key executive
compensation objectives are to:
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Enable us to attract and retain the key leadership talent
required to successfully execute our aggressive business
strategy;
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Align executive pay with performance, both annual and long-term;
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Ensure internal equity, both as compared to other executives
based upon position and contributions, and to the broader
employee population;
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Strongly link the interests of executives to those of our
shareholders and other key constituencies;
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Keep our executive compensation practices transparent, in line
with best practices in corporate governance and in compliance
with applicable rules and regulations; and
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Administer executive compensation on a cost-effective and
tax-efficient basis.
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We seek to achieve these broad objectives through:
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A strong emphasis on variable, performance-based pay that
motivates executives to achieve our business objectives and
holds them accountable for shareholder value-enhancing
activities and results;
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Significant use of equity compensation and stock ownership
guidelines to foster a strong ownership culture focused on
sustainable long-term growth;
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Increasing the proportion of total direct remuneration that is
(a) performance-based and at risk, and (b) represented
by equity as executives undertake greater levels of
responsibility;
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Compensation opportunities that are competitive in the market
for high-performing business leadership talent, based on
appropriate evaluation of that marketplace as well as the
individuals position responsibilities and results achieved;
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Assurances to executive officers and employees of fair treatment
and reasonable financial security in the event the
executives services are no longer needed by us;
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Assurances to executive officers of fair treatment and
reasonable financial security so that they can identify,
consider and pursue transactions that would be beneficial to
shareholders, but which might adversely impact their employment
status or financial condition;
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Securing executive officer commitments that safeguard our
business, including protection from competition and other
adverse activities, both during employment and after employment
ends;
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Use of compensation vehicles whose cost structure and tax
treatment are consistent with our business plan/budget, minimize
dilution and take into account the financial and accounting
consequences to us; and
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Governance by an informed Board of Directors and its independent
Compensation and Benefits Committee in an open environment of
full disclosure, careful analysis and thorough consideration.
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To accomplish these objectives, we intend that the levels of
compensation available to executive officers who successfully
enhance corporate value be fair internally as compared to each
other, and externally as compared to that offered by other
similar companies that potentially compete for their services.
This is critical to our ability to retain our high-quality
executives who have already demonstrated their leadership,
commitment, vision and overall worth to our organization, and
who may be sought by other firms or whose other interests might
attract them away from RHD. It is likewise critical to our
ability to attract new executives who share our values and
commitment and who have demonstrated elsewhere the leadership,
commitment and vision needed to guide RHD.
Elements
of our compensation program for named executive
officers
We have structured the major portion of executive compensation
as total direct remuneration, encompassing salary, annual
incentive awards and long-term incentive awards. Additional
elements supplement total direct remuneration. The table below
lists the various compensatory elements of our current program
for the NEOs, and briefly explains the purpose of each element.
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Element of
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How This Element Promotes
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Compensation Program
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Description
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RHD Objectives
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Annual Compensation(1):
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Salary
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Fixed annual compensation
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Intended to reflect relative internal value of position and be
competitive with marketplace in order to aid in recruitment and
retention
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Annual Incentive
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Opportunity to earn performance- based compensation for
achieving pre-set annual goals. For 2007, the primary goals were
based on advertising sales growth, earnings
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Motivate and reward achievement of short-term operating
corporate objectives that enhance long- term shareholder value
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123
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Element of
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How This Element Promotes
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Compensation Program
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Description
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RHD Objectives
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before interest, taxes, depreciation and amortization, which we
refer to as EBITDA, and free cash flow per share.(2)
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Long-term Compensation:(1)
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Equity Grants in the form of SARs or Restricted
Stock Units, or RSUs
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Stock-settled SARs, which have the same economic attributes as
stock options, were granted to named executives in February
2007, and vest ratably on the first three anniversaries of the
date of grant. RSUs may be granted in lieu of, or in combination
with, stock-settled SARs, at the Boards discretion.
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SARs provide more highly leveraged risk and reward alignment
with shareholder value; use of SARs minimize share dilution
compared with options; RSUs offer immediate stock ownership and
minimize dilution; vesting terms of SARs and RSUs promote
retention.
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Other Compensation Elements:
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Retirement income
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Qualified and non-qualified defined benefit and defined
contribution plans intended to provide pensions or lump sum
payments upon retirement
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Modest program designed to provide basic benefits to aid in
recruitment and retention
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Deferred compensation
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Opportunity to defer cash compensation and defer settlement of
restricted stock unit awards
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Attractive compensation program of relatively low cost in order
to aid in recruitment and retention; permits tax- favored
savings
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Severance payments and benefits
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Payments and benefits upon termination of an executives
employment in specified circumstances
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Intended to provide financial security at competitive levels to
attract lateral hires and to retain executives
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Severance payments and benefits after a change in
control
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Payments and benefits upon termination of an executives
employment in specified circumstances within two years after a
change in control
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Intended to provide financial security at competitive levels to
attract and retain executives under disruptive circumstances,
such as a change in control and leadership transitions; and to
encourage management to identify, consider and pursue
transactions that would benefit shareholders, but that might
adversely impact management
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Benefits
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Health and welfare benefits
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Customary programs to facilitate recruitment and retention
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124
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Element of
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How This Element Promotes
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Compensation Program
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Description
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RHD Objectives
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Perquisites
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Modest personal benefits, such as limited personal use of
company aircraft, financial planning services and executive
health services
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Intended to recognize and provide additional compensation to
executives at a relatively low cost to RHD
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(1)
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Salary, annual incentive and long-term compensation comprise
total direct remuneration. The Committees
stated objective is to position an executives total direct
remuneration opportunity over time for target performance
between the 60th and 75th percentile of competitive market
compensation for the executives position. See Total
Direct Remuneration below for a more detailed discussion
of these elements of executive compensation and
pay-for-performance requirements.
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(2)
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These are non-GAAP measures. Our Current Report on
Form 8-K
furnished to the SEC on October 27, 2004 disclosed that we
would utilize these non-GAAP measures for executive compensation
purposes, and also identified the most comparable GAAP measures,
discussed quantitative reconciliations between the applicable
GAAP and non-GAAP measures, and provided such other information
required by Regulation G under the Securities Exchange Act
of 1934, which we refer to as the Exchange Act, and
Item 10(e) of Regulation S-K under the Exchange Act. A
reconciliation between these non-GAAP measures and the most
comparable GAAP measures appears on
pages 152-153
of this prospectus.
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The Committee reviews and takes into account all elements of
executive compensation in setting policies and determining
compensation amounts. In the process, the Committee reviews
ongoing reports and special analyses of compensation for all
executive officers, including the Chief Executive Officer, in
consultation with its independent executive compensation
consultant, Steven Hall & Partners. These reports and
analyses include such information as the value to the executive
and cost to us of total remuneration at various performance
levels during employment and in the event of termination, as
well as compensation programs, structures and practices,
remuneration and benefits levels, and trends among peer group
companies and in the general marketplace.
Other policies and practices that contribute to achieving our
business and compensation objectives include:
Employment agreements.
We have employment
agreements with all of the NEOs, other than Mr. Bednarz,
who is covered by our executive severance policy. We also have
an employment agreement with one other executive officer that we
assumed in connection with the Dex Media merger. These
agreements formalize the terms and conditions of the employment
relationship, and assure the executive of fair treatment during
employment and in the event of termination (see
Severance policies below), while
requiring compliance with provisions that protect our business
against adverse activities during employment and after
termination. Employment agreements promote careful and complete
documentation and understanding of employment terms and
conditions, prevent uncertainty regarding those terms and
conditions of employment and discourage frequent renegotiation
of the terms and conditions of employment. Conversely, such
agreements can limit our ability to change certain employment
and compensation terms or conditions. In some cases, especially
in the recruitment process, executives have negotiated with us
regarding the terms and conditions of their employment. The
agreements embody the employment terms and conditions on which
our Committee and executives have reached agreement. The terms
and conditions of these employment agreements are summarized
below following the Summary Compensation Table and Grants of
Plan-Based Awards table.
Stock ownership guidelines.
Our Board of
Directors believes that all of our executive officers should
have a meaningful equity stake in RHD to better align their
interests with those of our shareholders. Ownership of a
substantial amount of our stock not only provides an incentive
for business decisions and performance that enhance shareholder
value, but it also exposes the executive officers to a
significant risk of loss in the event of a decline in our stock
price, thereby providing an incentive for careful stewardship as
well. Accordingly, the Board established stock ownership
guidelines at the time of the spin-off from D&B. These
guidelines are reviewed from time to time in light of market
practices and business strategy, and were revised
125
upward in 2005 to better reflect our transformational growth
strategy. The guidelines include various forms of equity stakes
and phase in over time for new executive officers. The Committee
periodically monitors the progress of each executive officer in
satisfying these requirements. Current guidelines for our
continuing NEOs are as follows:
Stock
Ownership Guideline Status at Fiscal Year-End 2007
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2007
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Ownership Guideline
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Current
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Salary
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Multiple
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$ Value
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# Shares(1,2)
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Holdings(1)
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David Swanson
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Chairman & Chief Executive Officer
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$
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955,000
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6.5
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$
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6,207,500
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170,208
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143,164
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Peter McDonald
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President & Chief Operating Officer
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$
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618,000
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4.5
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$
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2,781,000
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76,254
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52,649
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Steven Blondy
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EVP & Chief Financial Officer
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$
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500,000
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4.0
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$
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2,000,000
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54,840
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24,513
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George Bednarz
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Senior Vice President
Operations
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$
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325,000
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3.0
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$
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975,000
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26,734
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50,231
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Robert Bush
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Senior Vice President, General
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$
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425,000
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3.0
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$
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1,275,000
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34,960
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15,275
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Counsel & Corporate Secretary
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(1)
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For Stock Ownership Guideline purposes, Current Holdings
include: (a) shares of our common stock owned outright, if
any, by the NEO; (b) that number of shares (based upon the
then-present market price of our common stock) equal to 50% of
the in-the-money value of the NEOs vested
stock options with exercise prices below the then-present market
price of our common stock; (c) that number of shares (based
upon the then-present market price of our common stock) equal to
50% of the in-the-money value of the NEOs
vested SARs with grant prices below the then-present market
price of our common stock; (d) 50% of the NEOs
deferred shares granted under either our former Performance Unit
Plan or as a portion of the NEOs Annual Incentive Plan
payout (as described further below); (e) 50% of RSUs,
(f) 50% of shares electively deferred under our Deferred
Compensation Plan, and (g) shares deemed to be owned by the
NEO by virtue of his 401(k) Plan investment balance.
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(2)
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Based on the average of the high and low price of our common
stock on December 31, 2007 of $36.47. The average of the
high and low price of our common stock on March 20, 2008 was
$4.71.
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While historically our NEOs have exceeded (in many cases, far
exceeded) their respective ownership guidelines, due to the
dramatic decline in our stock price during the latter part of
2007 and into 2008, none of the NEOs presently satisfy their
ownership guidelines. Because this failure to satisfy the
ownership guidelines is due almost entirely to the stock price
decline, and not material disposition of RHD securities by the
NEOs, the Committee has temporarily suspended the stock
ownership guidelines and is considering, in consultation with
its independent compensation consultant, various alternatives
and potential remedial actions.
Insider trading policy.
We have a policy that
restricts certain executives, including the NEOs, from selling
more than 5% of their total equity holdings of RHD in any
quarter and more than 10% of their total holdings in any year.
The Committee reserves the right to modify these percentages
from time to time. This policy also precludes executives,
including the NEOs, from short selling, buying put options or
writing call options, or engaging in other transactions that
hedge the executives risk of owning our stock, or
otherwise engaging in highly speculative transactions with
respect to our stock. We recognize that our executives may sell
shares from time to time in the open market to realize value
from their share-based compensation to meet financial needs and
diversify their holdings. In aggregate, our NEOs liquidated less
than 7% of their collective total RHD holdings during 2007, and
none of them liquidated more than 9% of his total holdings. For
these calculations, RHD holdings consist of all vested and
unvested equity grants, as well as other personal holdings.
Business protection terms.
Our NEOs are
subject to significant contractual restrictions intended to
prevent them from taking actions that could potentially harm our
business, particularly after termination of employment. These
business protections include obligations not to compete, not to
hire away our employees, not to interfere with our relationships
with suppliers and customers, not to disparage RHD, not to
reveal confidential information, and to cooperate with us in
litigation. Business protection provisions are included in our
Policy on Business Conduct, employment agreements, equity award
agreements, standard form employee
126
agreements that are executed upon hire and standard form
releases that are required to be executed before we make
severance payments to any employee, including executives. In
addition, our 2005 Stock Award and Incentive Plan, which we
refer to as the 2005 Plan, provides for the automatic forfeiture
of equity awards and repayment of proceeds from certain equity
awards in the event of violation of these business protection
provisions.
Equity award grant practices.
In 2006, the
Committee requested that Steven Hall & Partners, its
independent executive compensation consultant, review our
historic practices regarding granting of stock options and stock
appreciation rights. Based upon the report of its consultant,
the Committee found no instances of abusive practices.
Substantially all of our option and SAR grants to executive
officers have occurred either as part of our regular annual
grant of equity awards at the regularly scheduled meeting of the
Committee in February of each year, or, in the case of equity
awards relating to a strategic transaction, at the date of a
Board meeting at which action was being taken with respect to
the transaction. Option and SAR grants generally have been
priced at the average of the high and low market price of our
common stock on the immediately preceding business day, or, on
occasion, at a higher price. While the Committee found no prior
instances of abusive grant practices, in order to avoid any
appearance of impropriety, for 2008 going forward, in the case
of grants that will be made around the same time as the public
release of material information (for example, earnings,
transactions, etc.), the Committee has determined that such
grants to executive officers will become effective upon the
later of (a) the third business day following the release
of such material information or (b) the date of the
Committees action approving the grant.
In 2006, the Committee adopted a policy governing the grant of
equity awards to new employees. For Vice Presidents and above,
SARs (the present form of equity long-term performance incentive
compensation) will be granted to newly-hired executive officers
on the first business day of the month following the month in
which he or she was hired.
Changes
to executive compensation program for 2007
Note: The discussion in this section and the
section captioned Total Direct Remuneration below
relates to our NEOs who served throughout all of 2007.
In view of the Dex Media merger and resultant increase in size
and complexity of our business, as well as in the
responsibilities and accountabilities of our management team,
during late 2005 and 2006 the Committee conducted a
comprehensive assessment of the objectives, strategy and
structure of our executive compensation programs with the advice
of its compensation consultant, Steven Hall &
Partners. In addition, during 2007 an in-depth compensation
review was performed, which specifically considered the impact
and internal positioning of the NEO positions and the
contributions of each NEO. While the objectives, strategy and
structure of our compensation programs continued to remain
appropriate, adjustments were implemented to more effectively
accomplish the Committees compensation objectives set
forth above.
These adjustments included:
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A further redefinition of our peer group to focus upon similar
companies as discussed in greater detail below; and
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Increased targeted total direct remuneration for certain NEOs
and other members of the management team to achieve competitive
compensation levels and to reflect their increased levels of
responsibility. The increase in targeted total remuneration was
implemented as follows:
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Increased base salary for the NEOs, ranging from 3% to 30%, and
for other members of the management team, in each case, to
levels commensurate with their experience and responsibilities
and competitive with base salaries in the peer group such that
all of the NEOs, other than Mr. Bednarz for whom there is
no peer data, received increases which resulted in base salaries
that were within approximately 10% of the median of peer group
data (based upon 2005 peer compensation data publicly reported
in 2006);
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Increased target levels of annual and equity incentives
resulting from such increases in base salary;
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127
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A 15% increase in his long-term equity compensation target as a
percentage of base salary for Mr. Bednarz in light of his
assumption of duties related to RHD Interactive in 2007;
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Increased incentive compensation levels for the CEO, which
included a (a) 25% increase in the level of target annual
incentive as a percentage of base salary and (b) 15%
increase in his long-term equity compensation target as a
percentage of base salary, in order to better align CEO total
direct remuneration with our peer group, further increase the
already significant proportion of target total direct
remuneration that varies with annual financial results and
long-term shareholder return performance, and offer a
well-leveraged opportunity to participate in shareholder value
created through the execution of our transformational growth
business strategy. The Committees actions were intended to
bring the CEOs target total direct remuneration in line
with its stated marketplace positioning as shown in the 2007
Compensation at Target Performance Level table below.
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Due to the lack of market data for his new responsibilities,
Mr. Bednarzs increases were geared to position his
target total direct remuneration to a level appropriate for his
new responsibilities relative to those of his officer colleagues
at RHD.
Total
direct remuneration
Peer group companies.
We intend that the
levels of compensation available to executive officers be
competitive with the compensation offered by other similar
publicly held companies, so that we can successfully attract and
retain the high quality executive talent which is critical to
the long-term success of RHD. We therefore analyze the
compensation programs at a peer group of companies in
considering and establishing the compensation terms for our
program. We identify peer group companies based on several
factors including line of business, revenues and growth. We also
consider profitability, cash flow, total shareholder return,
equity market capitalization and total enterprise value.
In 2007, the Committee reviewed and modified the composition of
our peer group for executive compensation purposes, based upon
analyses by independent consultants, Steven Hall &
Partners and the Semler Brossy Consulting Group. The Committee
considered the following factors, in addition to the dramatic
change in size and scope of RHD resulting from the Dex Media
merger:
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We now have only one direct competitor that is also a
stand-alone public company;
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Other companies in the yellow pages and local commercial search
industries have very different business models and financial
characteristics, thereby making peer comparisons difficult;
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Our leveraged financial structure and transformational growth
model significantly differentiate RHD from potential peer
companies; and
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We have historically hired executives from, and lost executives
to, companies in diverse industries.
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As a result of these distinguishing factors, the Committee
further refined our peer group for 2007 to focus upon companies
that, as a group, are comparable to our business in terms of
revenues, EBITDA and total enterprise value, defined as the sum
of market capitalization and total debt, while de-emphasizing
net income and market capitalization, in order to better reflect
our highly-leveraged business strategy.
128
Based on information available in 2007 for 2006 compensation
levels and performance, and analyses provided by the
Committees executive compensation consultant, Steven
Hall & Partners, the Committee identified the
following as our peer group companies for reference in setting
compensation for 2007:
Peer
Group Companies
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Belo Corporation
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McClatchy Company
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Dow Jones & Company, Inc.*
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McGraw-Hill Cos, Inc.
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The Dun & Bradstreet Corporation
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Meredith Corporation
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E.W. Scripps Company
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Moodys Corporation
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Equifax Inc.
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New York Times Company
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Fiserv Inc.
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Scholastic Corporation
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Idearc Inc.
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Symantec Corporation
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*
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Dow Jones was acquired in December 2007 and will be removed from
our peer group thereafter.
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Total direct remuneration Target marketplace
positioning.
The Committees stated
objective is to position an executives total direct
remuneration opportunity over time for target performance
between the 60th and 75th percentile of the
marketplace for the executives position, based upon peer
group data and the other information considered by the Committee
described above. The Committee believes this above-median
targeted marketplace positioning is warranted based upon our
historical above-average performance and our impressive growth
profile since 2002. Such compensation positioning also reflects
our high at-risk variable pay structure and stretch
performance objectives as described below. The Committee
believes that our positioning of total direct remuneration
supports our business strategy, strikes an appropriate balance
amongst the interests of our stakeholders, and ensures that we
are able to motivate strong performance, as well as attract and
retain key talent in our executive ranks. Due to the dramatic
and rapid increase in the size and scope of RHD over the past
several years, targeted total direct remuneration for some of
our NEOs falls below that range reflected by the
Committees stated objective. Our change in peer groups in
2006 and 2007 to better reflect the increased size, scope and
other characteristics of RHD exacerbated these shortfalls for
each affected NEO to varying degrees. Accordingly, the Committee
has been adjusting, and intends to continue to adjust, the
compensation of the affected NEOs in order to more closely
reflect its stated marketplace positioning objective for
achievement of target performance. Despite achieving target
performance in 2007 with respect to annual incentives, in light
of the dramatic decline in our stock price during the latter
part of 2007 and into 2008, as well as the challenging economic
environment that faces RHD in 2008, the Committee awarded no
increases in base salary, annual incentive target or total
direct remuneration target to any NEO for 2008 (other than
Mr. Bednarzs long-term incentive target based upon
his assuming additional responsibilities in 2008), which may
require more substantial adjustments in future years in order to
achieve its stated marketplace positioning for target
performance.
A major portion of target total direct remuneration, ranging
from 64% to 83% for the NEOs in 2007 as reflected by the
Compensation at Target Performance Level table
below, is placed at risk by requiring achievement of
(i) performance goals as a condition to earning annual
incentives, and (ii) stock price appreciation in order for
executives to realize value from SARs granted as long-term
incentives. The at-risk portion of total direct remuneration
ensures direct correlation and alignment of executive pay levels
with corporate performance and shareholder value creation. As
noted in our broad objectives above, as executives undertake
greater levels of responsibility, the percentage of total
compensation at risk and represented by equity increases.
Compensation objectives and strategy.
As a
result of the distinguishing factors noted above, although the
Committee utilizes peer group data for context and a frame of
reference for decision-making, the Committee does not rely
exclusively upon peer group data in setting the terms of our
compensation programs. Likewise, the Committee does not set
total direct remuneration or its component parts at levels to
achieve a mathematically precise market position.
129
In accordance with the Committees overall stated targeted
compensation objectives, and subject to the above considerations
with respect to continued adjustments necessary to achieve
targeted marketplace positioning objectives, the Committee
endeavors to set components of total direct remuneration as
follows:
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Base salary: Generally to be positioned near the peer
group median (50th percentile) for comparable
responsibilities, with individual performance considered by the
Committee, when appropriate, in awarding annual or off-cycle
salary increases.
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Variable compensation: Annual and long-term incentive
compensation is generally to be positioned at the
75th percentile of the peer group, so that total direct
remuneration will be in the 60th to 75th percentile
range when our financial and operating performance attains
targeted objectives. In setting performance objectives, the
Committee reviews prior period objectives and prior period
results to ensure that objectives are not routinely exceeded so
that the performance objectives can be fairly characterized as
stretch goals under the business conditions in which
we operate. In years impacted by material transactions, the
Committee utilizes the projections presented to the Board by
management in seeking Board approval of that transaction to help
guide performance objective setting.
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As a result, we endeavor to provide better-than-average earnings
opportunity through a heavy weighting on variable, at risk
incentive compensation, delivering highly competitive pay when
challenging performance objectives are met, balanced by the risk
of below average market compensation when performance objectives
are not met, such that compensation is properly aligned with
performance that enhances shareholder value. We believe this
approach enables us to attract, motivate and retain top
executive talent.
Actual total direct remuneration levels will vary from year to
year below and above target and those of the peer group based on
our performance relative to our objectives, as well as
performance of peer companies relative to their respective
goals. We set the amounts of variable compensation earnable for
above-target performance with a view to providing meaningful
incentives so that executives will strive for high performance,
but also at levels that represent a reasonable cost to RHD
relative to the returns to shareholders that likely would result
from such high performance.
Salary and annual incentive compensation are paid in cash. SARs,
which constitute the current form of long-term equity incentive
compensation for the NEOs, are payable in shares upon vesting
and exercise. As discussed above, our program has provided
substantial portions of total direct remuneration in the form of
shares and stock options/SARs in the past in order to promote
share ownership as a direct means of aligning the interests of
NEOs with the interests of shareholders. Our ownership
guidelines also encourage long-term share holding. We seek to
provide balance in the mix of cash and non-cash compensation to
the NEOs. At target performance for 2007, as reflected by the
Compensation at Target Performance Level Table
below, aggregate cash compensation ranged from 38% to 58% of
total direct remuneration for the NEOs, and equity compensation
ranged from 42% to 62% of total direct remuneration for the
NEOs. Between 38% and 56% of that total cash compensation for
the NEOs in 2007 was placed at risk by requiring achievement of
performance objectives as a condition to earning annual
incentives. The entire amount of equity compensation treated as
part of 2007 total direct remuneration was at risk because stock
appreciation rights have no value absent stock price
appreciation.
We maintain a strong linkage between performance and pay within
our executive compensation program through emphasis on
incentives and utilization of performance measures that
management and the Committee believe are key drivers of
shareholder value creation. For 2007, these measures included
advertising sales growth, EBITDA and free cash flow per share.
In our Annual Incentive Plan, each measure is weighted based on
its relative impact on the creation of shareholder value,
meeting market expectations for our performance and achieving
our other operating goals. Payout schedules are developed for
each measure and are approved by the Committee prior to or early
within the annual performance cycle. These payout scales reflect
the difficulty of achieving stretch performance
objectives. The Committee authorized annual incentive awards for
2007 performance under the 2005 Plan in
130
February 2007. The target annual award opportunity for the named
executive officers ranged from 60% of base salary up to 125% of
base salary for the Chief Executive Officer.
A grant of SARs to the NEOs on February 27, 2007
constituted the long-term component of total direct compensation
for 2007. The Committee generally determines the number of SARs
to grant to an executive officer as a percentage of base salary
using the Black-Scholes option valuation methodology. The
applicable percentage of base salary for annual SAR grants
ranged from 115% to 365% of base salary for the NEOs. Each grant
of SARs vests in equal installments on each of the first three
anniversaries of the date of grant, subject to accelerated
vesting in the event of death, disability or retirement or a
change in control. Settlement upon the vesting and exercise of
the SARs will be in the form of shares of our common stock.
The following table shows the target total direct remuneration
authorized by the Committee for 2007. The table includes the
amount of annual incentive that could be earned by meeting all
performance objectives in 2007 and also shows the grant-date
fair value of the SARs granted as a component of 2007 total
direct remuneration. Using the information presented to the
Committee in 2007, the table shows how the potential payouts of
total direct remuneration, which we refer to as TDR, at target
levels ranked against the market median level of compensation
for the comparable position, determined by using information
regarding peer group companies (based on 2005 compensation
information as reported in 2006).
2007
Compensation at Target Performance Level
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TDR Percentile
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SAR Fair
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Positioning at
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Annual
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Value at
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Total Direct
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Target vs.
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Name
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Salary
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Incentive
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Grant Date(1)
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Remuneration
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Peer Group
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David Swanson
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$
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955,000
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$
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1,193,750
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$
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3,485,750
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$
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5,634,500
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66th
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Peter McDonald
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$
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618,000
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$
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494,400
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$
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1,854,000
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$
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2,966,400
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82nd
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Steven Blondy
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$
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500,000
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$
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375,000
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$
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1,375,000
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$
|
2,250,000
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55th
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George Bednarz
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$
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325,000
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$
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195,000
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$
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422,500
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$
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942,500
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n/a
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*
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Robert Bush
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$
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425,000
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$
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255,000
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$
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488,750
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$
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1,168,750
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22nd
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*
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Information not available
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(1)
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For compensation purposes, we compute a fair value for SARs
using the Black-Scholes option pricing model as provided to us
by Steven Hall & Partners. In general, the assumptions used
by Steven Hall & Partners are the same as those used for
calculating fair value for purposes of our financial statements,
except that Steven Hall & Partners calculates volatility
using an average of our most recent 260 day, 3-year monthly and
5-year monthly volatility and does not discount award values for
estimated forfeitures related to service-based vesting
conditions as we do for financial purposes.
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As shown above, target total direct remuneration ranged from the
22nd to the 82nd percentile of the peer group for
2007. Since information for Messrs. Bednarzs position
was not available, his total direct remuneration targets were
set based on his position responsibilities relative to his
officer colleagues at RHD. Due to the dramatic and rapid
increase in the size and scope of RHD over the past several
years, total direct remuneration for some of our NEOs is below
the 60th to 75th percentile range reflected by the
stated objective of the Committee despite RHD having generally
achieved target performance in recent years. Those with greater
or lesser responsibilities and experience or tenure or those
recruited externally may be positioned above or below the
Committees stated objectives from time to time. The
Committee has been adjusting, and will continue to adjust,
compensation of affected NEOs in order to more closely reflect
its stated targeted compensation objective for the achievement
of targeted performance goals. Further analysis in late 2007
revealed that the CEOs positioning declined from the
66th percentile based upon 2005 market data released during
2007 to the 49th percentile based upon 2006 market data,
and similar declines will likely apply to the other NEOs as well.
Despite achieving target performance in 2007 with respect to
annual incentives, in light of the dramatic decline in our stock
price during the latter part of 2007 and into 2008, as well as
the challenging economic environment that faces RHD in 2008, the
Committee awarded no increases in base salary, annual incentive
131
target or total direct remuneration target to any NEO for 2008
(other than Mr. Bednarzs long-term incentive target
based upon his assuming additional responsibilities in 2008),
which may require more substantial adjustments in future years
in order to achieve its stated marketplace positioning for
target performance.
Annual incentives for 2007.
The NEOs earned
awards under the Annual Incentive Plan in 2007 based on the
level of achievement with respect to three performance measures,
which were determined by the Committee in February 2007 to be
the key drivers of shareholder value creation, focal elements in
our profitable growth strategy and key criteria by which
management plans and monitors our business:
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Advertising sales growth
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EBITDA
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Free cash flow per share
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With respect to 2006 performance, the Committee also identified
earnings per share as a performance measure. The Committee
eliminated earnings per share as a performance measure for 2007
since it believes that profitability is already measured by
EBITDA and free cash flow, which it deems more appropriate
measures based upon our leverage.
In accordance with our team philosophy, annual incentives paid
to NEOs are based strictly upon these corporate performance
measures, with Committee discretion limited to downward
adjustments based upon individual performance or other
considerations. No such downward adjustments were made to any of
the NEOs annual incentive payouts with respect to 2007
performance.
In February 2007, the Committee determined that the weighting of
these performance measures in determining the annual incentive
earned by each NEO would be 50% based on advertising sales
growth, 35% based on EBITDA, and 15% based on free cash flow per
share. The Committee selected these weightings to best reflect,
in its view, the key drivers of shareholder value creation.
Advertising sales was accorded the most weight in 2007 so as to
focus on top line growth for 2007.
Upon establishing these performance measures and weightings in
February 2007, the Committee specified that EBITDA be adjusted
to exclude the impacts of equity grant expensing under
SFAS No. 123(R), which we adopted effective
January 1, 2006.
In accordance with its standing written policy with respect to
the categories of and process for appropriate adjustments, the
Committee also subsequently determined that these performance
measures should be adjusted (for both favorable and unfavorable
items) to eliminate the remaining effects of purchase accounting
related to our Dex Media merger, as well as any impact (in each
case, which was not contemplated or reasonably estimable at the
time the Committee set performance goals in February
2007) from strategic transactions (including our
acquisition of Business.com in August 2007) and other
investments in sustainable long-term growth made during the
course of the year, in each case, based upon the forecasted
impacts approved by the Board at the time of approving the
transaction or other investment. The Committee also subsequently
determined it appropriate to exclude the impact of a
restructuring charge associated with RHDs decision in late
2007 to modestly reduce its workforce in early 2008.
In February 2007, the Committee, after completing its standard
deliberative process of due consideration of managements
business plan, the economic climate and investments required to
implement our business strategy, specified a schedule of
performance objectives and payout levels for these performance
measures, which included the following parameters and related
weightings, reflecting the aforementioned adjustments
subsequently approved by the Committee:
|
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|
|
Annual Incentive Payout as Percentage
|
|
|
of Target Payout Based on Performance
|
Performance Measure
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25% of Target
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|
100% of Target
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200% of Target
|
|
Advertising sales growth (50)%
|
|
(1.1)%
|
|
0.8%
|
|
1.9%
|
EBITDA (35)%
|
|
$1,398.7 Million
|
|
$1,442.0 Million
|
|
$1,457.0 Million
|
Free cash flow per share (15)%
|
|
$8.02
|
|
$8.45
|
|
$8.68
|
132
In February 2007, the Committee also determined a targeted
payout (represented as 100% of Target in the above table) as a
percentage of base salary for each named executive officer based
upon such NEOs position responsibilities and target direct
remuneration. Achievement between specified performance levels
would result in a payout based on straight-line interpolation
between the two closest specified performance levels included in
the table. There is no payout with respect to any performance
measure for which actual performance does not meet the threshold
level of 25% of target. If the level of performance under any
measure were to exceed the 200% level, the corresponding payout
also would exceed 200% based on straight-line interpolation, but
the maximum payout under the Annual Incentive Plan for all
performance measures combined may not exceed 300% of the named
executives target annual incentive. The target, minimum
and maximum awards under the Annual Incentive Plan for 2007
appear in the Grants of Plan-Based Awards table below.
Pay-for-performance analysis.
Our compensation
plan is intended to provide compensation that reflects our
performance. In February 2008, the Committee assessed
performance for 2007 under our Annual Incentive Plan and
determined final payout levels. The Committee determined that
(a) advertising sales growth of -0.2% represented 46.5% of
target; (b) EBITDA of $1451.4 million represented
162.7% of target; and (c) free cash flow per share of $8.57
represented 153.7% of target. Weighting these performance/payout
levels as described above, the Committee determined that the
final overall payout level for the annual incentive for each NEO
would be 103.3% of their individual target annual incentive. As
discussed above, these payouts were made entirely in cash in
early March 2008. While our advertising sales performance for
2007 was below our expectations, our EBITDA margin leads the
industry and we generated strong cash flow during 2007, each of
which exceeded our incentive targets. The Committee is mindful
of the dramatic decline in our stock price during the latter
part of 2007 and into 2008, but it believes that our operational
and financial performance during 2007 warrants the foregoing
annual incentive payouts. A reconciliation between these
non-GAAP measures and the most comparable GAAP measures appears
on
pages 152-153
of this prospectus.
While the foregoing annual incentive targets are somewhat lower
than the annual incentive targets with respect to 2006
performance previously disclosed, the Committee believes that
the foregoing targets reflected stretch goals based
upon industry trends and our investments in our Triple Play
strategy, including launching our new Dex market brand and our
new URL, DexKnows.com, across our entire footprint, the
introduction of 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 continued modernization and
consolidation of our IT platform. The Committee firmly believes
that these investments will drive future revenue growth and
shareholder value. See Business above for a further
description of these investments. The Committee believes that
our recent stock price decline is more reflective of credit
market instability, broader media industry trends, general
economic conditions, our strategy regarding return of capital to
shareholders and, since December 2007, our outlook for our 2008
performance, than it is of our performance in 2007.
Our long-term compensation, in the form of SARs for 2007, uses
stock price as the principal measure of performance. As of
December 31, 2007, our closing stock price was $36.48. This
represents a one-year total shareholder return of −41.8%,
and annualized total shareholder return for three years and five
years of −14.8% and 4.5%, respectively. As of
March 20, 2008, our closing stock price was $4.98. Based
upon our closing stock price on March 20, 2008, it
would represent a one year total shareholder return of
−93.1%, and annualized total shareholder return for three
years and five years of −56.1% and −30.4%,
respectively. Our long-term incentives have historically
delivered value to the NEOs through appreciation in the value of
their stock options, SARs, deferred and restricted stock awards
and other stock holdings based upon our historical stock price
appreciation. In this regard, the Committee notes that our stock
price presently stands at an all-time low; consequently, none of
the outstanding awards presently maintain any
in-the-money value for our NEOs. The Committee
believes this situation may present material risk to RHD in
terms of retention and shareholder value performance with
respect to our executives; accordingly, it is in the process of
considering, in consultation with its independent consultant,
various alternatives for providing incentives for retention and
shareholder value creation to our executives by way of long-term
incentive compensation during 2008.
We do not adjust the level of equity awards granted as the
long-term incentive component of an executives total
direct remuneration for a given year in light of the value of
retirement benefits or severance
133
benefits and, conversely, we do not adjust the level of
retirement benefits or severance payments based on the value of
an executives RHD stock holdings, stock options, SARs,
other equity awards or other compensation. We believe that
retirement and severance programs serve a function different
from that of equity incentive awards, the amount of which we
calibrate in our benchmarking process in setting total direct
remuneration levels. In particular, we value equity awards at
grant, but take the view that any value ultimately realized by
exercise of an option or SAR or by retaining shares acquired in
connection with equity awards represents the executives
reward for creating shareholder value, shared by our
shareholders and the executive alike.
Repricing
of outstanding awards
In March 2008, our Board of Directors approved, subject to
stockholder approval, which was subsequently obtained, a program
under which our current employees will be permitted to surrender
certain presently outstanding stock options and SARs, with
exercise prices substantially above the current market price of
our common stock, in exchange for new SARS, with new vesting
requirements and an exercise price equal to the fair market
value of our common stock on the grant date. We refer to this as
the exchange program.
The exchange program is designed to provide eligible employees
with an opportunity to exchange deeply underwater options and
SARs for new SARs covering fewer shares, but with an exercise
price based on the current, dramatically lower market price, and
requiring another three years of future service in order to
fully vest. The exchange program will not restore any of the
lost in-the-money value of any employees eligible awards,
but will provide an opportunity to participate in future
stockholder value creation through appreciation in our stock
price.
The Compensation and Benefits Committee established the exchange
ratios for the various tranches to target the weighted average
maximum of one new SAR for every 3.7 shares underlying
eligible awards. The weighted average exchange ratio for
eligible awards held by senior management members (as described
below) is 1 to 3.8, whereas the weighted average exchange ratio
for eligible awards held by all other eligible employees is 1 to
3.5. As a result, in order to receive one new SAR, the senior
management member will need to exchange awards covering a
greater number of shares than awards exchanged by other eligible
employees in the exchange program.
All new SARs will have a stated expiration date of seven years
after the grant date and will vest as to one-third of the
underlying shares on each of the first three anniversaries of
the grant date. In addition, certain members of our senior
management who participate in the exchange program will receive
new SARs that only will become exercisable upon achievement of
the below specified stock appreciation targets in addition to
the service-based vesting schedule applicable to all new SARs.
These senior management members are our named executive
officers, three other members of our executive committee and our
three general managers of sales. Exercisability of new SARs
granted to senior management members will be conditioned upon
the achievement of specified stock price appreciation targets.
In addition, these performance conditions to exercisability of
the new SARs granted to senior management members will be deemed
satisfied prior to achievement of the respective stock price
appreciation targets upon the occurrence of certain events,
including a change of control, voluntary or involuntary
termination, death, disability or retirement. Certain events
effectively accelerate the exercisability of one-third of the
total new SARs granted to each senior management member if any
stock price appreciation target has yet to have been met at that
time.
Each new SAR will have an exercise price equal to the average of
the high and low market prices of our common stock as reported
on the New York Stock Exchange on the trading day immediately
preceding the day of grant.
Retirement
programs
Retirement benefits provided to NEOs are modest and estimated to
rank significantly below median as compared to general industry
and peers with such programs.
134
Defined
benefit plans
In 2007, all of the NEOs participated in a tax-qualified defined
benefit pension plan for RHD employees and in a nonqualified
benefit restoration plan generally on the same terms as other
salaried employees. We provide defined benefit pensions to the
NEOs because we provide similar benefits to most of our
employees. See Pension benefits below.
401(k)
and deferred compensation plans
The named executive officers participate in the
R.H. Donnelley 401(k) Savings Plan and are eligible to
defer additional compensation under non-qualified deferred
compensation plans.
Our 401(k) Savings Plan is a tax-qualified retirement savings
plan available to substantially all RHD employees. Participating
employees may contribute up to 75% of eligible compensation on a
pre-tax
or
after-tax basis, provided that
pre-tax
contributions in a year may not exceed the limit imposed by
federal tax rules. RHD makes a matching contribution each pay
period equal to 50% of the employees contributions
(excluding employee contributions above 6% of eligible
compensation). The NEOs are eligible to participate (and all of
them do so) and receive this RHD matching contribution.
The NEOs can defer additional cash compensation under our
Deferred Compensation Plan, which we refer to as the DCP. The
DCP is an unfunded, non-qualified plan available to selected
management and highly compensated employees, including the NEOs
and most of our non-executive officers. Each participating
officer may defer receipt of a specified portion of his or her
salary or annual incentive and have the deferred amount credited
to a notional account under the DCP. Deferrals are limited only
to the extent necessary to allow us to deduct amounts for
current tax withholding and for contributions to pay for group
health and other benefits. Amounts deferred are deemed invested
in one or more notional investments specified by the
participant. Account balances are paid in future years in cash
(in a single sum or in installments) according to the
participants elections, account balance and retirement
eligibility.
Our 2005 Plan permits the NEOs and other officers participating
in the annual incentive program to defer any portion of their
annual award to be paid in stock. Beginning with respect to 2006
awards, annual incentive program awards are paid entirely in
cash. However, the stock component of annual incentive awards
deferred prior to 2006 is treated as a deferral under the 2005
Plan and credited to a notional account denominated in shares.
If we pay cash dividends on our stock, the officers
notional account will be credited with additional shares
equivalent to such dividends. Deferred stock account balances
are paid in future years in shares of RHD stock according to the
participants elections, account balance and retirement
eligibility.
Participants, who defer compensation or stock bonuses, if any,
enjoy the benefit of saving money on a pre-tax basis, because
income taxes are deferred until the benefits are paid.
RHDs costs in offering these benefits include modest
administrative expenses and the cost of delayed income tax
deductions on amounts deferred. We offset most of our DCP
obligations by purchasing universal life insurance contracts and
directing investments within those contracts to mirror
participant investment elections. The DCP is administered in
compliance with Section 409A of the Internal Revenue Code,
which we refer to as Code Section 409A.
Severance
policies
Severance protection is provided to all our executives with
employment agreements under the terms of their employment
agreements, and to other executives under our executive
severance policy. We believe this protection fosters a long term
perspective and permits executives to focus upon executing our
strategy and enhancing sustainable shareholder value without
undue concern or distraction. As discussed above, this
protection is also designed to be fair and competitive to aid in
attracting and retaining experienced executives. When recruited
from another company, the executive generally will seek to be
protected in the event he or she is terminated without cause or
we take actions giving him or her good reason to terminate his
or her employment with us. We believe that the protection we
provide including the level of severance payments
and post-termination benefits is appropriate in
terms of fostering long term shareholder value enhancing
135
performance, and within the range of competitive practice,
thereby facilitating recruiting and retention of key talent.
In line with competitive practices, severance payments and
benefits are increased should the executive be terminated
without cause or were to terminate for good reason within two
years after a change in control. This protection, while
potentially costly, provides a number of important benefits to
RHD. First, it permits an executive to evaluate a potential
change in control transaction while relatively free of concern
for his or her own situation, and ameliorates any conflict
between his or her own interests and those of our shareholders.
Second, change in control transactions take time to unfold, and
a stable management team can help to preserve our operations in
order to enhance the value delivered to our shareholders from a
transaction or, if no transaction is consummated, to ensure that
our business will continue without undue disruption afterwards.
We believe that the potential cost of executive change in
control severance payments and benefits, as a percentage of the
potential transaction price, would be well within the range of
reasonable industry practice, and represents an appropriate cost
relative to the benefits to us and our shareholders. It should
be noted that, although our change in control benefits provide
for the vesting of certain previously awarded equity grants
immediately upon a change in control, our executives voluntarily
waived such rights in our last three strategic transactions in
consideration of the fact that they would continue to constitute
the management team of the applicable combined company.
Benefit
programs
Benefits are part of the overall competitive compensation
program designed to attract and retain employees, including
executives. The NEOs participate in the same benefit programs as
our general employee population, with certain additional
benefits made available to them described in the table above
under Perquisites and in footnote 5 to the
Summary Compensation Table below.
Tax
deductibility
Code Section 162(m) limits the tax deductions that a public
company can claim for compensation to some of its named
executive officers. We generally seek to preserve such corporate
tax deductibility for compensation to the extent practicable,
although the Committee retains flexibility to approve, when
appropriate, compensation arrangements which promote the
objectives of our compensation program but which do not qualify
for full tax deductibility. We intend that performance-based
compensation authorized and earned under the annual incentive
program, and amounts to be realized in the future under the SARs
granted as part of 2007 compensation, qualify as
performance-based compensation and therefore was or will be
fully tax-deductible by us without limitation under Code
Section 162(m) Accordingly, to date, we have not accrued
for financial reporting purposes, any expense for prior awards
with respect to which a portion of the compensation resulting
from such awards would not be deductible by us, although
guidance on the requirements of Code Section 162(m) is not
complete, so there can be no assurance that the IRS will allow
all tax deductions with respect to all such compensation. In
connection with our permitting personal use of our corporate
aircraft by named executive officers, a portion of our related
expense is non-deductible under recent changes to
U.S. federal income tax law. We treat such personal use as
compensation, as reported in the All Other
Compensation column of the Summary Compensation Table. The
value of the disallowed tax deductions for 2007, based on our
estimated marginal federal income tax rate, was $79,000 in the
aggregate.
2008
compensation program for named executives
In February 2008, the Committee established our compensation
program for senior executives for 2008. The Committee intends to
review the competitive positioning of our program later in 2008
when 2007 market data becomes available, although it does not
presently intend to make any material adjustments to NEO
compensation during 2008. In general, the 2008 compensation
program has been structured in a manner substantially similar to
the 2007 program described above; although, despite achieving
target performance in 2007 with respect to annual incentive
targets, in light of the dramatic decline in our stock price
during the latter part of 2007 and into 2008, as well as the
challenging economic environment that faces RHD in 2008, the
Committee awarded no increases in base salary, annual incentive
target or total direct remuneration target
136
to any NEO or other senior executive for 2008, except that
Mr. Bednarzs long-term incentive target was increased
based upon his assuming additional responsibilities in 2008, and
Mr. McDonalds long-term incentive target was
decreased based upon the transfer of some of his prior
responsibilities to Mr. Bednarz so that he can concentrate
upon his duties as chief revenue officer.
The Committee also eliminated the use of equity awards at lower
levels of the organization, and utilized RSUs in lieu of, or in
combination with, SARs in awarding long term incentive
compensation to management-level employees, including the NEOs,
in order to conserve shares under the 2005 Plan. Moreover, the
Committee has under review our retirement programs in view of
internal considerations, as well as marketplace standards.
Lastly, the Committee also notes that our stock price presently
stands at an all-time low; consequently, virtually no
outstanding awards presently maintain any
in-the-money value for our employees, including the
NEOs. The Committee believes this situation may present material
risk to RHD in terms of retention and shareholder value
performance with respect to our executives and other key
employees; accordingly, it is in the process of considering, in
consultation with its independent consultant, various
alternatives for providing incentives for retention and
shareholder value creation to our executives and other key
employees through long-term incentive compensation during 2008.
Decision-making
responsibility
Governance of our compensation program is the responsibility of
the Committee, which consists solely of independent directors.
The Committee works with management, in particular the Chief
Executive Officer and the Senior Vice President
Human Resources, in making decisions regarding our compensation
program. While management is invited to participate in the
process and to express their opinions and views, the Committee
is the ultimate arbiter of all matters involving executive
compensation. The Committee also has retained Steven
Hall & Partners, a nationally-known compensation
consulting firm, to assist in gathering and analyzing market
data, advising the Committee on compensation standards and
trends, advising the Committee with respect to proposals by
management with respect to executive compensation, and assisting
in the implementation of policies and programs. The Committee
will retain the services of other consultants from time to time,
as deemed necessary or appropriate based on the need for
specialized expertise or the desire for additional perspective
on particularly complex issues. For example, in 2006, the
Committee retained Semler Brossy Consulting Company with respect
to the review of our 2007 peer group. Other consulting firms
assist us on projects requiring specialized expertise, such as
benefits and retirement plan design. All such consultants are
retained by and serve at the pleasure and direction of the
Committee, report directly to the Committee (although they may
discuss pertinent matters directly with management from time to
time), with RHD paying all related fees of such consultants as
directed by the Committee.
The following tables and accompanying narrative should be read
in conjunction with Compensation discussion and
analysis above.
137
Summary
of officer compensation during 2007
The following table summarizes the total compensation of our
NEOs for 2007. The NEOs are our Chief Executive Officer, our
Executive Vice President and Chief Financial Officer and our
three other most highly compensated executive officers serving
as such at December 31, 2007. Compensation payable, but
deferred at the election of the NEO, is shown in the table
without regard to such deferral.
Summary
Compensation Table Fiscal 2007
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Change in
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Pension
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Value and
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Non-
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Non-Equity
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qualified
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Incentive
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Deferred
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All
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Option/
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Plan
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Compen-
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Other
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Stock
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SARs
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Compen-
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sation
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Compen-
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Name and Principal
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Salary
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Bonus
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Awards
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Awards
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sation
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Earnings
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sation
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Total
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Position
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Year
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($)
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($)
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($)
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($)
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($)
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($)
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($)
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($)
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(a)
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(b)
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(c)(1)
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(d)
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(e)(1)
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(f)(1)
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(g)(2)
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(h)(3)
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(i)(4)
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(j)
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David Swanson
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2007
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931,662
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0
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1,376,608
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5,635,210
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1,233,144
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230,966
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118,270
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9,525,860
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Chairman and Chief
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2006
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846,615
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0
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407,549
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4,501,072
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1,056,550
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131,226
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163,775
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7,106,787
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Executive Officer
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Peter McDonald
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2007
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615,247
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0
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1,102,103
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3,772,506
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510,715
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131,961
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49,077
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6,181,609
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President and Chief
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2006
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595,961
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0
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113,647
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2,314,779
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596,640
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85,786
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50,795
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3,757,608
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Operating Officer
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Steven Blondy
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2007
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489,011
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0
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308,538
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1,744,773
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387,375
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42,598
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41,989
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3,014,284
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Executive Vice President
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2006
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449,303
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0
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73,306
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1,946,870
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419,513
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31,248
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37,581
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2,957,821
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and Chief Financial Officer
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George Bednarz
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2007
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307,349
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0
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29,489
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826,246
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201,435
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|
63,876
|
|
|
|
28,629
|
|
|
|
1,457,024
|
|
Senior Vice President
|
|
|
2006
|
|
|
|
254,081
|
|
|
0
|
|
|
70,522
|
|
|
|
789,588
|
|
|
|
186,450
|
|
|
|
47,139
|
|
|
|
29,128
|
|
|
|
1,376,908
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Bush
|
|
|
2007
|
|
|
|
407,624
|
|
|
0
|
|
|
52,265
|
|
|
|
661,821
|
|
|
|
263,415
|
|
|
|
22,933
|
|
|
|
32,161
|
|
|
|
1,440,219
|
|
Senior Vice President,
|
|
|
2006
|
|
|
|
347,281
|
|
|
0
|
|
|
33,564
|
|
|
|
762,502
|
|
|
|
261,030
|
|
|
|
19,926
|
|
|
|
28,290
|
|
|
|
1,452,593
|
|
General Counsel and Corporate Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The compensation amounts reported in the Stock
Awards and Option/SAR Awards columns reflect
the expense that we reported in our consolidated financial
statements under SFAS No. 123(R) without regard to
estimated forfeitures related to service-based vesting
conditions. These amounts reported in 2007 consist of a portion
of the fair value of the share-based awards that vested in 2007
or later, including awards granted before 2007. These amounts
reported in 2006 consist of a portion of the fair value of the
share-based awards that vested in 2006 or later, including
awards granted before 2006. For this purpose, the fair value of
an award is apportioned over the period during which the award
is expected to vest. The fair value of a stock award is equal to
the average of the high and low trading prices of our stock on
the grant date. The fair value of SARs is determined using the
Black-Scholes option pricing model. Our Black-Scholes
assumptions for financial statement purposes are described in
Note 8 of the notes to the consolidated financial
statements included herein.
|
|
|
|
(2)
|
|
Amounts reported in this column represent the cash annual
incentive award paid for annual performance under our Annual
Incentive Plan. These amounts for 2007 performance were paid in
early March 2008 and for 2006 performance were paid in early
March 2007. See Grants of plan-based awards
during 2007 below and Compensation
discussion and analysis Total direct
remuneration Annual incentives for 2007 above
for a further explanation of our annual incentive awards.
|
|
(3)
|
|
Amounts listed as Change in Pension Value and Nonqualified
Deferred Compensation Earnings reflect solely the change
during the year in the actuarial present value of each
NEOs pension benefit. Our
|
138
|
|
|
|
|
deferred compensation plan does not provide for above-market or
preferential earnings on non-qualified deferred compensation and
therefore no such amounts are included in the table above.
|
|
(4)
|
|
The All Other Compensation column for 2007 includes
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
|
|
|
Use of
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
|
Company
|
|
|
DC Plan
|
|
|
|
|
|
|
|
|
|
Planning
|
|
|
Aircraft
|
|
|
Contribution(a)
|
|
|
Other(b)
|
|
|
Total
|
|
|
David Swanson
|
|
$
|
13,422
|
|
|
$
|
34,635
|
|
|
$
|
6,750
|
|
|
$
|
63,463
|
|
|
$
|
118,270
|
|
Peter McDonald
|
|
$
|
13,717
|
|
|
$
|
738
|
|
|
$
|
6,750
|
|
|
$
|
27,872
|
|
|
$
|
49,077
|
|
Steve Blondy
|
|
$
|
12,993
|
|
|
$
|
0
|
|
|
$
|
6,750
|
|
|
$
|
22,246
|
|
|
$
|
41,989
|
|
George Bednarz
|
|
$
|
12,859
|
|
|
$
|
0
|
|
|
$
|
6,750
|
|
|
$
|
9,020
|
|
|
$
|
28,629
|
|
Robert Bush
|
|
$
|
13,062
|
|
|
$
|
0
|
|
|
$
|
6,750
|
|
|
$
|
12,349
|
|
|
$
|
32,161
|
|
|
|
|
(a)
|
|
DC Plan Contributions reflect our contributions
under our 401(k) Plan, as reported by our plan record keepers
prior to audit and any adjustments. The 401(k) plan is a
tax-qualified defined contribution plan.
|
|
(b)
|
|
Other compensation for Mr. Swanson includes
$8,339 for club dues, $2,118 for participation in our executive
health program, and a $53,006 payment, which we refer to as
401(k) Equalization Payment, equal to the amount we would have
contributed as a matching contribution to the 401(k) Plan in
2007 but for the contribution limitations under Federal tax
laws. Other compensation for Mr. Blondy
includes $2,118 for participation in our executive health
program and a $20,128 401(k) Equalization Payment.
Other compensation for Messrs. McDonald,
Bednarz and Bush represent 401(k) Equalization Payments.
|
Grants
of plan-based awards during 2007
The following table provides information regarding equity-based
and non-equity based incentive awards granted to each NEO for
the year ended December 31, 2007 under the 2005 Plan.
Grants of
Plan-Based Awards Fiscal 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future
|
|
All Other
|
|
|
|
|
|
Grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payouts
|
|
Option/SAR
|
|
|
|
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
|
|
Awards:
|
|
|
Exercise or
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
Number of
|
|
|
Base
|
|
|
Value of
|
|
|
|
|
|
|
Estimated Future Payouts Under
|
|
|
Incentive
|
|
Securities
|
|
|
Price of
|
|
|
Stock and
|
|
|
|
|
|
|
Non-Equity Incentive Plan Awards
|
|
|
Plan
|
|
Underlying
|
|
|
Option/SAR
|
|
|
Option/SAR
|
|
|
|
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Awards
|
|
Options/SARs
|
|
|
Awards
|
|
|
Awards
|
|
Name
|
|
Grant Date
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
(#)
|
|
(#)
|
|
|
($/Sh)
|
|
|
($)
|
|
(a)
|
|
(b)
|
|
|
(c)(1)
|
|
|
(d)(1)
|
|
|
(e)(1)
|
|
|
(f)
|
|
(g)(2)
|
|
|
(h)
|
|
|
(i)(3)
|
|
|
Dave Swanson
|
|
|
2/27/2007
|
|
|
|
298,438
|
|
|
|
1,193,750
|
|
|
|
3,581,250
|
|
|
0
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
2/27/2007
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
0
|
|
|
192,851
|
|
|
|
74.31
|
|
|
|
4,297,704
|
|
Peter McDonald
|
|
|
2/27/2007
|
|
|
|
123,600
|
|
|
|
494,400
|
|
|
|
1,483,200
|
|
|
0
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
2/27/2007
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
0
|
|
|
102,574
|
|
|
|
74.31
|
|
|
|
2,285,872
|
|
Steven Blondy
|
|
|
2/27/2007
|
|
|
|
93,750
|
|
|
|
375,000
|
|
|
|
1,125,000
|
|
|
0
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
2/27/2007
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
0
|
|
|
76,073
|
|
|
|
74.31
|
|
|
|
1,695,294
|
|
George Bednarz
|
|
|
2/27/2007
|
|
|
|
48,750
|
|
|
|
195,000
|
|
|
|
585,000
|
|
|
0
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
2/27/2007
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
0
|
|
|
23,375
|
|
|
|
74.31
|
|
|
|
520,914
|
|
Robert Bush
|
|
|
2/27/2007
|
|
|
|
63,750
|
|
|
|
255,000
|
|
|
|
765,000
|
|
|
0
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
2/27/2007
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
0
|
|
|
27,040
|
|
|
|
74.31
|
|
|
|
602,589
|
|
|
|
|
(1)
|
|
Amounts shown in these columns reflect threshold, target and
maximum payout levels under our Annual Incentive Plan for 2007
performance. In February 2007, the Committee established certain
performance measures, performance objectives and relative
weightings under our Annual Incentive Plan for 2007. See
Additional information relating to summary
compensation table and grants of plan-based awards table
below and Compensation discussion and
analysis Total direct remuneration
Annual incentives
|
139
|
|
|
|
|
for 2007 above for a detailed explanation of these
measures, and certain adjustments that were made by the
Committee, and the performance objectives and relative
weightings with respect to each measure. In February 2008, the
Committee assessed actual performance for 2007 against these
performance objectives and determined final payout amounts that
were paid during March 2008. See Additional
information relating to summary compensation table and grants of
plan-based awards table below and
Compensation discussion and
analysis Total direct remuneration
Annual incentives for 2007 and
Pay-for-performance
analysis above for a detailed explanation of actual
performance against these performance objectives and the
resultant payouts.
|
|
(2)
|
|
On February 27, 2007, we granted to Messrs. Swanson,
McDonald, Blondy, Bednarz, and Bush their regular annual grant
of stock-settled SARs. The numbers of SARs granted to each of
them is shown in the table above.
|
|
|
|
(3)
|
|
The fair value of SARs is determined using the Black-Scholes
option pricing model. Our Black-Scholes assumptions for
financial statement purposes are described in Note 8 of the
notes to our consolidated financial statements included herein.
For compensation purposes, we compute a fair value of SARs using
the Black-Scholes option pricing model as provided to us by
Steven Hall & Partners. In general, the assumptions
used by Steven Hall & Partners are the same as those
used for calculating fair value for purposes of our financial
statements, except that Steven Hall & Partners
calculates volatility using an average of our most recent
260 day,
3-year
monthly and
5-year
monthly volatility and does not discount award values for
estimated forfeitures related to service-based vesting
conditions as we do for financial statement purposes.
|
Additional
information relating to summary compensation table and grants of
plan-based awards table
The following narrative provides certain background information
to provide the reader with a better understanding of the
compensation amounts shown in the Summary Compensation Table and
Grants of Plan-Based Awards Table above. It should be read in
conjunction with the footnotes to those tables and
Compensation discussion and analysis
above.
Non-equity
incentive plan compensation
The NEOs earned awards under the Annual Incentive Plan in 2007
based on the level of achievement with respect to three
performance measures, which were determined by the Committee to
be the key drivers of shareholder value creation, focal elements
in our profitable growth strategy and key criteria by which
management plans and monitors our business:
|
|
|
|
|
Advertising sales growth (50%)
|
|
|
|
EBITDA (35%)
|
|
|
|
Free cash flow per share (15%)
|
The Committee determined the above-noted relative weightings of
each of these three performance measures to best reflect, in its
view, the key drivers of shareholder value creation. Advertising
sales was accorded the most weight in 2007 so as to focus on top
line growth for 2007. The Committee also determined a level of
targeted payout (represented as Target in the
Grants of Plan-Based Awards table above) as a percentage of base
salary for each NEO.
The Committee then specified a schedule of performance
objectives and performance levels and payout levels for these
performance measures. Achievement between specified performance
levels would result in a payout level based on straight-line
interpolation between the two closest specified performance
objectives included in the table. There is no payout on any
performance measure for which actual performance does not meet a
designated threshold level (at which level a 25% payout would be
payable). The maximum payout under the Annual Incentive Plan for
all performance measures combined may not exceed 300% of the
NEOs target annual incentive.
In February 2008, the Committee assessed performance for 2007
under our Annual Incentive Plan and determined final payout
levels. The Committee determined that (a) advertising sales
growth of -0.2%
140
represented 46.5% of target; (b) EBITDA of
$1451.4 million represented 162.7% of target; and
(c) free cash flow per share of $8.57 represented 153.7% of
target. Weighting these performance/payout levels as described
above, the Committee determined that the final overall payout
level for the annual incentive for each NEO would be 103.3% of
their individual target annual incentive. As discussed above,
these payouts were made entirely in cash in early March 2008.
While our advertising sales performance for 2007 was below our
expectations, our EBITDA margin leads the industry and we
generated strong cash flow during 2007. The Committee is mindful
of the dramatic decline in our stock price during the latter
part of 2007 and into 2008, but it believes that our operational
and financial performance during 2007 warrants the foregoing
annual incentive payouts. A reconciliation between these
non-GAAP measures and the most comparable GAAP measures appears
on pages 152-153 of this prospectus.
In accordance with our team philosophy, annual incentives paid
to NEOs are based strictly upon these corporate performance
measures, with Committee discretion limited to downward
adjustments based upon individual performance or other
considerations. No such downward adjustments were made to any of
the NEOs annual incentive payouts with respect to 2007
performance.
See Compensation discussion and
analysis Total direct remuneration
Annual incentives for 2007 for a more detailed explanation
of these matters.
Employment
agreements
The terms and conditions of each of the employment agreements
with our NEOs are substantially similar, except where specified
below. We have employment agreements with all of these
continuing NEOs, other than Mr. Bednarz, who is
covered under our executive severance policy. The executive
severance policy provides comparable benefits as set forth below.
As of December 31, 2007, the compensation of the NEOs as
provided by their respective employment agreements and other
compensation arrangements was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guideline
|
|
|
|
|
|
|
|
|
|
|
|
|
Guideline
|
|
|
Annual
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
|
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Award
|
|
|
|
|
|
|
|
|
|
|
|
|
Opportunity
|
|
|
Opportunity
|
|
|
|
|
|
Severance
|
|
|
|
|
|
|
(% of
|
|
|
(% of
|
|
|
|
|
|
Upon Change
|
|
Name
|
|
Base Salary
|
|
|
Base Salary)
|
|
|
Base Salary)
|
|
|
Severance(1)
|
|
|
in Control(1)
|
|
|
Dave Swanson
|
|
$
|
955,000
|
|
|
|
125
|
%
|
|
|
365
|
%
|
|
|
2 times
|
|
|
|
3 times
|
|
Peter McDonald
|
|
$
|
618,000
|
|
|
|
80
|
%
|
|
|
300
|
%
|
|
|
2 times
|
|
|
|
3 times
|
|
Steven Blondy
|
|
$
|
500,000
|
|
|
|
75
|
%
|
|
|
275
|
%
|
|
|
2 times
|
|
|
|
3 times
|
|
George Bednarz
|
|
$
|
325,000
|
|
|
|
60
|
%
|
|
|
130
|
%
|
|
|
1.5 times
|
|
|
|
2 times
|
|
Robert Bush
|
|
$
|
425,000
|
|
|
|
60
|
%
|
|
|
115
|
%
|
|
|
1.5 times
|
|
|
|
2 times
|
|
|
|
|
(1)
|
|
Severance payments are equal to the specified multiple of base
salary plus guideline annual incentive. See
Payments Upon Termination or
Change-in-Control
below for a discussion of the circumstances under which
severance payments may be triggered and more detailed
information about the amounts payable for each NEO.
|
For 2008, the Committee awarded no increases in base salary,
annual incentive target or total direct remuneration target to
any NEO (other than Mr. Bednarzs long-term incentive
target based upon his assuming additional responsibilities in
2008), and made no material changes to the foregoing severance
benefits for any NEO.
141
The remaining principal terms of the employment agreements and
arrangements with our NEOs are as follows:
|
|
|
Term
|
|
The employment agreements are subject to automatic one-year
renewals, unless notice has been given 90 days prior to the
scheduled termination date for the agreement. Any non-renewal of
the employment agreement by us would be considered a termination
without Cause.
|
|
Additional Compensation
|
|
Each NEO is eligible to participate in all bonuses, long-term
incentive compensation, stock options and other equity
participation arrangements made available to other senior
executives.
|
|
Benefits
|
|
Each NEO is eligible to participate in all employee benefit
programs (including perquisites, fringe benefits, vacation,
pension and 401(k) Plan participation and life, health, accident
and disability insurance) no less favorable than in effect prior
to their execution of his employment agreement.
|
|
Termination without Cause by RHD not arising from or within
two years after a Change in Control
|
|
Each NEO receives a cash lump sum payment equal to two times
(one-and-one
half times for Messrs. Bednarz and Bush) base salary plus
guideline annual incentive. Each NEO also receives continuation
of benefits for two years
(one-and-one
half years for Messrs. Bednarz and Bush). Terminated NEOs
are also eligible to receive a cash payment of a pro rata
portion of the guideline annual incentive.
|
|
Termination arising from, and within two years after, a
Change in Control
|
|
Each NEO receives a cash lump sum payment equal to three times
(two times for Messrs. Bednarz and Bush ) the sum of base
salary plus guideline annual incentive and continuation of
benefits for three years (two years for Messrs. Bednarz and
Bush). In addition, under the 2005 Plan, the 2001 Stock Award
and Incentive Plan and predecessor plans, upon a Change in
Control, certain awards may vest and become fully payable as
provided in the relevant Plan and/or grant documents. If
negotiations commence prior to a termination of employment but
eventually result in a Change in Control within two years, then
the NEO shall be treated as having been terminated within two
years following a Change in Control and, therefore, shall be
entitled to the benefits described above. Terminated NEOs are
also eligible to receive a cash payment of a pro rata portion of
the guideline annual incentive.
|
|
Death/Disability/Retirement
|
|
Each NEO (or beneficiary) receives salary through date of
termination and a pro rata portion of the target annual
incentive. Each NEO also receives continuation of benefits to
age 65 in event of Disability. Outstanding equity awards
are subject to accelerated vesting in the event of Death,
Disability or Retirement or a Change in Control, and such equity
awards may be exercised until the earlier to occur of one year
after the date of such termination or the established expiration
date of such award.
|
|
Excise Tax
|
|
The compensation of each NEO will be grossed up for
any excise tax imposed under Section 4999 of the U.S.
Internal Revenue Code relating to any payments made on account
of a change in control or a termination of the NEOs employment.
However, if total payments associated with such change in
control are less than
|
142
|
|
|
|
|
360% of the executives base amount under
applicable tax rules, the total payment will be reduced to the
level at which no excise tax would apply, and therefore no gross
up will be paid.
|
|
Restrictive Covenants
|
|
Non-compete during employment and 12 months
following termination, the NEO shall not directly or indirectly
engage in any business which is in competition with any line of
business conducted by RHD or its affiliates.
|
|
|
|
Non-solicitation during employment and
12 months following termination, the NEO shall not solicit
or otherwise interfere with RHDs relationship with its
employees, customers and suppliers.
|
|
|
|
Confidentiality during employment and at all times
thereafter the NEO shall not disclose to any third party
RHDs confidential and/or proprietary information.
|
During 2008, we intend to negotiate with the NEOs certain
revisions to these employment agreement provisions to ensure
documentary compliance with Code Section 409A, as well as
to reflect the IRS latest interpretation of Code
Section 162(m). See Payments upon
termination or
change-in-control
below for a more detailed description of payments and benefits
due to the NEOs upon certain termination events or Change in
Control.
Capitalized terms used under this caption Employment
Agreements have the meanings as defined in the relevant
employment agreements.
Outstanding
equity awards at fiscal year-end
The following table provides information regarding all
outstanding SARs/Options and other equity awards held by the
NEOs at year-end 2007.
Outstanding
Equity Awards At Fiscal Year-End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
Plan Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
Market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
Plan Awards:
|
|
or Payout
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Value of
|
|
|
Number
|
|
Value of
|
|
|
|
Options/SARs Awards
|
|
|
Shares or
|
|
|
Shares or
|
|
|
of Unearned
|
|
Unearned
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Units of
|
|
|
Units of
|
|
|
Shares,
|
|
Shares,
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Units or
|
|
Units or
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
That
|
|
|
That
|
|
|
Other
|
|
Other
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option/SARs
|
|
|
|
|
|
Have
|
|
|
Have
|
|
|
Rights That
|
|
Rights That
|
|
|
|
Options/SARs
|
|
|
Options/SARs
|
|
|
Exercise
|
|
|
Option/SARs
|
|
|
Not
|
|
|
Not
|
|
|
Have
|
|
Have
|
|
|
|
(#)
|
|
|
(#)
|
|
|
Price
|
|
|
Expiration
|
|
|
Vested
|
|
|
Vested
|
|
|
Not Vested
|
|
Not Vested
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
($)
|
|
|
Date
|
|
|
(#)
|
|
|
($)
|
|
|
(#)
|
|
($)
|
|
(a)
|
|
(b)
|
|
|
(c)(1)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)(2)
|
|
|
(g)(2)
|
|
|
(h)
|
|
(i)
|
|
|
David Swanson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,309
|
|
|
|
1,105,369
|
|
|
|
|
|
|
|
|
|
|
88,403
|
|
|
|
|
|
|
|
29.510
|
|
|
|
05/01/12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450,000
|
|
|
|
|
|
|
|
25.540
|
|
|
|
10/25/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,800
|
|
|
|
|
|
|
|
41.095
|
|
|
|
02/26/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
288,462
|
|
|
|
|
|
|
|
41.580
|
|
|
|
07/28/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
100,000
|
|
|
|
65.000
|
|
|
|
10/03/12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192,851
|
|
|
|
74.310
|
|
|
|
02/27/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
Plan Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
Market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
Plan Awards:
|
|
or Payout
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Value of
|
|
|
Number
|
|
Value of
|
|
|
|
Options/SARs Awards
|
|
|
Shares or
|
|
|
Shares or
|
|
|
of Unearned
|
|
Unearned
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Units of
|
|
|
Units of
|
|
|
Shares,
|
|
Shares,
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Units or
|
|
Units or
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
That
|
|
|
That
|
|
|
Other
|
|
Other
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option/SARs
|
|
|
|
|
|
Have
|
|
|
Have
|
|
|
Rights That
|
|
Rights That
|
|
|
|
Options/SARs
|
|
|
Options/SARs
|
|
|
Exercise
|
|
|
Option/SARs
|
|
|
Not
|
|
|
Not
|
|
|
Have
|
|
Have
|
|
|
|
(#)
|
|
|
(#)
|
|
|
Price
|
|
|
Expiration
|
|
|
Vested
|
|
|
Vested
|
|
|
Not Vested
|
|
Not Vested
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
($)
|
|
|
Date
|
|
|
(#)
|
|
|
($)
|
|
|
(#)
|
|
($)
|
|
(a)
|
|
(b)
|
|
|
(c)(1)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)(2)
|
|
|
(g)(2)
|
|
|
(h)
|
|
(i)
|
|
|
Peter McDonald
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,720
|
|
|
|
682,718
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
29.120
|
|
|
|
05/22/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
236,000
|
|
|
|
|
|
|
|
25.540
|
|
|
|
10/25/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,600
|
|
|
|
|
|
|
|
41.095
|
|
|
|
02/26/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,750
|
|
|
|
|
|
|
|
41.580
|
|
|
|
07/28/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
50,000
|
|
|
|
65.000
|
|
|
|
10/03/12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,574
|
|
|
|
74.310
|
|
|
|
02/27/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven Blondy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,559
|
|
|
|
458,027
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
|
|
|
|
28.745
|
|
|
|
03/01/12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
|
|
|
|
25.540
|
|
|
|
10/25/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,300
|
|
|
|
|
|
|
|
41.095
|
|
|
|
02/26/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,500
|
|
|
|
|
|
|
|
41.580
|
|
|
|
07/28/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
50,000
|
|
|
|
65.000
|
|
|
|
10/03/12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,073
|
|
|
|
74.310
|
|
|
|
02/27/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George Bednarz
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
722
|
|
|
|
26,331
|
|
|
|
|
|
|
|
|
|
|
31,680
|
|
|
|
|
|
|
|
15.313
|
|
|
|
07/14/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,736
|
|
|
|
|
|
|
|
16.531
|
|
|
|
02/22/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,736
|
|
|
|
|
|
|
|
24.750
|
|
|
|
01/31/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,000
|
|
|
|
|
|
|
|
26.585
|
|
|
|
02/13/12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,000
|
|
|
|
|
|
|
|
25.540
|
|
|
|
10/25/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,900
|
|
|
|
|
|
|
|
41.095
|
|
|
|
02/26/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,712
|
|
|
|
|
|
|
|
41.580
|
|
|
|
07/28/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,333
|
|
|
|
16,667
|
|
|
|
65.000
|
|
|
|
10/03/12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,375
|
|
|
|
74.310
|
|
|
|
02/27/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Bush
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
769
|
|
|
|
28,045
|
|
|
|
|
|
|
|
|
|
|
71,862
|
|
|
|
|
|
|
|
25.540
|
|
|
|
10/25/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,500
|
|
|
|
|
|
|
|
41.095
|
|
|
|
02/26/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,596
|
|
|
|
|
|
|
|
41.580
|
|
|
|
07/28/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,333
|
|
|
|
16,667
|
|
|
|
65.000
|
|
|
|
10/03/12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,040
|
|
|
|
74.310
|
|
|
|
02/27/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
All unexercised options and SARs vest ratably over 3 years
and have either a
7-year
term
or a
10-year
term from date of grant.
|
|
|
|
(2)
|
|
Amounts in columns (f) and (g) reflect unvested
deferred shares granted as a portion of the annual incentive
award payout on March 6, 2006 under the 2005 Annual
Incentive Plan, which we refer to as the 2005 AIP, and, for
Messrs. Swanson, McDonald and Blondy, also reflect
performance shares in the form of RSUs granted in December 2006
in the amounts of 26,388 RSUs, 16,492 RSUs, and 11,133 RSUs,
respectively. The market value in column (g) is based on
the average of the high and low price of RHD common stock on
December 31, 2007, which was $36.47. The 2005 AIP grants
shown in the table vested on the second anniversary of the grant
date. The Committee granted the RSUs to retain our
high-performing top management team, to ensure our future
growth, to recognize their leadership and valued contributions
to our continued success, especially in view of the effort
required to integrate and restructure our operations following
the Dex Media merger, and to provide an incentive and reward for
the future creation of
|
144
|
|
|
|
|
shareholder value. These RSUs required achievement of a
performance goal in order to be earned and require three years
of continued service in order to become vested, although since
Mr. McDonald is retirement-eligible, he is no longer
subject to a risk of forfeiture related to vesting. The
performance condition required for the earning of the RSUs was
satisfied (and thus no longer represents a condition) on
February 5, 2007, and, accordingly, are shown in column
(f) rather than column (h).
|
Option/SAR
exercises and stock vested during 2007
The following table provides information regarding the exercise
of stock options, SARs and similar equity awards by the NEOs,
and the vesting and distribution of restricted stock units to
the NEOs, during 2007.
Option/SAR
Exercises and Stock Vested Fiscal 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
of Shares
|
|
|
Value
|
|
|
|
Acquired on
|
|
|
Realized on
|
|
|
Acquired
|
|
|
Realized
|
|
|
|
Exercise
|
|
|
Exercise
|
|
|
on Vesting
|
|
|
on Vesting
|
|
Name
|
|
(#)
|
|
|
($)
|
|
|
(#)
|
|
|
($)
|
|
(a)
|
|
(b)
|
|
|
(c)
|
|
|
(d)(1)
|
|
|
(e)
|
|
|
David Swanson
|
|
|
145,911
|
|
|
|
7,583,592
|
|
|
|
6,136
|
(2)
|
|
|
442,580
|
|
Peter McDonald
|
|
|
24,000
|
|
|
|
1,343,755
|
|
|
|
2,912
|
|
|
|
209,948
|
|
Steven Blondy
|
|
|
40,000
|
|
|
|
1,919,234
|
|
|
|
2,025
|
(3)
|
|
|
146,028
|
|
George Bednarz
|
|
|
15,307
|
|
|
|
876,393
|
|
|
|
1,241
|
|
|
|
89,529
|
|
Robert Bush
|
|
|
0
|
|
|
|
0
|
|
|
|
1,185
|
|
|
|
85,469
|
|
|
|
|
(1)
|
|
Amounts in column (d) reflect restricted stock units
granted March 9, 2005 under the 2004 Annual Incentive
Program, which we refer to as the 2004 AIP, and March 6,
2006 under the 2005 AIP. Upon completion of the respective
performance periods January 1, 2004 to December 31,
2004 for the 2004 AIP and January 1, 2005 to
December 31, 2005 for the 2005 AIP, a dollar amount was
determined for each NEO based on our actual financial
performance against pre-established performance objectives. The
dollar amount was then converted into a number of restricted
stock units by dividing the dollar amount of the award by our
stock price (calculated as the average of the high and low
prices of our common stock on the 10 trading days subsequent to
delivery of our respective audited financial statements to the
Committee). Each of the 2004 and 2005 AIP grants vested 50% on
each of the first two anniversaries of the grant date.
|
|
(2)
|
|
Settlement of these RSUs remain deferred until seven months
following termination of employment in accordance with
Mr. Swansons deferral elections under the terms of
the DCP.
|
|
(3)
|
|
Of this amount, settlement of 600 RSUs remain deferred until
seven months following termination of employment in accordance
with Mr. Blondys deferral elections under the terms
of the DCP.
|
145
Pension
benefits
Pension
Benefits Fiscal 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
|
|
|
Number of
|
|
|
Present
|
|
|
During
|
|
|
|
|
Years of
|
|
|
Value of
|
|
|
Last
|
|
|
|
|
Credited
|
|
|
Accumulated
|
|
|
Fiscal
|
Name
|
|
Plan Name
|
|
Service
|
|
|
Benefit
|
|
|
Year
|
(a)
|
|
(b)
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
David Swanson
|
|
RHD Retirement Account
|
|
|
21.500
|
|
|
$
|
241,159
|
|
|
$0
|
|
|
RHD PBEP
|
|
|
21.500
|
|
|
$
|
815,426
|
|
|
$0
|
Peter McDonald(1)
|
|
RHD Retirement Account
|
|
|
12.083
|
|
|
$
|
120,373
|
|
|
$0
|
|
|
RHD PBEP
|
|
|
12.083
|
|
|
$
|
356,514
|
|
|
$0
|
Steven Blondy
|
|
RHD Retirement Account
|
|
|
4.833
|
|
|
$
|
44,093
|
|
|
$0
|
|
|
RHD PBEP
|
|
|
4.833
|
|
|
$
|
114,496
|
|
|
$0
|
George Bednarz
|
|
RHD Retirement Account
|
|
|
31.000
|
|
|
$
|
342,186
|
|
|
$0
|
|
|
RHD PBEP
|
|
|
31.000
|
|
|
$
|
172,003
|
|
|
$0
|
Robert Bush
|
|
RHD Retirement Account
|
|
|
7.167
|
|
|
$
|
51,065
|
|
|
$0
|
|
|
RHD PBEP
|
|
|
7.167
|
|
|
$
|
54,209
|
|
|
$0
|
|
|
|
(1)
|
|
Mr. McDonald had accrued benefits under the DonTech
Retirement Account and the DonTech Pension Benefit Equalization
Plan, which we refer to as the DonTech PBEP, at the time of his
subsequent hire by RHD. The DonTech Retirement Account merged
into the RHD Retirement Account and the DonTech PBEP merged into
the RHD PBEP as of January 1, 2007.
|
Present value of accumulated pension
benefits.
For each of the pension plans
referenced in the above table, the present values of accumulated
benefits are provided as of December 31, 2007, and are
based on a discount rate of 6.48% and a retirement age of 65.
Assumptions regarding pre-retirement mortality have been
disregarded. The actuarial assumptions used in calculating
present values are the same as those used in the actuarial
valuation of RHDs pension obligations at December 31,
2007, as set forth in Note 10 of the notes to our
consolidated financial statements included herein.
RHD Retirement Account.
The R.H. Donnelley
Corporation Retirement Account, which we refer to as the RHD
Retirement Account, is a funded and tax-qualified defined
benefit pension plan that provides benefits under a cash
balance formula. Under this formula, pension benefits are
based on the participants notional account balance. Each
month, the participants notional account balance is
credited with a notional pay credit equal to a percentage of
eligible compensation for the month. The percentage is based on
the participants age and years of service, as follows:
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
Age +
|
|
|
|
of Eligible
|
Credited Service
|
|
|
|
Monthly
|
at End of Month
|
|
|
|
Compensation
|
|
less than 35
|
|
|
3.00
|
%
|
between 35 and 44
|
|
|
4.00
|
%
|
between 45 and 54
|
|
|
5.00
|
%
|
between 55 and 64
|
|
|
7.50
|
%
|
between 65 and 74
|
|
|
9.00
|
%
|
between 75 and 84
|
|
|
10.50
|
%
|
85 and over
|
|
|
12.50
|
%
|
Eligible compensation includes the participants salary,
wages, regular cash bonuses, commissions, overtime pay and
severance pay, plus the participants pre-tax 401(k) and
cafeteria plan contributions. Eligible
146
compensation does not include forms of special remuneration such
as retainers, stay bonuses and income derived from equity
compensation.
The participants notional account balance is also credited
with monthly interest credits based on
30-year
Treasury rates, with a minimum monthly interest credit rate of
0.25%.
As of December 31, 2007, the RHD Retirement Account covered
all employees of RHDI who had attained age 21 and completed
at least one year of service. Employees of Dex Media,
LocalLaunch and Business.com were not eligible to participate.
Participants become fully vested in their accrued retirement
benefit upon completion of five years of service or upon
attaining age 65 while actively employed. At any time
following termination of employment, a vested participant may
elect to receive a lump sum payment equal to his or her notional
account balance, or monthly payments under an immediate or
deferred annuity that is actuarially equivalent to the notional
account balance.
R.H. Donnelley PBEP.
The Pension Benefit
Equalization Plan of RHD, which we refer to as the RHD PBEP, is
an unfunded, non-qualified plan that covers participants in the
RHD Retirement Account whose benefits under the RHD Retirement
Account are limited by the qualified plan rules. RHD PBEP
benefits are based on the participants notional account
balance. The participants notional account balance under
the RHD PBEP is equal to the excess of (1) the
participants uncapped notional account balance
determined in accordance with the RHD Retirement Account
disregarding the Code Section 415 limit on benefits and
Section 401(a)(17) limit on compensation, over (2) the
participants notional account balance under the RHD
Retirement Account. We will pay the benefits from our general
assets in the form of a lump sum that is equivalent to the RHD
PBEP notional account balance.
Nonqualified
deferred compensation
Deferred compensation plan.
The NEOs and a
select group of other officers and key employees can defer cash
compensation under our DCP. The DCP is an unfunded,
non-qualified plan. Each participant may defer receipt of a
specified portion of his or her salary, bonus or commission
income and have the amount deferred credited to a notional
account under the DCP. Deferrals are limited only to the extent
necessary to allow RHD to deduct amounts for current tax
withholding and for contributions to pay for group health and
other benefits. Amounts deferred are deemed invested in one or
more investment vehicles specified by the participant. Earnings
are calculated by reference to the actual investment performance
of these investment vehicles. Participants may change their
investment allocations monthly.
When participants make their deferral elections, they must
designate when and how their account balances will be paid
following (1) termination on account of retirement or
long-term disability, (2) death, and (3) termination
for any other reason. Participants may also elect to have
distributions made as of a specified date prior to termination
of employment or following a
change-in-control.
Death benefits are paid in a lump sum, and payment options
following any other distribution event include a lump sum or
installments over up to five years (15 years for
termination on account of retirement or long-term disability).
We pay all of the deferred compensation under the DCP in cash
from our general assets.
Stock bonus deferrals.
Under our 2005 Plan
(and under similar plans established before 2005), we permit the
NEOs and other officers to defer the receipt of RHD stock that
becomes deliverable pursuant to performance-based incentive
awards of restricted stock units. Deferred RHD stock is credited
to a notional account denominated in shares. If we pay cash
dividends on our stock, the officers notional account will
be credited with additional shares equivalent in value to such
dividends. Deferred stock account balances are paid in future
years in shares of RHD stock, according to the
participants payment elections, account balance and
retirement eligibility. Payment options are the same as those
available under the DCP.
147
The following table provides certain information regarding stock
deferrals and deferrals under our DCP:
Nonqualified
Deferred Compensation Fiscal 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
|
Registrant
|
|
Aggregate
|
|
|
Aggregate
|
|
Aggregate
|
|
|
|
Contributions
|
|
|
Contributions
|
|
Earnings
|
|
|
Withdrawals/
|
|
Balance
|
|
Name
|
|
in Last FY
|
|
|
in Last FY
|
|
in Last FY
|
|
|
Distributions
|
|
at Last FYE
|
|
(a)
|
|
(b)(1)
|
|
|
(c)
|
|
(d)(2)
|
|
|
(e)
|
|
(f)
|
|
|
David Swanson
|
|
$
|
442,896
|
|
|
$0
|
|
$
|
(2,181,108
|
)
|
|
$0
|
|
$
|
3,758,367
|
|
Peter McDonald
|
|
$
|
0
|
|
|
$0
|
|
$
|
0
|
|
|
$0
|
|
$
|
0
|
|
Steven Blondy
|
|
$
|
42,731
|
|
|
$0
|
|
$
|
(114,851
|
)
|
|
$0
|
|
$
|
1,645,124
|
|
George Bednarz
|
|
$
|
0
|
|
|
$0
|
|
$
|
(212,664
|
)
|
|
$0
|
|
$
|
295,543
|
|
Robert Bush
|
|
$
|
181,270
|
|
|
$0
|
|
$
|
15,199
|
|
|
$0
|
|
$
|
939,609
|
|
|
|
|
(1)
|
|
The executive contributions reported in column (b) for
Messrs. Swanson and Blondy reflect the deferral of RHD
stock that would otherwise have been issued and delivered to
them in 2007 under the terms of restricted stock units granted
on March 9, 2005 under the 2004 AIP and March 6, 2006
under the 2005 AIP. The Stock Awards column of the
Summary Compensation Table includes expenses related to these
deferred awards as follows: Mr. Swanson: $157,782 for 2007
and $407,549 for 2006; and Mr. Blondy: $7,405 for 2007 and
$66,375 for 2006. RHD stock deferrals are included in columns
(d) and (e) of the Option/SAR Exercises and Stock
Vested table above, and have been previously reported in the
Summary Compensation Table for previous years.
Mr. Bushs contributions reflect deferrals of salary
payable in 2007 and the annual incentive payments payable in
2007 with respect to 2006 performance, which amounts are
included in the Summary Compensation Table comprising $20,240 in
the Salary column for 2007 and $161,030 in the
Non-Equity Incentive Plan Compensation column for
2006.
|
|
(2)
|
|
The earnings (loss) reported in column (d) include the
change in value of the deemed investments in the
participants notional account (for deferrals under the
DCP) and the change in value of RHD stock credited to the
participants notional account (for stock deferrals). Our
deferred compensation plans do not provide for above-market or
preferential earnings on non-qualified deferred compensation,
and none of the amounts reported in column (d) are
reflected in the Summary Compensation Table above.
|
Payments
upon termination or
change-in-control
Severance protection is provided to our NEOs with employment
agreements under those agreements, and to other executives under
our executive severance policy. We believe this protection
fosters a long term perspective and permits executives to focus
upon executing our strategy and enhancing sustainable
shareholder value without undue concern or distraction. This
protection is also designed to be fair and competitive to aid in
attracting and retaining experienced executives. We believe that
the protection we provide including the level of
severance payments and post-termination benefits is
appropriate in terms of fostering long term shareholder value
enhancing performance, and within the range of competitive
practice, thereby facilitating recruiting and retention of key
talent.
In line with competitive practices, severance payments and
benefits are increased should the executive be terminated
without cause or voluntarily resign for good reason within two
years after a change in control. This protection, while
potentially costly, provides a number of important benefits to
RHD. First, it permits an executive to evaluate a potential
change in control transaction while relatively free of concern
for his or her own situation, and ameliorates any conflict
between his or her own interests and those of our shareholders.
Second, change in control transactions take time to unfold, and
a stable management team can help to preserve our operations in
order to enhance the value delivered to our shareholders from a
transaction or, if no transaction is consummated, to ensure that
our business will continue without undue disruption afterwards.
We believe that the potential cost of executive change in
control severance payments and benefits, as a percentage of the
potential transaction price, would be well within the range of
reasonable industry practice, and represents an appropriate cost
relative to these benefits to RHD and its shareholders. It
should be noted that, although our change in control benefits
provide for the immediate vesting of certain previously awarded
equity
148
grants upon a change in control, our NEOs voluntarily waived
such rights in our last three strategic transactions in
consideration of the fact that they would continue to constitute
the management team of the applicable combined company.
The following table shows the potential value of payments and
benefits to each NEO who was serving at December 31, 2007
pursuant to their respective employment agreements and other
applicable arrangements and plans under various employment
termination and change in control scenarios assuming such events
occurred as of December 31, 2007. See
Additional information relating to summary
compensation table and grants of plan-based awards
table Employment agreements above for other
important terms and conditions of employment for our NEOs.
Capitalized terms used without definition in this section have
the meanings as defined in the relevant employment agreements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination Scenario (12/31/07)
|
|
Mr. Swanson
|
|
|
Mr. McDonald
|
|
|
Mr. Blondy
|
|
|
Mr. Bednarz
|
|
|
Mr. Bush
|
|
|
Voluntary Resignation or For Cause
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without Cause or for Good Reason
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Not within two years of CIC)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro rata Incentive pay(1)
|
|
$
|
1,193,750
|
|
|
$
|
494,400
|
|
|
$
|
375,000
|
|
|
|
|
|
|
$
|
255,000
|
|
Severance pay
|
|
|
4,297,500
|
|
|
|
2,224,800
|
|
|
|
1,750,000
|
|
|
|
780,000
|
|
|
|
1,020,000
|
|
Health benefits continuation
|
|
|
13,637
|
|
|
|
13,637
|
|
|
|
20,455
|
|
|
|
15,341
|
|
|
|
10,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,504,887
|
|
|
$
|
2,732,837
|
|
|
$
|
2,145,455
|
|
|
$
|
795,341
|
|
|
$
|
1,285,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within Two Years of CIC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Without cause or for good reason)
Pro rata Incentive pay(1)
|
|
$
|
1,193,750
|
|
|
$
|
494,400
|
|
|
$
|
375,000
|
|
|
$
|
0
|
|
|
$
|
255,000
|
|
Severance pay
|
|
|
6,446,250
|
|
|
|
3,337,200
|
|
|
|
2,625,000
|
|
|
|
1,040,000
|
|
|
|
1,360,000
|
|
Health benefits continuation
|
|
|
20,455
|
|
|
|
20,455
|
|
|
|
30,682
|
|
|
|
20,455
|
|
|
|
13,637
|
|
Unvested SARs/Options(2)
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Unvested Deferred Shares(2)
|
|
|
143,038
|
|
|
|
81,277
|
|
|
|
52,020
|
|
|
|
26,339
|
|
|
|
28,053
|
|
Unvested RSUs(2)
|
|
|
962,634
|
|
|
|
601,628
|
|
|
|
406,132
|
|
|
|
0
|
|
|
|
0
|
|
Perquisites(3)
|
|
|
75,626
|
|
|
|
43,733
|
|
|
|
47,421
|
|
|
|
26,623
|
|
|
|
27,306
|
|
Outplacement
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
25,000
|
|
280G/4999 Tax Gross Up(4)
|
|
|
|
|
|
|
1,032,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,866,753
|
|
|
$
|
5,636,422
|
|
|
$
|
3,561,255
|
|
|
$
|
1,138,417
|
|
|
$
|
1,708,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CIC Assuming no termination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested SARs/Options(2)
|
|
$
|
0
|
|
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Unvested Deferred Shares(2)
|
|
|
143,038
|
|
|
|
81,277
|
|
|
|
52,020
|
|
|
|
26,339
|
|
|
|
28,053
|
|
Unvested RSUs(2)
|
|
|
962,634
|
|
|
|
601,628
|
|
|
|
406,132
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,105,672
|
|
|
$
|
682,905
|
|
|
$
|
458,152
|
|
|
$
|
26,339
|
|
|
$
|
28,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Death or Disability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro rata Incentive pay(1)
|
|
$
|
1,193,750
|
|
|
$
|
494,400
|
|
|
$
|
375,000
|
|
|
|
|
|
|
$
|
255,000
|
|
Unvested SARs/Options(2)
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Unvested Deferred Shares(2)
|
|
|
143,038
|
|
|
|
81,277
|
|
|
|
52,020
|
|
|
|
26,339
|
|
|
|
28,053
|
|
Unvested RSUs pro rata(2)
|
|
|
962,634
|
|
|
|
601,628
|
|
|
|
406,132
|
|
|
|
0
|
|
|
|
0
|
|
Disability Present Value of Health
Benefits through age 65
|
|
|
62,738
|
|
|
|
46,455
|
|
|
|
118,024
|
|
|
|
88,490
|
|
|
|
92,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,362,160
|
|
|
$
|
1,223,760
|
|
|
$
|
951,176
|
|
|
$
|
114,829
|
|
|
$
|
375,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination Scenario (12/31/07)
|
|
Mr. Swanson
|
|
|
Mr. McDonald
|
|
|
Mr. Blondy
|
|
|
Mr. Bednarz
|
|
|
Mr. Bush
|
|
|
Retirement(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested SARs/Options(2)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
$
|
0
|
|
|
|
|
|
Unvested Deferred Shares(2)
|
|
$
|
71,519
|
|
|
$
|
81,277
|
|
|
|
|
|
|
$
|
13,169
|
|
|
|
|
|
Unvested RSUs(2)
|
|
|
481,317
|
|
|
|
601,628
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
552,836
|
|
|
$
|
682,905
|
|
|
$
|
0
|
|
|
$
|
13,169
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Upon termination without cause, death or disability, the
Committee may determine, in its sole and absolute discretion, to
pay Mr. Bednarz a pro rata incentive award based on our
actual financial performance. Pro rata incentive payout is based
on actual performance for Mr. Bednarz and target
performance for all other NEOs.
|
|
|
|
(2)
|
|
This amount represents the aggregate in-the-money value of the
options, restricted stock units, and other equity awards which
would become vested as a direct result of the termination event
or Change in Control, as the case may be, before the applicable
stated vesting date, plus the aggregate value of any
performance-based award that would be deemed earned and vested
solely as a direct result of the termination event or Change in
Control, as the case may be, before the stated earning or
vesting date. The stated earning or vesting date is the date at
which an award would have been earned or vested absent such
termination event or Change in Control, as the case may be. This
calculation of value does not attribute any additional value to
options based on their remaining term and does not discount the
value of awards based on the portion of the vesting period
elapsed at the date of the termination event or Change in
Control. Represents the
in-the-money
value of stock options/SARs. Stock awards are valued the closing
price of our common stock of $36.48 on December 31, 2007.
Because Mr. McDonald is currently retirement eligible
(age 55 with ten years of service), equity awards are
deemed vested for purposes of this calculation and do not
accelerate.
|
|
|
|
(3)
|
|
Perquisites include financial planning services and RHD paid
life insurance, as well as, in the case of Mr. Swanson,
executive health screenings and club membership fees.
|
|
|
|
(4)
|
|
This amount includes any payment of a
gross-up
to offset the estimated amount of the golden parachute excise
tax that would apply to each executive and the amount of
additional excise tax and income and other taxes payable by the
executive as a result of the Change in Control. At
December 31, 2007, only Mr. McDonald would have been
entitled to such a gross up payment assuming that
our non-compete provisions have a value equal to one years
base salary. If no value is ascribed to the non-compete, then
the
gross-up
for Messrs. Swanson and McDonald would be $2,401,498 and
$1,355,023, respectively, and no other NEOs would be entitled to
any gross up payments.
|
|
(5)
|
|
Reflects 50% of unvested deferred share awards for
Messrs. Swanson and Bednarz who are Early
Retirement eligible or age 50 with 20 years of
service at December 31, 2007. Reflects 100% of unvested
equity awards for Mr. McDonald who is
Retirement eligible or age 55 with
10 years of service at December 31, 2007.
|
In light of (1) the dramatic decline in our stock price
during the latter part of 2007 and into 2008, (2) the fact
that most executives subject to our share ownership guidelines
and insider trading policy described above have accumulated
large vested, but unexercised, equity stakes in RHD,
(3) RHDs present stock price stands at an all-time
low so that no outstanding awards hold any
in-the-money value, and (4) potential
restructuring activities that may result from recent economic
weakness that may impact our financial performance during 2008,
the Committee recently adopted a policy that extends the
post-termination exercise period of vested options and SARs for
such executives (including the NEOs), who meet certain
conditions at the time of their involuntary termination. The
policy extends the post-termination exercise period for these
affected executives from 90 days following involuntary
termination to the earlier of (a) the expiration date of
the relevant award or (b) between one and two (depending
upon the executive) years following involuntary termination. If
our stock price appreciates over this extension period, this
policy would increase the value of those equity awards to a
terminated executive that satisfied the terms and conditions of
that policy.
150
In addition to the incremental value of payments and benefits
under the various termination and Change in Control scenarios
described above, the NEOs would be eligible for certain deferred
compensation and pension payments and benefits, and could
realize value through the exercise of previously vested options
and SARs, as follows:
Deferred compensation.
The NEOs other than
Mr. McDonald participate in deferred compensation plans
that permit the deferral of salary, bonus, and commission
income. The last column of the Nonqualified Deferred
Compensation table reports each NEOs aggregate
nonqualified deferred compensation balance at December 31,
2007. The NEOs are entitled to receive the amount in their
deferred compensation accounts in the event of termination of
employment in a single sum or in installments in accordance with
payout elections specified in their deferral elections. The
account balances continue to be credited with increases or
decreases reflecting changes in the value of the notional
investments specified by the NEO (or increases or decreases in
the value of our stock, with respect to RHD stock bonus
deferrals) and to accrue interest income or dividend payments,
as applicable, between the termination event and the date
distributions are made, and therefore amounts received by the
NEOs would differ from those shown in the Nonqualified Deferred
Compensation table.
Pension benefits.
The Pension Benefits table
above describes the general terms of the RHD PBEP, along with
the years of credited service and the present value of each
NEOs accumulated benefits under such plans as of
December 31, 2007. The table below shows the lump sum
pension benefits payable under the RHD PBEP if the NEO had died
or terminated employment as of December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Immediate
|
|
|
Immediate
|
|
|
|
|
|
|
Single-Life
|
|
|
Single-Life
|
|
|
|
|
|
|
Annuity
|
|
|
Annuity
|
|
|
|
|
|
|
Payable Annually
|
|
|
Payable Annually
|
|
|
|
|
|
|
to Executive
|
|
|
to Beneficiary
|
|
|
Projected Single-Life
|
|
|
|
Assuming
|
|
|
Assuming
|
|
|
Annuity Commencing
|
|
|
|
12/31/2007
|
|
|
Executives Death
|
|
|
at Normal
|
|
|
|
Termination(1)
|
|
|
on 12/31/2007(2)
|
|
|
Retirement Date(3)
|
|
|
David Swanson
|
|
$
|
64,164
|
|
|
$
|
63,449
|
|
|
$
|
407,895
|
|
Peter McDonald
|
|
$
|
27,920
|
|
|
$
|
25,779
|
|
|
$
|
124,125
|
|
Steve Blondy
|
|
$
|
9,142
|
|
|
$
|
9,133
|
|
|
$
|
149,746
|
|
George Bednarz
|
|
$
|
13,525
|
|
|
$
|
13,009
|
|
|
$
|
65,764
|
|
Robert Bush
|
|
$
|
4,510
|
|
|
$
|
4,488
|
|
|
$
|
145,896
|
|
|
|
|
(1)
|
|
If a NEO had terminated employment on December 31, 2007,
the amount shown is the amount payable to the NEO in January of
2008 under a single-life annuity with monthly payments.
|
|
(2)
|
|
If a NEO had died as of December 31, 2007, the amount shown
is the amount payable to his beneficiary in January of 2008
under a single-life annuity with monthly payments.
|
|
(3)
|
|
If a NEO terminates employment due to disability and is
receiving Social Security disability benefits and benefits under
our long-term disability insurance plan, the NEO may defer
payment of his pension benefits until age 65. The NEO will
continue to earn company pay credits and interest credits under
the RHD Retirement Account and the RHD PBEP until age 65
or, if earlier, the date he ceases to be disabled or elects to
begin collecting pension benefits under such plans. The amount
shown is the annual amount payable to the NEO under a
single-life annuity with monthly payments on his normal
retirement date, assuming that the NEO terminated employment on
December 31, 2007 due to disability, started receiving
Social Security disability benefits and benefits under our
long-term disability insurance plan, continued to receive such
disability benefits until age 65, and elected to defer
payment of his RHD Retirement Account and RHD PBEP benefits
until his normal retirement date (the first day of the calendar
month coincident with or next following his 65th birthday).
|
Option/SAR exercises.
The table above does not
reflect the value the NEOs could realize upon exercise of
options and SARs that had already vested as of December 31,
2007. Based on the closing price of our common stock on that
date of $36.48, the following amounts could have been realized
by the NEOs through exercise of such previously vested options
and SARs, whether or not there had occurred a change in control
or
151
a termination of employment as of that date: Mr. Swanson,
$5,539,169; Mr. McDonald, $2,585,520; Mr. Blondy,
$1,017,725; Mr. Bednarz, $2,026,509; and Mr. Bush,
$786,170. The closing price of our common stock on March 20,
2008 was $4.98.
Reconciliation
of Non-GAAP Measures (Unaudited)
Certain non-GAAP financial information presented below may
differ from comparable non-GAAP financial information presented
elsewhere in this prospectus, as the following amounts reflect
defined elements of our compensation program.
The following table represents a reconciliation of Net
income GAAP to EBITDA and Adjusted EBITDA (1):
|
|
|
|
|
|
|
2007
|
|
|
|
(Amounts in millions)
|
|
|
Net income GAAP
|
|
$
|
46.9
|
|
Plus tax provision
|
|
|
29.0
|
|
Plus interest expense, net
|
|
|
830.9
|
|
Less non-operating income
|
|
|
(1.8
|
)
|
|
|
|
|
|
Operating income
|
|
|
905.0
|
|
Plus depreciation and amortization
|
|
|
463.1
|
|
|
|
|
|
|
EBITDA
|
|
|
1,368.1
|
|
Plus amortized deferred cost uplift on Dex Media sales contracts
as of the merger date
|
|
|
28.9
|
|
Plus purchase accounting adjustments related to bad debt expense
previously charged to goodwill related to directories acquired
in the Dex Media merger and other compensation expense related
to the Business.com Acquisition
|
|
|
6.5
|
|
Plus SFAS No. 123 (R) non-cash compensation expense
|
|
|
39.0
|
|
Plus restructuring charge associated with planned headcount
reductions and consolidation of responsibilities to be
effectuated during 2008
|
|
|
5.5
|
|
Plus non-operating income from gain on sale of investment
|
|
|
1.8
|
|
Plus directory revenue resulting from the change to RHDs
method of directory based revenue recognition associated with
directories acquired in the Dex Media merger
|
|
|
1.6
|
|
|
|
|
|
|
Net effect of adjustments to GAAP results
|
|
|
83.3
|
|
|
|
|
|
|
EBITDA adjusted
|
|
$
|
1,451.4
|
|
|
|
|
|
|
|
|
|
(1)
|
|
EBITDA represents earnings before interest, taxes, depreciation
and amortization. Adjusted EBITDA represents adjusted earnings
before interest, taxes, depreciation and amortization. EBITDA
and adjusted EBITDA are not measurements 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. In addition, EBITDA may not be
comparable to similarly titled measures of other companies. Net
income GAAP and EBITDA for the year ended
December 31, 2007 includes the following:
|
|
|
|
|
a.
|
$39.0 million of non-cash stock-based compensation in
accordance with Statement of Financial Accounting Standards No.
123(R), Share-Based Payment;
|
|
|
|
|
b.
|
$28.9 million of cost uplift associated with the Dex Media
merger. As a result of purchase accounting required by GAAP, we
recorded the deferred directory costs 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.;
|
152
|
|
|
|
c.
|
$3.2 million of other compensation expense related to the
Business.com Acquisition, not all of which has been paid in cash
during the period;
|
|
|
|
|
d.
|
$5.5 million restructuring charge associated with planned
headcount reductions and consolidation of responsibilities to be
effectuated during 2008; and
|
|
|
|
|
e.
|
$1.8 million of non-operating income from a gain on sale of
an investment.
|
Net income GAAP and EBITDA for the year ended
December 31, 2007 excludes the following:
|
|
|
|
a.
|
$3.3 million in recoveries and other purchase accounting
adjustments related to bad debt expense associated with
directories acquired in the Dex Media merger previously charged
to goodwill; and
|
|
|
|
|
b.
|
$1.6 million of directory revenue resulting from the change
to RHDs method of directory based revenue recognition
associated with directories acquired in the Dex Media merger.
|
The following table represents a reconciliation of Cash flow
from operations GAAP to Adjusted cash flow from
operations and Adjusted free cash flow. The table also presents
a calculation of Free cash flow per share (2).
|
|
|
|
|
|
|
2007
|
|
|
|
(Amounts in millions)
|
|
|
Cash flow from operations GAAP
|
|
$
|
691.8
|
|
Add: Other compensation expense associated with the Business.com
Acquisition
|
|
|
2.4
|
|
|
|
|
|
|
Adjusted cash flow from operations
|
|
|
694.2
|
|
Less: Additions to fixed assets and computer
software GAAP
|
|
|
(77.4
|
)
|
|
|
|
|
|
Free cash flow adjusted
|
|
$
|
616.8
|
|
|
|
|
|
|
Weighted average diluted shares outstanding GAAP
|
|
|
72.0
|
|
Free cash flow per share
|
|
$
|
8.57
|
|
|
|
|
|
|
|
|
|
(2)
|
|
Free cash flow per share in 2007 is calculated as adjusted free
cash flow divided by weighted average diluted shares
outstanding GAAP.
|
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 revenue, which is recognized under the deferral and
amortization method. 2007 pro forma advertising sales assumes
the Business.com Acquisition occurred on January 1, 2007.
Directors
compensation
The Committee periodically reviews the level and balance of our
non-employee director compensation with the input and assistance
of Steven Hall & Partners, an independent executive
and board compensation consultant. In conjunction with the Dex
Media merger, the Committee, in consultation with its
consultant, conducted an assessment of its compensation. As a
result of this assessment, the consultant made certain
recommendations to the Committee and the Committee made certain
recommendations to the Board. Based on these recommendations,
the Board determined that, beginning in April 2006, we would pay
each non-employee director the following compensation:
|
|
|
|
|
Annual cash retainer of $40,000, or $48,000 in the case of the
chairpersons of the Compensation and Benefits and Corporate
Governance Committees, or $52,000 in the case of the chairperson
of the Audit and Finance Committee;
|
|
|
|
A fee of $1,200 for each Board meeting ($500 for shorter
telephonic meetings) attended, $1,200 for each committee meeting
attended, plus $1,000 for each committee meeting attended for
which the director serves as chairperson;
|
153
|
|
|
|
|
A fee of $800 to a committee chairperson for attendance at a
meeting of a committee he or she does not chair; and
|
|
|
|
The Lead Director will receive an additional cash retainer of
$36,000 for service as Lead Director, over and above his $40,000
retainer for Board service.
|
In addition to the foregoing cash compensation, historically
each non-employee director received an annual grant of 1,500
deferred shares of our common stock and an option to purchase
1,500 shares of our common stock as of the date of the
annual meeting of stockholders. All such deferred share and
option grants vest in three equal installments as of the close
of business on the day immediately preceding the date of the
three annual meetings of stockholders immediately following the
date of grant, subject to accelerated vesting in the event of
death, disability or retirement at or after age 65, or a
change in control of RHD. Stock options have an exercise price
equal to the fair market value of our stock on the date of
grant, and expire seven years after grant. Directors may elect
to defer any or all of their cash retainer fees into a deferred
cash account, which may be deemed invested in various investment
alternatives, a deferred share account or options to purchase
additional shares of our common stock. All non-cash awards to
non-employee directors are made under the 2005 Plan. Due to the
recent decline in our stock price, for 2008 and beyond, the
Board may increase the number of shares subject to these annual
grants following consultation with the Committees
independent compensation consultant regarding peer company
director compensation practices, market trends and other
relevant information.
Each non-employee director is required to own at least
5,000 shares of our common stock within three years of
becoming a director. Each director who had served at least three
years as of February 15, 2008 met this ownership
requirement. Each director is entitled to reimbursement for his
or her reasonable out-of-pocket expenses incurred in connection
with travel to and from, and attendance at, meetings of the
Board or its committees and related activities.
Director
Compensation During 2007
The following table sets forth certain information regarding the
compensation earned by or awarded to each non-employee director
who served on our Board of Directors in 2007. Mr. Swanson,
an employee of ours, is not compensated for his Board service.
The table includes compensation information for Mr. Lewis,
who was a member of the Board during 2007, but who did not serve
on our Board as of December 31, 2007.
Director
Compensation Fiscal 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retainers or Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned or
|
|
|
Stock
|
|
|
Option/SARS
|
|
|
|
|
|
|
Paid in Cash
|
|
|
Awards
|
|
|
Awards
|
|
|
Total
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
(a)
|
|
(b)(1)
|
|
|
(c)(2)(3)
|
|
|
(d)(2)(3)
|
|
|
(e)
|
|
|
Active Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael P. Connors
|
|
|
65,700
|
|
|
|
60,796
|
|
|
|
7,899
|
|
|
|
134,395
|
|
Nancy E. Cooper
|
|
|
52,100
|
|
|
|
97,192
|
|
|
|
7,899
|
|
|
|
157,191
|
|
Robert Kamerschen
|
|
|
91,375
|
|
|
|
166,201
|
|
|
|
7,899
|
|
|
|
265,476
|
|
Thomas J. Reddin
|
|
|
31,100
|
|
|
|
16,043
|
|
|
|
4,874
|
|
|
|
52,017
|
|
Alan F. Schultz
|
|
|
50,200
|
|
|
|
91,234
|
|
|
|
7,899
|
|
|
|
149,333
|
|
David M. Veit
|
|
|
55,000
|
|
|
|
97,192
|
|
|
|
7,899
|
|
|
|
160,091
|
|
Barry Lawson Williams
|
|
|
71,600
|
|
|
|
97,192
|
|
|
|
7,899
|
|
|
|
176,691
|
|
Edwina Woodbury
|
|
|
71,500
|
|
|
|
98,305
|
|
|
|
7,899
|
|
|
|
177,704
|
|
Former Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell T. Lewis
|
|
|
16,300
|
|
|
|
34,570
|
|
|
|
0
|
|
|
|
50,870
|
|
154
|
|
|
(1)
|
|
Of this amount, Mr. Kamerschen deferred $68,625 (deferred
as 1,226 shares of RHD common stock held in a deferred
share account). Settlement of these shares remains deferred
until termination of service as a director in accordance with
Mr. Kamerschens deferral elections.
|
|
|
|
(2)
|
|
The compensation amounts reported in the Stock
Awards and Options/SARs Awards columns reflect
the expense that we reported in our 2007 financial statements
under SFAS No. 123(R) without regard to estimated
forfeitures related to service-based vesting conditions. These
amounts consist of a portion of the fair value of the
share-based payment awards that vest in 2007 or later, including
awards granted before 2007. For this purpose, the fair value of
an award is apportioned over the period during which the award
is expected to vest. The fair value of a stock award is equal to
the average of the high and low trading prices of our stock on
the grant date. The fair value of stock options is determined
using the Black-Scholes option pricing model. Our Black-Scholes
assumptions for financial statement purposes are described in
Note 8 of the notes to the consolidated financial
statements included herein. For compensation purposes, we
compute a fair value for options using the Black-Scholes option
pricing model as provided to us by Steven Hall &
Partners. In general, the assumptions used by Steven
Hall & Partners are the same as those used for
calculating fair value for purposes of our financial statements,
except that Steven Hall & Partners calculates
volatility using an average of our most recent 260 day,
3-year
monthly and
5-year
monthly volatility and does not discount award values for
estimated forfeitures related to service-based vesting
conditions as we do for financial statement purposes.
|
|
|
|
|
|
The following table shows the grant date fair value of each
grant of deferred shares and stock options to our non-employee
directors in 2007 and the aggregate number of stock awards and
aggregate number of stock options outstanding and held by them
at December 31, 2007.
|
|
|
|
|
|
The fair value of deferred shares is equal to the average of the
high and low trading prices of our stock on the grant date. The
fair value of stock options is determined using the
Black-Scholes option pricing model. Our Black-Scholes
assumptions for financial statement purposes are described in
Note 8 of the notes to the consolidated financial
statements included herein. For compensation purposes, we
compute a fair value for options using the Black-Scholes option
pricing model as provided to us by Steven Hall &
Partners. In general, the assumptions used by Steven
Hall & Partners are the same as those used for
calculating fair value for purposes of our financial statements,
except that Steven Hall & Partners calculates
volatility using an average of our most recent 260 day,
3-year
monthly and
5-year
monthly volatility and does not discount award values for
estimated forfeitures related to service-based vesting
conditions as we do for financial statement purposes.
|
|
|
|
|
|
On May 3, 2007, we granted to each director then serving an
award consisting of 1,500 deferred shares and options to
purchase 1,500 shares at $80.675 per share. Upon joining
our Board on July 24, 2007, we granted Mr. Reddin an
award consisting of 1,500 deferred shares and options to
purchase 1,500 shares at $74.645 per share. Each of these
awards vest in three equal installments on the day immediately
preceding the date of the three annual meetings of stockholders
following the date of grant, subject to accelerated vesting in
the event of death, disability or retirement at or after
age 65, or upon a change in control. Nevertheless, our
Board members have voluntarily waived such accelerated vesting
in our last three strategic transactions. The stock options
expire seven years after grant.
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted in 2007
|
|
|
Number of Options, Deferred Shares
|
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
and other Stock Awards Held at
|
|
|
|
of Deferred
|
|
|
of Stock
|
|
|
December 31, 2007
|
|
|
|
Stock
|
|
|
Options
|
|
|
Deferred
|
|
|
Deferred
|
|
|
Stock
|
|
|
Stock
|
|
|
|
at Grant
|
|
|
at Grant
|
|
|
Stock
|
|
|
Stock
|
|
|
Options
|
|
|
Options
|
|
|
|
Date
|
|
|
Date
|
|
|
(unvested)
|
|
|
(vested)
|
|
|
(unvested)
|
|
|
(vested)
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
(#)
|
|
|
(#)
|
|
|
(#)
|
|
|
(#)
|
|
|
Active Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael P. Connors
|
|
|
121,013
|
|
|
|
36,449
|
|
|
|
2,500
|
|
|
|
5,934
|
|
|
|
2,500
|
|
|
|
500
|
|
Nancy E. Cooper
|
|
|
121,013
|
|
|
|
36,449
|
|
|
|
3,000
|
|
|
|
6,000
|
|
|
|
3,000
|
|
|
|
6,000
|
|
Robert Kamerschen
|
|
|
121,013
|
|
|
|
36,449
|
|
|
|
13,915
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
12,000
|
|
Thomas J. Reddin
|
|
|
111,968
|
|
|
|
34,016
|
|
|
|
1,500
|
|
|
|
0
|
|
|
|
1,500
|
|
|
|
0
|
|
Alan F. Schultz
|
|
|
121,013
|
|
|
|
36,449
|
|
|
|
3,000
|
|
|
|
1,500
|
|
|
|
3,000
|
|
|
|
1,500
|
|
David M. Veit
|
|
|
121,013
|
|
|
|
36,449
|
|
|
|
3,000
|
|
|
|
6,000
|
|
|
|
3,000
|
|
|
|
6,000
|
|
Barry Lawson Williams
|
|
|
121,013
|
|
|
|
36,449
|
|
|
|
3,000
|
|
|
|
12,737
|
|
|
|
3,000
|
|
|
|
9,000
|
|
Edwina Woodbury
|
|
|
121,013
|
|
|
|
36,449
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
3,000
|
|
Former Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell T. Lewis
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
500
|
|
|
|
0
|
|
|
|
0
|
|
Independence
Determinations
The Board of Directors has unanimously determined that
Messrs. Connors, Kamerschen, Lewis (who retired from the
Board during 2007), Reddin, Schultz, Veit and Williams and
Mdmes. Cooper and Woodbury neither are affiliated persons of RHD
nor do they have any material relationship with RHD, and
therefore qualify as independent directors within the meaning of
all applicable laws and regulations, including the independence
standards of the New York Stock Exchange, which the Board has
adopted as categorical standards to assist it in making
determinations of independence. As a result, independent
directors constitute a majority of our Board of Directors. In
addition, all members of all Board committees qualify as
independent within the meaning of all applicable laws and
regulations, including the independence standards of the New
York Stock Exchange.
In making these independence determinations, the Board
considered all of the automatic bars to independence specified
in the respective independence standards of the SEC and the New
York Stock Exchange and definitively determined that none of
those conditions existed. In addition, the Board considered
whether any material relationship beyond the automatic bars
existed between RHD
and/or
its
management
and/or
any
of their respective affiliates or family members, on the one
hand, and each director or any family member of such director or
any entity with which such director or family member of such
director was employed or otherwise affiliated, on the other
hand. For those directors for whom the Board determined there
was a relationship, the Board then considered whether or not the
relationship was material or did in fact, or could reasonably be
expected to, compromise such directors independence from
management. The Board definitively determined for those
directors identified as independent above that either no such
relationship existed at all or that any relationship that
existed was not material
and/or
did
not so compromise such directors independence from
management. See Compensation committee interlocks and
insider participation; certain relationships and related party
transactions below for a description of certain
relationships or other matters the Board considered in making
these independence determinations.
Compensation
committee interlocks and inside participation; certain
relationships and related party transactions
Messrs. Schultz, Connors and Williams serve as members of
the Compensation and Benefits Committee, and Messrs. Lewis
(until he retired during 2007) and Reddin (until February
2008, when he left the Compensation and Benefits Committee)
served as members of the Compensation and Benefits Committee
during 2007. No such member of that committee is or has been an
officer or employee of RHD and none had
156
interlocking relationships with any other entities of the type
that would be required to be disclosed in this prospectus.
Ms. Cooper was the Senior Vice President and Chief
Financial Officer of IMS until July 2006. Mr. Kamerschen,
who serves as our Lead Director and previously served as
chairperson of our Compensation and Benefits Committee, also
serves on IMS compensation committee, but is not and has
never been an executive officer of either company. The Board has
unanimously determined that because Mr. Kamerschen is an
independent director of both RHD and IMS, and RHD and IMS have
no material relationship (as described further below), and
Ms. Cooper has since left IMS, his service on both
compensation committees did not give rise to any conflict or
independence concerns with respect to Mr. Kamerschen.
In addition, as disclosed in our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006, through a
series of contractual provisions resulting from a series of
spin-offs of various subsidiaries of The Dun &
Bradstreet Corporation, or D&B, and due to the fact that
RHD is technically the successor to D&B as a result of the
structure (i.e., reverse spin) of those spin-off transactions,
under certain circumstances IMS may be required to provide
indemnification payments to us
and/or
we
may be required to provide certain indemnity payments to IMS
with respect to certain pending legal and tax matters. However,
D&B (and subsequently Moodys Corporation agreed to be
jointly and severally liable to us for D&Bs
obligations) has contractually assumed all obligations of ours
with respect to these matters so that practically if IMS were to
provide or receive indemnity payments with respect to these
matters it would provide or receive such indemnity payments to
or from D&B and not us. The Board of Directors carefully
considered these matters, including advice from counsel, and has
determined that Ms. Cooper
and/or
IMS
are not affiliated persons of RHD, and that no material
relationship exists between Ms. Cooper (other than in her
capacity as director)
and/or
IMS
on the one hand, and RHD on the other, that could reasonably be
expected to compromise her independence from management. This is
particularly the case since Ms. Cooper has since left IMS.
Accordingly, as set forth above under Independence
determinations, the Board has unanimously concluded that
Ms. Cooper is independent within the meaning of all
applicable laws and regulations.
On July 25, 2007, Jacob Winebaum, then Chief Executive
Officer of Business.com, entered into an agreement with RHD to
purchase 0.1 million shares of RHD common stock for
approximately $9.0 million. This agreement became effective
on August 23, 2007, the date the Business.com acquisition
was completed. Mr. Winebaum was appointed President of RHD
Interactive following completion of the Business.com
acquisition. Mr. Winebaum has recently voluntarily
terminated his employment with RHD to spend more time with his
family. He will remain a strategic advisor to RHD.
Related
Party Transactions Policy
The Board has adopted a written policy with respect to related
person transactions, a copy of which was filed with the SEC on
April 4, 2008 as an annex to our proxy statement. This
policy applies to our executive officers, directors, director
nominees and beneficial owners of more than 5% of our voting
securities, as well as immediately family members of those
persons. The types of transactions covered by the policy include
any financial transaction, arrangement or relationship, or any
series of similar transactions, arrangements or relationships in
which we were or are to be a participant, the amount involved
exceeds $120,000, and a related person had or will have a direct
or indirect material interest. Certain enumerated categories of
transactions are specifically excluded from the definition of a
related party transaction.
Related party transactions are reviewed and approved by either
the Audit and Finance Committee or the Corporate Governance
Committee of the Board of Directors. If advance approval is not
practical, one of the committees will review, and in its
discretion ratify the transaction at the next meeting of the
committee. The following factors are considered in the review
and approval or ratification of a related party transaction:
|
|
|
|
|
the related persons interest in the transaction;
|
|
|
|
the approximate dollar value of the amount involved in the
transaction;
|
|
|
|
the approximate dollar value of the amount of the related
persons interest in the transaction;
|
157
|
|
|
|
|
whether the transaction was undertaken in the ordinary course of
our business;
|
|
|
|
whether the transaction with the related person is proposed to
be, or was, entered into on terms no less favorable to us than
terms that could have been reached with an unrelated third party;
|
|
|
|
the purpose of, and the potential benefits to us of, the
transaction; and
|
|
|
|
any other information regarding the transaction or the related
person in the context of the proposed transaction that would be
material to investors.
|
158
Security
ownership of certain beneficial owners and management
The following table sets forth the number of shares of our
common stock beneficially owned as of March 21, 2008 by
(i) each of the NEOs, (ii) each of our directors,
(iii) all of our directors and executive officers as a
group and (iv) owners of more than 5% of the outstanding
shares of our common stock. Except as indicated in the footnotes
to the table, we believe that the persons named in the table
have sole voting and investment power with respect to all shares
owned beneficially by them. The mailing address for each of our
directors and NEOs listed below is 1001 Winstead Drive, Cary,
North Carolina 27513.
|
|
|
|
|
|
|
|
|
|
|
Shares of RHD
|
|
|
|
Common Stock
|
|
|
|
Amount Beneficially
|
|
|
Percentage
|
|
Beneficial Owners
|
|
Owned(1)
|
|
|
of Class(1)
|
|
|
David C. Swanson
|
|
|
1,355,381
|
(2)
|
|
|
1.9
|
%
|
Peter J. McDonald
|
|
|
601,635
|
(3)
|
|
|
*
|
|
Steven M. Blondy
|
|
|
390,310
|
(4)
|
|
|
*
|
|
George F. Bednarz
|
|
|
282,641
|
(5)
|
|
|
*
|
|
Robert J. Bush
|
|
|
188,972
|
(6)
|
|
|
*
|
|
Michael P. Connors
|
|
|
10,434
|
(7)
|
|
|
*
|
|
Nancy E. Cooper
|
|
|
15,000
|
(8)
|
|
|
*
|
|
Robert Kamerschen
|
|
|
28,915
|
(9)
|
|
|
*
|
|
Thomas J. Reddin
|
|
|
1,500
|
(10)
|
|
|
*
|
|
Alan F. Schultz
|
|
|
7,000
|
(11)
|
|
|
*
|
|
David M. Veit
|
|
|
15,300
|
(12)
|
|
|
*
|
|
Barry Lawson Williams
|
|
|
24,737
|
(13)
|
|
|
*
|
|
Edwina Woodbury
|
|
|
9,000
|
(14)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All Directors and Executive Officers as a Group (19 persons)
|
|
|
3,188,441
|
(15)
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
Wellington Management Company LLP
|
|
|
9,507,906
|
(16)
|
|
|
13.8
|
%
|
75 State Street
|
|
|
|
|
|
|
|
|
Boston, MA 02109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UBS AG
|
|
|
9,332,469
|
(17)
|
|
|
13.6
|
%
|
Bahnhofstrasse 45
|
|
|
|
|
|
|
|
|
Zurich, Switzerland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lord, Abbett & Co. LLC
|
|
|
7,934,800
|
(18)
|
|
|
11.5
|
%
|
90 Hudson Street
|
|
|
|
|
|
|
|
|
Jersey City, NJ 07302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lazard Asset Management LLC
|
|
|
6,527,934
|
(19)
|
|
|
9.5
|
%
|
30 Rockefeller Plaza
|
|
|
|
|
|
|
|
|
New York, NY 10012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vanguard Windsor Funds
|
|
|
6,225,205
|
(20)
|
|
|
9.0
|
%
|
100 Vanguard Blvd.
|
|
|
|
|
|
|
|
|
Malvern, PA 19355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotchkis and Wiley Capital Management LLC
|
|
|
5,237,315
|
(21)
|
|
|
7.6
|
%
|
725 S. Fiegeroa Street, 39th Floor
|
|
|
|
|
|
|
|
|
Los Angeles, CA 90017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GS Investment Strategies, LLC
|
|
|
5,200,000
|
(22)
|
|
|
7.6
|
%
|
1 New York Plaza
|
|
|
|
|
|
|
|
|
New York, NY 10004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FMR Corp.
|
|
|
4,629,300
|
(23)
|
|
|
6.7
|
%
|
82 Devonshire Street
|
|
|
|
|
|
|
|
|
Boston, MA 02109
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Represents ownership of less than 1%.
|
159
|
|
|
(1)
|
|
The amounts and percentage of our common stock beneficially
owned are reported on the basis of rules and regulations of the
SEC governing the determination of beneficial ownership of
securities. Under such rules and regulations, a person is deemed
to be a beneficial owner of a security if that
person has or shares voting power, which includes
the power to vote or to direct the voting of such security, or
investment power, which includes the power to
dispose of or to direct the disposition of such security. A
person is also deemed to be a beneficial owner of any securities
which that person has a right to acquire beneficial ownership of
within 60 days. Under these rules and regulations, more
than one person may be deemed a beneficial owner of the same
securities and a person may be deemed to be a beneficial owner
of securities in which he has no economic interest. As of March
21, 2008, we had 68,787,618 shares of common stock
outstanding.
|
|
(2)
|
|
Includes 1,232,949 shares of our common stock that may be
acquired pursuant to options or SARs exercisable as of March 21,
2008 or within 60 days thereafter.
|
|
(3)
|
|
Includes 575,041 shares of our common stock that may be
acquired pursuant to options or SARs exercisable as of March 21,
2008 or within 60 days thereafter.
|
|
(4)
|
|
Includes 369,158 shares of our common stock that may be
acquired pursuant to options or SARs exercisable as of March 21,
2008 or within 60 days thereafter.
|
|
(5)
|
|
Includes 261,889 shares of our common stock that may be
acquired pursuant to options or SARs exercisable as of March 21,
2008 or within 60 days thereafter.
|
|
(6)
|
|
Includes 184,304 shares of our common stock that may be
acquired pursuant to options or SARs exercisable as of March 21,
2008 or within 60 days thereafter.
|
|
(7)
|
|
Includes 500 shares of our common stock that may be
acquired pursuant to options exercisable as of March 21, 2008 or
within 60 days thereafter.
|
|
(8)
|
|
Includes 6,000 shares of our common stock that may be
acquired pursuant to options exercisable as of March 21, 2008 or
within 60 days thereafter.
|
|
(9)
|
|
Includes 12,000 shares of our common stock that may be
acquired pursuant to options exercisable as of March 21, 2008 or
within 60 days thereafter.
|
|
(10)
|
|
Includes no shares of our common stock that may be acquired
pursuant to options exercisable as of March 21, 2008 or within
60 days thereafter.
|
|
(11)
|
|
Includes 1,500 shares of our common stock that may be
acquired pursuant to options exercisable as of March 21, 2008 or
within 60 days thereafter.
|
|
(12)
|
|
Includes 6,000 shares of our common stock which may be
acquired pursuant to options exercisable as of March 21, 2008 or
within 60 days thereafter.
|
|
(13)
|
|
Includes 9,000 shares of our common stock which may be
acquired pursuant to options exercisable as of March 21, 2008 or
within 60 days thereafter.
|
|
(14)
|
|
Includes 3,000 shares of our common stock which may be
acquired pursuant to options exercisable as of March 21, 2008 or
within 60 days thereafter.
|
|
(15)
|
|
Includes 2,905,908 shares of our common stock that may be
acquired pursuant to options or SARs exercisable as of March 21,
2008 or within 60 days thereafter.
|
|
(16)
|
|
Wellington Management Company LLP filed Schedule 13G/A with
the SEC on February 14, 2008 reporting that it beneficially
owned 9,507,906 shares of our common stock as of
December 31, 2007, with shared voting power over
2,923,591 shares and shared dispositive power over
9,470,111 of those shares.
|
|
(17)
|
|
UBS AG filed Schedule 13G with the SEC on February 11,
2008 reporting that it beneficially owned 9,332,469 shares
of our common stock as of December 31, 2007, with sole
voting power over 8,554,421 shares and shared dispositive
power over all of those shares.
|
|
(18)
|
|
Lord, Abbett & Co. LLC filed Schedule 13G/A with
the SEC on February 14, 2008 reporting that it beneficially
owned 7,934,800 shares of our common stock as of
December 31, 2007, with sole voting power over 7,640,700 of
those shares and sole dispositive power over all of those shares.
|
|
(19)
|
|
Lazard Asset Management LLC filed Schedule 13G/A with the
SEC on February 6, 2008 reporting that it beneficially
owned 6,527,934 shares of our common stock as of
December 31, 2007, with sole voting power over 4,121,725 of
those shares and sole dispositive power over all of those shares.
|
160
|
|
|
(20)
|
|
Vanguard Windsor Funds filed Schedule 13G/A with the SEC on
February 13, 2008 reporting that it beneficially owned
6,225,205 shares of our common stock as of
December 31, 2007, with sole voting power over all of those
shares.
|
|
(21)
|
|
Hotchkis and Wiley Capital Management LLC filed
Schedule 13G with the SEC on February 13, 2008
reporting that it beneficially owned 5,237,315 shares of
our common stock as of December 31, 2007, with sole voting
power over 3,116,628 shares and sole dispositive power over
all of those shares.
|
|
(22)
|
|
GS Investment Strategies LLC filed Schedule 13G with the
SEC on February 13, 2008 reporting that it beneficially
owned 5,200,000 shares of our common stock as of
December 31, 2007, with sole voting and dispositive power
over all of those shares.
|
|
(23)
|
|
FMR Corp. and Edward C. Johnson 3d. jointly filed
Schedule 13G/A with the SEC on February 14, 2008
reporting that FMR and various of its affiliates beneficially
owned 4,629,300 shares of our common stock as of
December 31, 2007, with sole voting power over none of
those shares and sole dispositive power over all of those
shares. Mr. Johnson is a control person of FMR Corp.
|
161
Description
of other indebtedness
6.875% senior
notes
General
RHD has issued $300 million aggregate principal amount of
6.875% senior notes due 2013. As of March 31, 2008,
all $300 million aggregate principal amount of the
6.875% senior notes were outstanding. As of June 25,
2008, an aggregate principal amount of approximately $47.7
million of the 6.875% senior notes was tendered and cancelled in
connection with the RHDI exchange offers.
Ranking
The 6.875% senior notes are general unsecured obligations
of RHD and:
|
|
|
|
|
are effectively subordinated to secured obligations of RHD to
the extent of the value of the assets securing such
obligations; and
|
|
|
|
are equal in right of payment to all existing and future
unsecured obligations of RHD that are not, by their terms,
expressly subordinated in right of payment to the
6.875% senior notes.
|
The 6.875% senior notes are not entitled to the benefit of
any sinking fund.
Optional
redemption
The 6.875% senior notes may be redeemed, in whole or in
part, at any time prior to January 15, 2009 at the option
of RHD at a redemption price equal to 100% of the principal
amount of the 6.875% senior notes redeemed plus the greater
of (1) 1.0% of the then outstanding principal amount of the
6.875% senior notes and (2) the excess of (a) the
present value at the redemption date of (i) the redemption
price of the 6.875% senior notes at January 15, 2009,
as set forth in the table below, plus (ii) all required
interest payments due through January 15, 2009, excluding
accrued but unpaid interest, compounded using a discount rate
equal to the treasury rate as of such redemption date plus 50
basis; over (b) the then outstanding principal amount of
the 6.875% senior notes.
On or after January 15, 2009, RHD may redeem all or a part
of the 6.875% senior notes at the redemption prices,
expressed as a percentage of the principal amount, set forth in
the table below, plus accrued and unpaid interest, if redeemed
during the twelve-month period beginning on January 15 of the
years indicated below:
|
|
|
|
|
Year
|
|
Percentage
|
|
|
2009
|
|
|
103.438%
|
|
2010
|
|
|
101.719%
|
|
2011 and thereafter
|
|
|
100.000%
|
|
Mandatory
offers to purchase
In the event of a change of control, which is defined in the
indenture governing the 6.875% senior notes, each holder of
the 6.875% senior notes will have the right to require RHD
to repurchase all or any part of such holders
6.875% senior notes at a purchase price in cash equal 101%
of the principal amount thereof, plus accrued and unpaid
interest to the date of purchase.
In addition, certain asset dispositions are triggering events
which may require RHD to use the proceeds from those asset
dispositions to make an offer to purchase the 6.875% 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 certain periods to repay
certain indebtedness or to invest in certain assets.
162
Covenants
The indenture governing the 6.875% senior notes contains
certain covenants that, among other things, limit RHDs
ability and the ability of some of RHDs subsidiaries to:
|
|
|
|
|
incur additional debt;
|
|
|
|
pay dividends on, redeem or repurchase capital stock;
|
|
|
|
make certain investments;
|
|
|
|
enter into certain 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.
|
Events of
default
The indenture governing the 6.875% senior notes also
provides for events of default which, if any of them occurs,
would permit or require the principal of and accrued interest on
such 6.875% senior notes to become or to be declared to be
due and payable.
6.875%
series A-1
senior discount notes
General
RHD has issued $365 million aggregate principal amount at
maturity of 6.875%
series A-1
senior discount notes due 2013. These notes were issued with
original issue discount for federal tax purposes. Original issue
discount is the difference between the stated redemption price
at maturity and the issue price of the notes. As of
March 31, 2008, the accreted value of the
series A-1
senior discount notes was $340.2 million. As of June 25,
2008, an aggregate principal amount at maturity of approximately
$31.2 million of the series A-1 senior discount notes was
tendered and cancelled in connection with the RHDI exchange
offers.
Ranking
The
series A-1
senior discount notes are general unsecured obligations of RHD
and:
|
|
|
|
|
are effectively subordinated to secured obligations of RHD to
the extent of the value of the assets securing such
obligations; and
|
|
|
|
are equal in right of payment to all existing and future
unsecured obligations of RHD that are not, by their terms,
expressly subordinated in right of payment to the
series A-1
senior discount notes.
|
The
series A-1
senior discount notes are not entitled to the benefit of any
sinking fund.
Optional
redemption
The
series A-1
senior discount notes may be redeemed, in whole or in part, at
any time prior to January 15, 2009 at the option of RHD at
a redemption price equal to 100% of the principal amount at
maturity of the
series A-1
senior discount notes plus the greater of (1) 1.0% of the
principal amount at maturity of the
series A-1
senior discount notes and (2) the excess of (a) the
present value at the redemption date of (i) the redemption
price of the
series A-1
senior discount notes at January 15, 2009, as set forth in
the table below, plus (ii) all required interest payments
due through January 15, 2009, excluding accrued but unpaid
interest, compounded using a discount rate equal to the treasury
rate as of such redemption date plus 50 basis; over (b) the
principal amount at maturity of the
series A-1
senior discount notes.
163
On or after January 15, 2009, RHD may redeem all or a part
of the
series A-1
senior discount notes at the redemption prices, expressed as a
percentage of the principal amount at maturity, set forth in the
table below, plus accrued and unpaid interest, if redeemed
during the twelve-month period beginning on January 15 of the
years indicated below:
|
|
|
|
|
Year
|
|
Percentage
|
|
|
2009
|
|
|
103.438%
|
|
2010
|
|
|
101.719%
|
|
2011 and thereafter
|
|
|
100.000%
|
|
Mandatory
offers to purchase
In the event of a change of control, which is defined in the
indenture governing the
series A-1
senior discount notes, each holder of the
series A-1
senior discount notes will have the right to require RHD to
repurchase all or any part of such holders
series A-1
senior discount notes at a purchase price in cash equal 101% of
the accreted value, plus accrued and unpaid interest to the date
of purchase.
In addition, certain asset dispositions are triggering events
which may require RHD to use the proceeds from those asset
dispositions to make an offer to purchase the
series A-1
senior discount notes at 100% of their accreted value, together
with accrued and unpaid interest, if any, to the date of
purchase if such proceeds are not otherwise used within certain
periods to repay certain indebtedness or to invest in certain
assets.
Covenants
The indenture governing the
series A-1
senior discount notes contains certain covenants that, among
other things, limit RHDs ability and the ability of some
of RHDs subsidiaries to:
|
|
|
|
|
incur additional debt;
|
|
|
|
pay dividends on, redeem or repurchase capital stock;
|
|
|
|
make certain investments;
|
|
|
|
enter into certain 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.
|
Events of
default
The indenture governing the
series A-1
senior discount notes also provides for events of default which,
if any of them occurs, would permit or require the principal of
and accrued interest on such
series A-1
senior discount notes to become or to be declared to be due and
payable.
6.875%
series A-2
senior discount notes
General
RHD has issued $660 million aggregate principal amount at
maturity of 6.875%
series A-2
senior discount notes due 2013. These notes were issued with
original issue discount for federal tax purposes. Original issue
discount is the difference between the stated redemption price
at maturity and the issue price of the notes. As of
March 31, 2008, the accreted value of the
series A-2
senior discount notes was $615.4 million. As of June 25,
2008, an aggregate principal amount at maturity of approximately
$99.5 million of the series A-2 senior discount notes was
tendered and cancelled in connection with the RHDI exchange
offers.
164
Ranking
The
series A-2
senior discount notes are general unsecured obligations of RHD
and:
|
|
|
|
|
are effectively subordinated to secured obligations of RHD to
the extent of the value of the assets securing such
obligations; and
|
|
|
|
are equal in right of payment to all existing and future
unsecured obligations of RHD that are not, by their terms,
expressly subordinated in right of payment to the
series A-2
senior discount notes.
|
The
series A-2
senior discount notes are not entitled to the benefit of any
sinking fund.
Optional
redemption
The
series A-2
senior discount notes may be redeemed, in whole or in part, at
any time prior to January 15, 2009 at the option of RHD at
a redemption price equal to 100% of the principal amount at
maturity of the
series A-2
senior discount notes redeemed plus the greater of (1) 1.0%
of the principal amount at maturity of the
series A-2
senior discount notes and (2) the excess of (a) the
present value at the redemption date of (i) the redemption
price of the
series A-2
senior discount notes at January 15, 2009, as set forth in
the table below, plus (ii) all required interest payments
due through January 15, 2009, excluding accrued but unpaid
interest, compounded using a discount rate equal to the treasury
rate as of such redemption date plus 50 basis; over (b) the
principal amount at maturity of the
series A-2
senior discount notes.
On or after January 15, 2009, RHD may redeem all or a part
of the
series A-2
senior discount notes at the redemption prices, expressed as a
percentage of the principal amount at maturity, set forth in the
table below, plus accrued and unpaid interest, if redeemed
during the twelve-month period beginning on January 15 of the
years indicated below:
|
|
|
|
|
Year
|
|
Percentage
|
|
|
2009
|
|
|
103.438%
|
|
2010
|
|
|
101.719%
|
|
2011 and thereafter
|
|
|
100.000%
|
|
Mandatory
offers to purchase
In the event of a change of control, which is defined in the
indenture governing the
series A-2
senior discount notes, each holder of the
series A-2
senior discount notes will have the right to require RHD to
repurchase all or any part of such holders
series A-2
senior discount notes at a purchase price in cash equal 101% of
the accreted value, plus accrued and unpaid interest to the date
of purchase.
In addition, certain asset dispositions are triggering events
which may require RHD to use the proceeds from those asset
dispositions to make an offer to purchase the
series A-2
senior discount notes at 100% of their accreted value, together
with accrued and unpaid interest, if any, to the date of
purchase if such proceeds are not otherwise used within certain
periods to repay certain indebtedness or to invest in certain
assets.
Covenants
The indenture governing the
series A-2
senior discount notes contains certain covenants that, among
other things, limit RHDs ability and the ability of some
of RHDs subsidiaries to:
|
|
|
|
|
incur additional debt;
|
|
|
|
pay dividends on, redeem or repurchase capital stock;
|
|
|
|
make certain investments;
|
|
|
|
enter into certain transactions with affiliates;
|
|
|
|
expand into unrelated businesses;
|
|
|
|
create liens;
|
165
|
|
|
|
|
sell certain assets or merge with or into other
companies; and
|
|
|
|
designate subsidiaries as unrestricted subsidiaries.
|
Events of
default
The indenture governing the
series A-2
senior discount notes also provides for events of default which,
if any of them occurs, would permit or require the principal of
and accrued interest on such
series A-2
senior discount notes to become or to be declared to be due and
payable.
8.875%
series A-3
senior notes
General
RHD has issued $1,210 million aggregate principal amount of
8.875%
series A-3
senior notes due 2016. As of March 31, 2008, all
$1,210 million aggregate principal amount of the
series A-3
senior notes were outstanding. As of June 25, 2008, an aggregate
principal amount of approximately $151.2 million of the series
A-3
senior
notes was tendered and cancelled in connection with the RHDI
exchange offers.
Ranking
The
series A-3
senior notes are general unsecured obligations of RHD and:
|
|
|
|
|
are effectively subordinated to secured obligations of RHD to
the extent of the value of the assets securing such
obligations; and
|
|
|
|
are equal in right of payment to all existing and future
unsecured obligations of RHD that are not, by their terms,
expressly subordinated in right of payment to the
series A-3
senior notes.
|
The
series A-3
senior notes are not entitled to the benefit of any sinking fund.
Optional
redemption
The
series A-3
senior notes may be redeemed, in whole or in part, at any time
prior to January 15, 2011 at the option of RHD at a
redemption price equal to 100% of the principal amount of the
series A-3
senior notes redeemed plus the greater of (1) 1.0% of the
then outstanding principal amount of the
series A-3
senior notes and (2) the excess of (a) the present
value at the redemption date of (i) the redemption price of
the
series A-3
senior notes at January 15, 2011, as set forth in the table
below, plus (ii) all required interest payments due through
January 15, 2011, excluding accrued but unpaid interest,
compounded using a discount rate equal to the treasury rate as
of such redemption date plus 50 basis; over (b) the then
outstanding principal amount of the
series A-3
senior notes.
On or after January 15, 2011, RHD may redeem all or a part
of the
series A-3
senior notes at the redemption prices, expressed as a percentage
of the principal amount, set forth in the table below, plus
accrued and unpaid interest, if redeemed during the twelve-month
period beginning on January 15 of the years indicated below:
|
|
|
|
|
Year
|
|
Percentage
|
|
|
2011
|
|
|
104.438%
|
|
2012
|
|
|
102.958%
|
|
2013
|
|
|
101.479%
|
|
2014 and thereafter
|
|
|
100.000%
|
|
In addition, at any time prior to January 15, 2009, RHD may
redeem up to 40% of the aggregate principal amount of the
series A-3
senior notes at a redemption price of 108.875% of the principal
amount thereof, plus accrued and unpaid interest to the
redemption date, with the net cash proceeds of certain equity
offerings of RHD or of any of its direct or indirect parent
corporations, provided that at least 60% of the originally
issued principal amount of the
series A-3
senior notes remains outstanding after the occurrence of such
redemption and the redemption occurs within 90 days of the
closing of such equity offering.
166
Mandatory
offers to purchase
In the event of a change of control, which is defined in the
indenture governing the
series A-3
senior notes, each holder of the
series A-3
senior notes will have the right to require RHD to repurchase
all or any part of such holders
series A-3
senior notes at a purchase price in cash equal to 101% of the
principal amount thereof, plus accrued and unpaid interest to
the date of purchase. In addition, certain asset dispositions
are triggering events which may require RHD to use the proceeds
from those asset dispositions to make an offer to purchase the
series A-3
senior 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 certain periods to
repay certain indebtedness or to invest in certain assets.
Covenants
The indenture governing the
series A-3
senior notes contains certain covenants that, among other
things, limit RHDs ability and the ability of some of
RHDs subsidiaries to:
|
|
|
|
|
incur additional debt;
|
|
|
|
pay dividends on, redeem or repurchase capital stock;
|
|
|
|
make certain investments;
|
|
|
|
enter into certain transactions with affiliates; and
|
|
|
|
expand into unrelated businesses;
|
|
|
|
create liens;
|
|
|
|
sell certain assets or merge with or into other companies and;
|
|
|
|
designate subsidiaries as unrestricted subsidiaries.
|
Events of
default
The indenture governing the
series A-3
senior notes also provides for events of default which, if any
of them occurs, would permit or require the principal of and
accrued interest on such
series A-3
senior discount notes to become or to be declared to be due and
payable.
RHDI
notes
General
On June 25, 2008, RHDI issued approximately
$412.9 million aggregate principal amount of
11.75% senior notes due 2015.
Guarantees
The obligations of RHDI pursuant to the RHDI notes are fully and
unconditionally, jointly and severally guaranteed, on an
unsecured senior basis, by RHD and the RHDI subsidiaries that
guarantee RHDIs obligations under the RHDI credit facility
on a general, senior unsecured basis.
Ranking
The debt evidenced by the RHDI notes and the guarantee by RHD
and the subsidiary guarantors will be the senior unsecured
obligations of RHDI, RHD and the applicable subsidiary
guarantor, as the case may be, and will rank senior in right of
payment to all subordinated obligations of RHDI, RHD and the
subsidiary guarantors, as the case may be, and equally with any
of RHDIs, RHDs and the subsidiary guarantors
existing and future senior unsecured debt, as the case may be,
including, in the case of RHD, the remaining aggregate principal
amount of the 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 due 2017
167
outstanding after the RHDI exchange offers. The RHDI notes will
be effectively subordinated to any of RHDIs secured debt,
including the RHDI Credit facility to the extent of the value of
the assets securing such secured debt and will be structurally
subordinated to any debt of RHDIs subsidiaries that do not
issue, in the future, a guarantee of the RHDI notes.
Optional
Redemption
The RHDI notes may be redeemed, in whole or in part, at any time
prior to May 15, 2012 at the option of RHDI at a redemption
price equal to 100% of the principal amount of the RHDI notes
redeemed plus the greater of (1) 1.0% of the then
outstanding principal amount of the RHDI notes and (2) the
excess of (a) the present value at the redemption date of
(i) the redemption price of the RHDI notes at May 15,
2012, as set forth in the table below, plus (ii) all
required interest payments due through May 15, 2012,
excluding accrued but unpaid interest, compounded using a
discount rate equal to the treasury rate as of such redemption
date plus 50 basis; over (b) the then outstanding principal
amount of the RHDI notes.
On or after May 15, 2012, RHD may redeem all or a part of
the
series A-4
senior notes at the redemption prices, expressed as a percentage
of the principal amount, set forth in the table below, plus
accrued and unpaid interest, if redeemed during the twelve-month
period beginning on May 15 of the years indicated below:
|
|
|
|
|
Year
|
|
Percentage
|
|
|
2012
|
|
|
105.875
|
%
|
2013
|
|
|
102.938
|
%
|
2014 and thereafter
|
|
|
100.000
|
%
|
In addition, at any time prior to May 15, 2011, RHDI may
redeem up to 35% of the aggregate principal amount of the RHDI
notes at a redemption price of 111.75% of the principal amount
thereof, plus accrued and unpaid interest to the redemption
date, with the net cash proceeds of certain equity offerings of
RHD or RHDI, provided that at least 65% of the originally issued
principal amount of the RHDI notes remains outstanding after the
occurrence of such redemption and the redemption occurs within
90 days of the closing of such equity offering.
Mandatory
Offers to Purchase
In the event of a change of control, which is defined in the
indenture governing the RHDI notes, each holder of the RHDI
notes will have the right to require RHDI to repurchase all or
any part of such holders RHDI notes at a purchase price in
cash equal 101% of the principal amount thereof, plus accrued
and unpaid interest to the date of purchase.
In addition, certain asset dispositions are triggering events
which may require RHDI to use the proceeds from those asset
dispositions to make an offer to purchase the RHDI 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 certain periods to repay certain
indebtedness or to invest in certain assets.
Covenants
The indenture governing the RHDI notes contains certain
covenants that, among other things, limit RHDIs ability
and the ability of some of RHDIs subsidiaries to:
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|
|
|
|
pay dividends on, redeem or repurchase capital stock;
|
|
|
|
|
|
make certain investments;
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|
|
|
|
|
enter into certain transactions with affiliates;
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|
|
|
|
expand into unrelated businesses;
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168
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|
|
|
|
sell certain assets or merge with or into other companies;
|
|
|
|
|
|
designate subsidiaries as unrestricted subsidiaries;
|
|
|
|
|
|
enter into agreements that restrict dividends to RHDI from its
restricted subsidiaries; and
|
|
|
|
|
|
issue guarantees of debt.
|
Events
of Default
The indenture governing the RHDI notes also provides for events
of default which, if any of them occurs, would permit or require
the principal of and accrued interest on such RHDI notes to
become or to be declared to be due and payable.
The RHDI
credit facility
On June 6, 2008, the RHD credit facility was amended to,
among other things, (i) permit certain senior unsecured
debt of RHDI to be issued in exchange for certain outstanding
debt of RHD under the indebtedness covenant, restricted payments
covenant, investments covenant and modification of debt
instruments covenant, (ii) modify the financial performance
covenants for greater flexibility, (iii) increase the
interest rates applicable to the loans thereunder, including the
base rate (including a minimum base rate of 4.00%), the
Eurodollar rate (including a minimum Eurodollar rate of 3.00%)
and the applicable margins applied thereto and (iv) extend
the maturity date of $100 million of the $175 million
revolving facility to June 2011. The remaining $75 million
of the revolving facility will mature in December 2009.
The RHDI credit facility provides for aggregate facilities
consisting of a
tranche D-1
term loan, a
tranche D-2
term loan and a $175.0 million revolving credit facility
until December 2009 and thereafter a $100.0 million
revolving credit facility until June 2011. All term loans
require quarterly principal and interest payments. The RHDI
credit facility provides for a new uncommitted tranche C
term loan for potential borrowings up to $400 million,
which proceeds, if borrowed, may be used to fund acquisitions,
refinance certain indebtedness or to make certain restricted
payments. The
tranche D-1
and D-2 term loans mature in June 2011. As of March 31,
2008, the outstanding principal balance of the RHDI credit
facility was $301.23 million and $1,206.4 million
principal balance owing under the
tranche D-1
term loan and the
tranche D-2
term loan, respectively, and no amount was outstanding under the
RHDI revolving credit facility.
Guarantees;
security
The RHDI credit facility is fully and unconditionally, jointly
and severally, guaranteed by RHD and each of RHDIs direct
and indirect existing and future domestic subsidiaries.
Additionally, the RHDI credit facility is secured by a pledge by
RHD of all of the equity interests in RHDI owned by it and a
pledge of substantially all of the assets of RHDI and its
existing and future direct and indirect domestic subsidiaries.
Interest
rates
The interest rates applicable to the loans are, at the option of
the RHDI, the base rate or Eurodollar rate plus the following
applicable margins:
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|
|
|
|
|
|
|
|
Eurodollar Rate
|
|
|
|
|
|
Initial Amount of
|
|
|
|
Loans
|
|
|
Base Rate Loans
|
|
|
Facility/Commitment
|
|
|
Revolver
|
|
|
3.50
|
%
|
|
|
2.50
|
%
|
|
$
|
175.0 million*
|
|
Tranche D-1
Term Loans
|
|
|
3.75
|
%
|
|
|
2.75
|
%
|
|
$
|
350.0 million
|
|
Tranche D-2
Term Loans
|
|
|
3.75
|
%
|
|
|
2.75
|
%
|
|
$
|
1,422.0 million
|
|
|
|
|
*
|
|
$100.0 million of this revolver matures in June 2011 and $75.0
million matures in December 2009.
|
169
Covenants
The RHDI credit facility contains certain covenants that, among
other things, restrict RHDs ability to (i) transact
business other than those incidental to the ownership of the
RHDI or any subsidiary created or acquired in connection with a
permitted acquisition (including joint ventures) and to provide
shared services to RHDI and Dex Media and their respective
subsidiaries, and (ii) incur indebtedness and grant liens
other than certain types of permitted indebtedness and permitted
liens. The RHDI credit facility requires RHDI and its
subsidiaries to comply with various negative covenants that
restrict their activities (subject to negotiated exceptions),
including, but not limited to, limitations on liens and other
encumbrances, the incurrence of debt, payment of dividends,
redemptions and repurchases of capital stock, prepayments,
redemptions and repurchases of debt, loans and investments,
capital expenditures, mergers, consolidations, acquisitions,
asset dispositions and sale/leaseback transactions, and
transactions with affiliates.
In addition, the RHDI credit facility requires RHDI and its
subsidiaries to comply with various affirmative covenants and
financial performance covenants customary for financings of this
type (subject to negotiated exceptions). The financial covenants
include a maximum total leverage test, maximum senior secured
leverage test, and minimum interest coverage test.
Events of
default
The RHDI credit facility contains various events of default,
including but not limited to payment defaults, defaults under
other material agreements or instruments of indebtedness,
breaches of representations and warranties, noncompliance with
covenants, judgments in excess of certain amounts, failure of
any guaranty or security document supporting the RHDI credit
facility to be in full force and effect, bankruptcy related
events of default, and change of control.
Mandatory
prepayments
The RHDI credit facility requires prepayment of the term loans
and, under certain circumstances, a corresponding reduction in
the revolving credit facility, with the proceeds of certain
asset sales, casualty insurance and certain recovery events, the
incurrence of certain indebtedness, a percentage of certain
equity issuances, and a percentage of excess cash flow, in each
case of or by RHDI
and/or
its
subsidiaries.
Dex Media
notes
8%
notes
General
Dex Media has issued $500 million aggregate principal
amount of 8% notes due 2013. The 8% notes mature on
November 15, 2013. The 8% notes bear cash interest of
8% per annum, payable on May 15th and
November 15th of each year. As of March 31, 2008,
all $500 million aggregate principal amount of the
8% notes were outstanding, excluding fair value adjustments.
Ranking
The 8% notes are general senior unsecured obligations of
Dex Media and:
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|
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are effectively subordinated to any existing or future secured
obligations of Dex Media to the extent of the value of the
assets securing such obligations;
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are equal in right of payment to all existing and future
unsecured obligations of Dex Media that are not, by their terms,
expressly subordinated in right of payment to the 8% notes
(other than Dex Medias contingent support obligations
under the Dex Media credit facility to which the 8% notes
are subordinated);
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are effectively subordinated to all obligations of each of Dex
Medias existing and future subsidiaries; and
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170
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|
are effectively senior to all obligations of RHD, including the
notes, that are not guaranteed by Dex Media.
|
The 8% notes are not entitled to the benefit of any sinking
fund.
Optional
redemption
The 8% notes may be redeemed, in whole or in part, at any
time prior to November 15, 2008 at the option of Dex Media
at a redemption price equal to 100% of the principal amount of
the 8% notes redeemed plus accrued and unpaid interest and
the excess of (1) the present value at the redemption date
of (a) the redemption price of the 8% notes at
November 15, 2008, as set forth in the table below, plus
(b) all required interest payments due through
November 15, 2008, excluding accrued but unpaid interest,
computed using a discount rate equal to the treasury rate as of
such redemption date plus 50 basis points; over
(2) the then outstanding principal amount of the
8% notes.
On or after November 15, 2008, Dex Media may redeem all or
a part of the 8% notes at the redemption prices, expressed
as a percentage of the principal amount, set forth in the table
below, plus accrued and unpaid interest, if redeemed during the
twelve-month period beginning on November 15 of the years
indicated below:
|
|
|
|
|
Year
|
|
Percentage
|
|
|
2008
|
|
|
104.000%
|
|
2009
|
|
|
102.667%
|
|
2010
|
|
|
101.333%
|
|
2011 and thereafter
|
|
|
100.000%
|
|
Mandatory
offers to purchase
In the event of a change of control, which is defined in the
indenture governing the 8% notes, each holder of the
8% notes will have the right to require Dex Media to
repurchase all or any part of such holders 8% notes
at a purchase price in cash equal 101% of the principal amount
thereof, plus accrued and unpaid interest to the date of
purchase.
In addition, certain asset dispositions are triggering events
which may require Dex Media to use the proceeds from those asset
dispositions to make an offer to purchase the 8% 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 certain periods to repay certain
indebtedness or to invest in certain assets.
Covenants
The indenture governing the 8% notes contains certain
covenants that, among other things, limit Dex Medias
ability and the ability of some of Dex Medias subsidiaries
to:
|
|
|
|
|
incur additional debt;
|
|
|
|
pay dividends on, redeem or repurchase capital stock;
|
|
|
|
make certain investments;
|
|
|
|
enter into certain 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.
|
171
Events
of default
The indenture governing the 8% notes also provides for
events of default which, if any of them occurs, would permit or
require the principal of and accrued interest on such
8% notes to become or to be declared to be due and payable.
9%
discount notes
General
Dex Media has issued $750 million aggregate principal
amount at maturity of 9% discount notes under two indentures.
The 9% discount notes mature on November 15, 2013. The 9%
discount notes were issued at an original issued discount with
interest accruing at 9%, per annum, compounded semi-annually.
Interest accrues in the form of increased accreted value until
November 15, 2008, at which time the accreted value will be
equal to the full principal amount at maturity. After
November 15, 2008, the 9% discount notes bear cash interest
at 9% per annum, payable semi-annually on May 15 and November 15
of each year. As of March 31, 2008, the accreted value of
the 9% discount notes was $733.8 million.
Ranking
The 9% discount notes are general senior unsecured obligations
of Dex Media and:
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|
|
|
|
are effectively subordinated to any existing or future secured
obligations of Dex Media to the extent of the value of the
assets securing such obligations;
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|
|
|
are equal in right of payment to all existing and future
unsecured obligations of Dex Media that are not, by their terms,
expressly subordinated in right of payment to the 9% discount
notes (other than Dex Medias contingent support
obligations under the Dex Media credit facilities to which the
9% discount notes are subordinated);
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|
|
|
are effectively subordinated to all obligations of each of Dex
Medias existing and future subsidiaries; and
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|
|
|
are effectively senior to all obligations of RHD, including the
notes, that are not guaranteed by Dex Media.
|
The 9% discount notes are not entitled to the benefit of any
sinking fund.
Optional
redemption
The 9% discount notes may be redeemed, in whole or in part, at
any time prior to November 15, 2008 at the option of Dex
Media at a redemption price equal to 100% of the accreted value
of the 9% discount notes redeemed plus the excess of
(1) the present value at the redemption date of
(a) the redemption price of the 9% discount notes at
November 15, 2008, as set forth in the table below,
computed using a discount rate equal to the treasury rate as of
such redemption date plus 50 basis points; over
(2) the accreted value of the 9% discount notes. On or
after November 15, 2008, Dex Media may redeem all or a part
of the 9% discount notes at the redemption prices, expressed as
a percentage of the principal amount at maturity, set forth in
the table below, plus accrued and unpaid interest, if redeemed
during the twelve-month period beginning on November 15 of the
years indicated below:
|
|
|
|
|
Year
|
|
Percentage
|
|
|
2008
|
|
|
104.500%
|
|
2009
|
|
|
103.000%
|
|
2010
|
|
|
101.500%
|
|
2011 and thereafter
|
|
|
100.000%
|
|
172
Mandatory
offers to purchase
In the event of a change of control, which is defined in the
indenture governing the 9% discount notes, each holder of the 9%
discount notes will have the right to require Dex Media to
repurchase all or any part of such holders 9% discount
notes at a purchase price in cash equal 101% of the accreted
value thereof on the date of purchase.
In addition, certain asset dispositions are triggering events
which may require Dex Media to use the proceeds from those asset
dispositions to make an offer to purchase the 9% notes at
100% of their accreted value, together with accrued and unpaid
interest, if any, to the date of purchase if such proceeds are
not otherwise used within certain periods to repay certain
indebtedness or to invest in certain assets.
Covenants
The indenture governing the 9% discount notes contains certain
covenants that, among other things, limit Dex Medias
ability and the ability of some of Dex Medias subsidiaries
to:
|
|
|
|
|
incur additional debt;
|
|
|
|
pay dividends on, redeem or purchase capital stock;
|
|
|
|
make certain investments;
|
|
|
|
enter into certain 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.
|
Events
of default
The indenture governing the 9% discount notes also provides for
events of default which, if any of them occurs, would permit or
require the principal of and accrued interest on such 9%
discount notes to become or to be declared to be due and payable.
Dex
Medias subsidiaries notes
8.5% senior
notes
General
Dex Media West and Dex Media West Finance Co. co-issued
$385 million aggregate principal amount of 8.5% senior
notes due 2010. The 8.5% senior notes mature on
August 15, 2010. The 8.5% senior notes bear cash
interest of 8.5% per annum, payable on
February 15th and August 15th of each year.
As of March 31, 2008, all $385 million aggregate
principal amount of the 8.5% notes were outstanding,
excluding fair value adjustments.
Guarantees
Each of Dex Media Wests current and future subsidiaries,
except for Dex Media West Finance Co., jointly and severally
irrevocably and unconditionally guarantees the obligations under
the 8.5% senior notes on a senior, unsecured basis.
173
Ranking
The 8.5% senior notes and related guarantees are general
senior unsecured obligations of Dex Media West and Dex Media
West Finance Co. and any of their subsidiary guarantors and:
|
|
|
|
|
are effectively subordinated to secured obligations of Dex Media
West and Dex Media West Finance Co. and any of their subsidiary
guarantors to the extent of the value of the assets securing
such obligations;
|
|
|
|
are equal in right of payment to all existing and future
unsecured obligations of Dex Media West and Dex Media West
Finance Co. and any of their subsidiary guarantors that are not,
by their terms, expressly subordinated in right of payment to
the 8.5% senior notes;
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|
|
|
are effectively senior to all obligations of Dex Media and are
effectively senior to all obligations of RHD, including the
notes.
|
The 8.5% senior notes are not entitled to the benefit of
any sinking fund.
Optional
redemption
The 8.5% senior notes may be redeemed, in whole or in part,
at any time prior to August 15, 2007 at the option of Dex
Media West and Dex Media West Finance Co. at a redemption price
equal to 100% of the principal amount of the 8.5% senior
notes redeemed plus any accrued and unpaid interest and the
excess of (1) the present value at the redemption date of
(a) the redemption price of the 8.5% senior notes at
August 15, 2007, as set forth in the table below, plus
(b) all required interest payments due through
8.5% senior notes, excluding accrued but unpaid interest,
computed using a discount rate equal to the treasury rate as of
such redemption date plus 50 basis points; over
(2) the then outstanding principal amount of the
8.5% senior notes.
On or after August 15, 2007, Dex Media West and Dex Media
West Finance Co. may redeem all or a part of the
8.5% senior notes at the redemption prices, expressed as a
percentage of the principal amount, set forth in the table
below, plus accrued and unpaid interest, if redeemed during the
twelve-month period beginning on August 15 of the years
indicated below:
|
|
|
|
|
Year
|
|
Percentage
|
|
|
2007
|
|
|
104.250%
|
|
2008
|
|
|
102.125%
|
|
2009 and thereafter
|
|
|
100.000%
|
|
Mandatory
offers to purchase
In the event of a change of control, which is defined in the
indenture governing the 8.5% senior notes, each holder of
the 8.5% senior notes will have the right to require Dex
Media West and Dex Media West Finance Co. to repurchase all or
any part of such holders 8.5% senior notes at a
purchase price in cash equal 101% of the principal amount
thereof, plus accrued and unpaid interest to the date of
purchase.
In addition, certain asset dispositions are triggering events
which may require Dex Media West and Dex Media West Finance Co.
to use the proceeds from those asset dispositions to make an
offer to purchase the 8.5% 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 certain periods to repay certain indebtedness or to
invest in certain assets.
Covenants
The indenture governing the 8.5% senior notes contains
certain covenants that, among other things, limit Dex Media
Wests ability and the ability of some of Dex Media
Wests subsidiaries to:
|
|
|
|
|
incur additional debt;
|
|
|
|
pay dividends on, redeem or purchase capital stock;
|
174
|
|
|
|
|
make certain investments;
|
|
|
|
enter into certain transactions with affiliates;
|
|
|
|
expand into unrelated businesses;
|
|
|
|
create liens;
|
|
|
|
sell certain assets or merge with or into other companies;
|
|
|
|
agree to payment restrictions affecting future restricted
subsidiaries; and
|
|
|
|
designate subsidiaries as unrestricted subsidiaries.
|
Events
of default
The indenture governing the 8.5% senior notes also provides
for events of default which, if any of them occurs, would permit
or require the principal of and accrued interest on such
8.5% senior notes to become or to be declared to be due and
payable.
5.875% senior
notes
General
Dex Media West and Dex Media West Finance Co. co-issued
$300 million aggregate principal amount of
5.875% senior notes due 2011. The 5.875% senior notes
mature on November 15, 2011. The 5.875% senior notes
bear cash interest of 5.875% per annum, payable on
May 15th and November 15th of each year. As
of March 31, 2008, $8.7 million aggregate principal
amount of the 5.875% senior notes were outstanding,
excluding fair value adjustments.
Guarantees
Each of Dex Media Wests current and future subsidiaries,
except for Dex Media West Finance Co., jointly and severally
irrevocably and unconditionally guarantees the obligations under
the 5.875% senior notes on a senior, unsecured basis.
Ranking
The 5.875% senior notes and related guarantees are general
senior unsecured obligations of Dex Media West and Dex Media
West Finance Co. and any of their subsidiary guarantors and:
|
|
|
|
|
are effectively subordinated to secured obligations of Dex Media
West and Dex Media West Finance Co. and any of their subsidiary
guarantors to the extent of the value of the assets securing
such obligations;
|
|
|
|
are equal in right of payment to all existing and future
unsecured obligations of Dex Media West and Dex Media West
Finance Co. and any of their subsidiary guarantors that are not,
by their terms, expressly subordinated in right of payment to
the 5.875% senior notes;
|
|
|
|
are effectively senior to all obligations of Dex Media and are
effectively senior to all obligations of RHD, including the
notes.
|
The 5.875% senior notes are not entitled to the benefit of
any sinking fund.
Optional
redemption
The 5.875% senior notes may be redeemed, in whole or in
part, at any time prior to November 15, 2008 at the option
of Dex Media West and Dex Media West Finance Co. at a redemption
price equal to 100% of the principal amount of the
5.875% senior notes redeemed plus any accrued and unpaid
interest and the excess of (1) the present value at the
redemption date of (a) the redemption price of the
5.875% senior notes at November 15, 2008, as set forth
in the table below, plus (b) all required interest payments
due through
175
5.875% senior notes, excluding accrued but unpaid interest,
computed using a discount rate equal to the treasury rate as of
such redemption date plus 50 basis points; over
(2) the then outstanding principal amount of the
5.875% senior notes.
On or after November 15, 2008, Dex Media West and Dex Media
West Finance Co. may redeem all or a part of the
5.875% senior notes at the redemption prices, expressed as
a percentage of the principal amount, set forth in the table
below, plus accrued and unpaid interest, if redeemed during the
twelve-month period beginning on November 15 of the years
indicated below:
|
|
|
|
|
Year
|
|
Percentage
|
|
|
2008
|
|
|
102.938%
|
|
2009
|
|
|
101.469%
|
|
2010 and thereafter
|
|
|
100.000%
|
|
Mandatory
offers to purchase
In the event of a change of control, which is defined in the
indenture governing the 5.875% senior notes, each holder of
the 5.875% senior notes will have the right to require Dex
Media West and Dex Media West Finance Co. to repurchase all or
any part of such holders 5.875% senior notes at a
purchase price in cash equal 101% of the principal amount
thereof, plus accrued and unpaid interest to the date of
purchase.
In addition, certain asset dispositions are triggering events
which may require Dex Media West and Dex Media West Finance Co.
to use the proceeds from those asset dispositions to make an
offer to purchase the 5.875% 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 certain periods to repay certain indebtedness or to
invest in certain assets.
Covenants
The indenture governing the 5.875% senior notes contains
certain covenants that, among other things, limit Dex Media
Wests ability and the ability of some of Dex Media
Wests subsidiaries to:
|
|
|
|
|
incur additional debt;
|
|
|
|
pay dividends on, redeem or purchase capital stock;
|
|
|
|
make certain investments;
|
|
|
|
enter into certain transactions with affiliates;
|
|
|
|
expand into unrelated businesses;
|
|
|
|
create liens;
|
|
|
|
sell certain assets or merge with or into other companies;
|
|
|
|
agree to payment restrictions affecting future restricted
subsidiaries; and
|
|
|
|
designate subsidiaries as unrestricted subsidiaries.
|
Events
of default
The indenture governing the 5.875% senior notes also
provides for events of default which, if any of them occurs,
would permit or require the principal of and accrued interest on
such 5.875% senior notes to become or to be declared to be
due and payable.
176
9.875% senior
subordinated notes
General
Dex Media West and Dex Media West Finance Co. co-issued
$780 million aggregate principal amount of
9.875% senior subordinated notes. The 9.875% senior
subordinated notes mature on August 15, 2013. The
9.875% senior subordinated notes bear cash interest of
9.875% per annum, payable on February 15th and
August 15th of each year. As of March 31, 2008,
$761.7 million aggregate principal amount of the
9.875% senior subordinated notes were outstanding,
excluding fair value adjustments.
Guarantees
Each of Dex Media Wests current and future subsidiaries,
except for Dex Media West Finance Co., jointly and severally
irrevocably and unconditionally guarantees the obligations under
the 9.875% senior subordinated notes on an unsecured,
senior subordinated basis.
Ranking
The 9.875% senior subordinated notes and related guarantees
are general senior subordinated unsecured obligations of Dex
Media West and Dex Media West Finance Co. and any of their
subsidiary guarantees and:
|
|
|
|
|
are subordinated in right of payment to all existing and future
senior obligations and secured obligations of Dex Media West and
Dex Media West Finance Co. and any of their subsidiary
guarantors to the extent of the value of the assets securing
such obligations;
|
|
|
|
are
pari passu
in right of payment with any existing and
future senior subordinated indebtedness of Dex Media West and
Dex Media West Finance Co. and any of their subsidiary
guarantors; and
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are effectively senior to all obligations of Dex Media and are
effectively senior to all obligations of RHD, including the
notes.
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The 9.875% senior subordinated notes are not entitled to
the benefit of any sinking fund.
Optional
redemption
The 9.875% senior subordinated notes may be redeemed, in
whole or in part, at any time prior to August 15, 2008 at
the option of Dex Media West and Dex Media West Finance Co. at a
redemption price equal to 100% of the principal amount of the
9.875% senior subordinated notes redeemed plus any accrued
and unpaid interest and the excess of (1) the present value
at the redemption date of (a) the redemption price of the
9.875% senior subordinated notes at August 15, 2008,
as set forth in the table below, plus (b) all required
interest payments due through 9.875% senior subordinated
notes, excluding accrued but unpaid interest, computed using a
discount rate equal to the treasury rate as of such redemption
date plus 50 basis points; over (2) the then
outstanding principal amount of the 9.875% senior
subordinated notes.
On or after August 15, 2008, Dex Media West and Dex Media
West Finance Co. may redeem all or a part of the
9.875% senior subordinated notes at the redemption prices,
expressed as a percentage of the principal amount, set forth in
the table below, plus accrued and unpaid interest, if redeemed
during the twelve-month period beginning on August 15 of the
years indicated below:
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Year
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Percentage
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2008
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104.938%
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2009
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103.292%
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2010
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101.646%
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2011 and thereafter
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100.000%
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Mandatory
offers to purchase
In the event of a change of control, which is defined in the
indenture governing the 9.875% senior subordinated notes,
each holder of the 9.875% senior subordinated notes will
have the right to require Dex Media West and Dex Media West
Finance Co. to repurchase all or any part of such holders
9.875% senior subordinated notes at a purchase price in
cash equal 101% of the principal amount thereof, plus accrued
and unpaid interest to the date of purchase.
In addition, certain asset dispositions are triggering events
which may require Dex Media West and Dex Media West Finance Co.
to use the proceeds from those asset dispositions to make an
offer to purchase the 9.875% 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 certain periods to repay certain indebtedness or to
invest in certain assets.
Covenants
The indenture governing the 9.875% senior subordinated
notes contains certain covenants that, among other things, limit
Dex Media Wests ability and the ability of some of Dex
Media Wests subsidiaries to:
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incur additional debt;
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pay dividends on, redeem or purchase capital stock;
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make certain investments;
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enter into certain transactions with affiliates;
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expand into unrelated businesses;
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sell certain assets or merge with or into other companies;
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agree to payment restrictions affecting future restricted
subsidiaries; and
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designate subsidiaries as unrestricted subsidiaries.
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Events
of default
The indenture governing the 9.875% senior subordinated
notes also provides for events of default which, if any of them
occurs, would permit or require the principal of and accrued
interest on such 9.875% senior subordinated notes to become
or to be declared to be due and payable.
The Dex
Media credit facilities
General
Unless the context otherwise requires, the description of the
Dex Media credit facilities that appears below refers to both
the Dex Media East credit facility and the Dex Media West credit
facility.
The Dex
Media East credit facility
On October 24, 2007, we replaced the former Dex Media East
credit facility with a new Dex Media East credit facility. The
new Dex Media East credit facility consists 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 revolving loan facility or incur additional term
loans by such amount. The new Dex Media East credit facility is
secured by pledges of similar assets and has similar covenants
and events of default as the former Dex Media East credit
facility.
As of March 31, 2008, the outstanding balances under the
Dex Media East credit facility totaled $1,101.9 million,
comprised of $700.0 million under Term Loan A and
$400.0 million under Term Loan B
178
and $1.9 million was outstanding under the
$100.0 million revolving credit facility (with an
additional $3.0 million utilized under three standby
letters of credit). The new Dex Media East revolving credit
facility and Term Loan A will mature in October 2013, and the
Term Loan B will mature in October 2014. The weighted average
interest rate of outstanding debt under the new Dex Media East
credit facility was 4.75% and 6.87% at March 31, 2008 and
December 31, 2007, respectively.
The former Dex Media East credit facility, as amended and
restated in connection with the Dex Media merger, consisted of
revolving loan commitments and a Term Loan A and Term Loan B. On
October 17, 2007, $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, were repaid
from the proceeds of the notes issued on October 17, 2007.
The Dex
Media West credit facility
On June 6, 2008, we replaced the former Dex Media West
credit facility with a new Dex Media West credit facility. The
new Dex Media West credit facility consists of a
$130.0 million Tranche A Term Loan, a
$950.0 million Tranche B Term Loan and a
$90.0 million revolving credit facility. The new Dex Media
West credit facility also provides for an uncommitted
incremental facility whereby Dex Media West can borrow
additional revolving or term loans in an aggregate amount not to
exceed $400.0 million under certain circumstances, subject
to obtaining commitments for such incremental 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 new Dex Media West revolving credit facility will mature in
October 2013. The Tranche A Term Loan will begin to
amortize on June 30, 2009 and shall thereafter be repayable
in quarterly amounts totaling 10% in the first year thereafter,
15% in the second and third years thereafter, 20% in the fourth
year thereafter and 20% payable on June 30, 2013, with the
remainder being payable on October 24, 2013. The
Tranche B Term Loan will begin to amortize on June 30,
2009, and shall thereafter be repayable in quarterly
installments totaling 1% annually thereafter, with the remainder
being payable on October 24, 2014. Notwithstanding the
foregoing, in the event that more than $25.0 million of Dex
Media Wests 9.875% senior subordinated notes due 2013
(or any refinancing or replacement thereof) are outstanding, the
revolving credit facility and the term loans will mature on the
date that is three months prior to the final maturity date of
such notes.
The proceeds of the term loans were used to refinance the
outstanding term loans under the former Dex Media West credit
facility, with the remainder of the proceeds being used for
general corporate purposes of Dex Media West and its
subsidiaries.
Guarantees
The obligations under the Dex Media East credit facility are
secured and unconditionally and irrevocably guaranteed jointly
and severally by Dex Media East, Inc., Dex Media Easts
existing subsidiaries and each domestic restricted subsidiary
that Dex Media East may create or acquire, with certain
exceptions as set forth in the applicable credit agreement,
pursuant to the terms of a separate guarantee and collateral
agreement. Similarly, the obligations under the Dex Media West
credit facility are secured and unconditionally and irrevocably
guaranteed jointly and severally by Dex Media West, Inc., Dex
Media Wests existing subsidiaries and each domestic
restricted subsidiary that Dex Media West may create or acquire,
with certain exceptions as set forth in the applicable credit
agreement, pursuant to the terms of a separate guarantee and
collateral agreement.
Interest
rates and fees
The Dex Media credit facilities bear interest, at Dex
Medias subsidiaries option, at either:
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a base rate used by JPMorgan Chase Bank, N.A., plus an
applicable margin; or
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a eurocurrency rate on deposits for one, two, three or six-month
periods (or nine or twelve-month periods if, at the time of the
borrowing, all lenders agree to make such a duration available),
plus an applicable margin.
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179
In addition to paying interest on outstanding principal amounts
under the Dex Media credit facilities, Dex Medias
subsidiaries are required to pay a commitment fee to the lenders
for the unused commitments under their respective revolving loan
commitments, which is payable quarterly in arrears.
Security
interests
Borrowings under the Dex Media credit facilities, the guarantees
described above and obligations under related hedging agreements
are secured by a perfected security interest in:
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in the case of the Dex Media East credit facility, all of the
tangible and intangible assets of each of Dex Media East, Inc.,
Dex Media East and each of their respective existing and future
direct and indirect restricted subsidiaries, with certain
exceptions as set forth in the Dex Media East credit
facility; and
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in the case of the Dex Media West credit facility, all of the
tangible and intangible assets of each of Dex Media West, Inc.,
Dex Media West and each of their respective existing and future
direct and indirect restricted subsidiaries, with certain
exceptions as set forth in the Dex Media West credit facility.
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Mandatory
and optional repayment
The borrower under the Dex Media credit facilities is required
to make scheduled principal repayments each quarter under the
applicable credit agreement. Subject to exceptions for
reinvestment of proceeds and other exceptions and materiality
thresholds, each such borrower is required to prepay outstanding
loans under its respective credit facility with the net proceeds
of certain asset dispositions and excess cash flow.
Covenants
The Dex Media credit facilities contain negative and affirmative
covenants and requirements affecting Dex Media
and/or
its
existing and future subsidiaries. The Dex Media credit
facilities contain the following negative covenants and
restrictions, among others, restrictions on liens,
sale-leaseback transactions, debt, dividends and other
restricted junior payments, redemptions and stock repurchases,
consolidations and mergers, acquisitions, asset dispositions,
investments, loans, advances, changes in line of business,
changes in fiscal year, restrictive agreements with
subsidiaries, transactions with affiliates, amendments to
charter, by-laws and other material documents, hedging
agreements, intercompany indebtedness, and commingling of
certain funds. The Dex Media credit facilities also require Dex
Medias existing and future subsidiaries, with certain
exceptions set forth in the applicable credit agreements, to
meet certain financial covenants and ratios, in particular
leverage ratios and interest coverage ratios.
The Dex Media credit facilities contain the following
affirmative covenants, among others: delivery of financial and
other information to the administrative agent, notice to the
administrative agent upon the occurrence of certain events of
default, material litigation and other events, conduct of
business and existence, payment of obligations, maintenance of
properties, licenses and insurance, access to books and records
by the lenders, compliance with laws, use of proceeds, further
assurances, maintenance of collateral and maintenance of
interest rate protection agreements.
Events of
default
The Dex Media credit facilities contain various events of
default, including but not limited to, failure to pay principal,
interest or fees, violation of covenants, material inaccuracy of
representations and warranties, cross-defaults and
cross-accelerations in other material agreements, certain
bankruptcy and insolvency events, certain ERISA events, certain
undischarged judgments, change of control, invalidity of the
liens, invalidity of guarantees or security documents and
material breach of, or loss of right under, agreements with
Qwest that result in a material adverse effect on Dex Media
East, Inc. or Dex Media West, Inc. and their respective
subsidiaries, as the case may be.
180
The
exchange offer
Purpose
and effect of the exchange offer
On October 2, 2007 and October 17, 2007, we sold
$1 billion and $500 million, respectively, aggregate
principal amount of the outstanding notes in a private placement
through initial purchasers to a limited number of
Qualified Institutional Buyers, as defined under the
Securities Act. In connection with each sale of the notes, we
and the initial purchasers entered into registration rights
agreements, dated as of October 2, 2007 and
October 17, 2007, respectively. Under those agreements, we
must, among other things, file with the SEC a registration
statement under the Securities Act covering the exchange offer
and use our reasonable best efforts to cause that registration
statement to become effective under the Securities Act. Upon the
effectiveness of that registration statement, we must offer each
holder of the notes the opportunity to exchange its notes for an
equal principal amount of exchange notes. You are a holder with
respect to the exchange offer if you are a person in whose name
any outstanding notes are registered on our books or any other
person who has obtained a properly completed assignment of
outstanding notes from the registered holder.
We are making the exchange offer to comply with our obligations
under the registration rights agreements. A copy of each of the
registration rights agreements is an exhibit to our Current
Report on
Form 8-K
filed on October 5, 2007 and October 17, 2007,
respectively.
In order to participate in the exchange offer, you must
represent to us, among other things, that:
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you are acquiring the exchange notes under the exchange offer in
the ordinary course of your business;
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you are not engaged in, and do not intend to engage in, a
distribution of the exchange notes;
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you do not have any arrangement or understanding with any person
to participate in the distribution of the exchange notes;
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you are not a broker-dealer tendering outstanding notes acquired
directly from us for your own account;
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you are not one of our affiliates, as defined in
Rule 405 of the Securities Act; and
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you are not prohibited by law or any policy of the SEC from
participating in the exchange offer.
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Resale of
the exchange notes
Based on a previous interpretation by the Staff of the SEC set
forth in no-action letters issued to third parties, including
Exxon Capital Holdings Corporation (available May 13,
1988), Morgan Stanley & Co. Incorporated (available
June 5, 1991), Mary Kay Cosmetics, Inc. (available
June 5, 1991), Warnaco, Inc. (available October 11,
1991), and K-III Communications Corp. (available May 14,
1993), we believe that the exchange notes issued in the exchange
offer may be offered for resale, resold and otherwise
transferred by you, except if you are an affiliate of us,
without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that the
representations set forth in Purpose and
effect of the exchange offer apply to you.
If you tender in the exchange offer with the intention of
participating in a distribution of the exchange notes, you
cannot rely on the interpretation by the Staff of the SEC as set
forth in the Morgan Stanley & Co. Incorporated
no-action letter and other similar letters and you must comply
with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale
transaction. If our belief regarding resale is inaccurate, those
who transfer exchange notes in violation of the prospectus
delivery provisions of the Securities Act and without an
exemption from registration under the federal securities laws
may incur liability under these laws. We do not assume or
indemnify you against this liability.
The exchange offer is not being made to, nor will we accept
surrenders for exchange from, holders of outstanding notes in
any jurisdiction in which the exchange offer or the acceptance
thereof would not be in compliance with the securities or blue
sky laws of the particular jurisdiction. Each broker-dealer that
receives exchange notes for its own account in exchange for
outstanding notes, where the outstanding notes were acquired by
that broker-dealer as a result of market-making activities or
other trading activities, must
181
acknowledge that it will deliver a prospectus in connection with
any resale of the exchange notes. For additional information,
see Plan of distribution. In order to facilitate the
disposition of exchange notes by broker-dealers participating in
the exchange offer, we have agreed, subject to specific
conditions, to make this prospectus, as it may be amended or
supplemented from time to time, available for delivery by those
broker-dealers to satisfy their prospectus delivery obligations
under the Securities Act. Any holder that is a broker-dealer
participating in the exchange offer must notify the exchange
agent at the telephone number set forth in the enclosed letter
of transmittal and must comply with the procedures for
broker-dealers participating in the exchange offer. We have not
entered into any arrangement or understanding with any person to
distribute the exchange notes to be received in the exchange
offer.
Terms of
the exchange offer
Upon the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal, we will accept any
and all outstanding notes validly tendered and not withdrawn
prior to 8:00 a.m., New York City time, on the day the
exchange offer expires.
As of the date of this prospectus, $1,235.3 million aggregate
principal amount of the notes is outstanding. This prospectus,
together with the letter of transmittal, is being sent to all
registered holders of the outstanding notes on this date. There
will be no fixed record date for determining registered holders
of the outstanding notes entitled to participate in the exchange
offer; however, holders of the outstanding notes must tender
their certificates therefor or cause their outstanding notes to
be tendered by book-entry transfer before the expiration date of
the exchange offer to participate.
The form and terms of the exchange notes will be the same as the
form and terms of the outstanding notes except that the exchange
notes will be registered under the Securities Act and therefore
will not bear legends restricting their transfer. Following
consummation of the exchange offer, all rights under the
registration rights agreements accorded to holders of
outstanding notes, including the right to receive additional
interest on the outstanding notes, to the extent and in the
circumstances specified in the registration rights agreements,
will terminate.
We intend to conduct the exchange offer in accordance with the
provisions of the registration rights agreements and applicable
federal securities laws. Outstanding notes that are not tendered
for exchange under the exchange offer will remain outstanding
and will be entitled to the rights under the indenture. Any
outstanding notes not tendered for exchange will not retain any
rights under the applicable registration rights agreement and
will remain subject to transfer restrictions. For additional
information, see Consequences of failure to
exchange.
We will be deemed to have accepted validly tendered outstanding
notes when, as and if we will have given oral or written notice
of its acceptance to the exchange agent. The exchange agent will
act as agent for the tendering holders for the purposes of
receiving the exchange notes from us. If any tendered
outstanding notes are not accepted for exchange because of an
invalid tender, the occurrence of other events set forth in this
prospectus, or otherwise, certificates for any unaccepted
outstanding notes will be promptly returned, or, in the case of
outstanding notes tendered by book-entry transfer, those
unaccepted outstanding notes will be credited to an account
maintained with The Depository Trust Company, without
expense to the tendering holder of those outstanding notes
promptly after the expiration date of the exchange offer. For
additional information, see Procedure for
tendering.
Those who tender outstanding notes in the exchange offer will
not be required to pay brokerage commissions or fees or, subject
to the instructions in the letter of transmittal, transfer taxes
with respect to the exchange under the exchange offer. We will
pay all charges and expenses, other than applicable taxes
described below, in connection with the exchange offer. For
additional information, see Fees and
expenses.
182
Expiration
Date; Extensions; Amendments
The expiration date is 8:00 a.m., New York City time, on
July 25, 2008, unless we, in our sole discretion, extend
the exchange offer, in which case, the expiration date will be
the latest date and time to which the exchange offer is
extended. We may, in our sole discretion, extend the expiration
date of the exchange offer or, upon the occurrence of particular
events, terminate the exchange offer. The events that would
cause us to terminate the exchange offer are set forth under
Conditions.
To extend the exchange offer, we must notify the exchange agent
by oral or written notice before 9:00 a.m., New York City
time, on the next business day after the previously scheduled
expiration date and make a public announcement of the extension.
We reserve the right:
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to extend the exchange offer or to terminate the exchange offer
if any of the conditions set forth below under
Conditions are not satisfied by giving
oral or written notice of the delay, extension or termination to
the exchange agent; or
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to amend the terms of the exchange offer in any manner
consistent with the registration rights agreements.
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Any delay in acceptances, extension, termination or amendment
will be followed as promptly as practicable by notice of the
delay to the registered holders of the outstanding notes. If we
amend the exchange offer in a manner that constitutes a material
change, we will promptly disclose the amendment by means of a
prospectus supplement that will be distributed to the registered
holders of the outstanding notes, and we will extend the
exchange offer for a period of up to ten business days,
depending on the significance of the amendment and the manner of
disclosure to the registered holders of the outstanding notes,
if the exchange offer would otherwise expire during that
extension period.
Without limiting the manner in which we may choose to make a
public announcement of any delay, extension, amendment or
termination of the exchange offer, we will have no obligation to
publish, advertise or otherwise communicate that public
announcement, other than by making a timely release to an
appropriate news agency.
When all the conditions to the exchange offer have been
satisfied or waived, we will accept, promptly after the
expiration date of the exchange offer, all outstanding notes
properly tendered and will issue the exchange notes promptly
after the expiration date of the exchange offer. For additional
information, see Conditions below. For
purposes of the exchange offer, we will be deemed to have
accepted properly tendered outstanding notes for exchange when,
as and if we will have given oral or written notice of our
acceptance to the exchange agent.
In all cases, issuance of the exchange notes for outstanding
notes that are accepted for exchange under the exchange offer
will be made only after timely receipt by the exchange agent of
certificates for those outstanding notes or a timely
confirmation of book-entry transfer of the outstanding notes
into the exchange agents account at The Depository
Trust Company, a properly completed and duly executed
letter of transmittal, and all other required documents;
provided, however, that we reserve the absolute right to waive
any defects or irregularities in the tender of outstanding notes
or in the satisfaction of conditions of the exchange offer by
holders of the outstanding notes. If any tendered outstanding
notes are not accepted for any reason set forth in the terms and
conditions of the exchange offer, if the holder withdraws any
previously tendered outstanding notes, or if outstanding notes
are submitted for a greater principal amount of outstanding
notes than the holder desires to exchange, then the unaccepted,
withdrawn or portion of non-exchanged outstanding notes, as
appropriate, will be returned promptly after the expiration or
termination of the exchange offer, or, in the case of the
outstanding notes tendered by book-entry transfer, those
unaccepted, withdrawn or portion of non-exchanged outstanding
notes, as appropriate, will be credited to an account maintained
with The Depository Trust Company, without expense to the
tendering holder.
183
Conditions
Without regard to other terms of the exchange offer, we will not
be required to exchange any exchange notes for any outstanding
notes and may terminate the exchange offer before the acceptance
of any outstanding notes for exchange and before the expiration
of the exchange offer, if:
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any action or proceeding is instituted or threatened in any
court or by or before any governmental agency with respect to
the exchange offer that, in our reasonable judgment, might
materially impair our ability to proceed with the exchange offer;
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the Staff of the SEC proposes, adopts or enacts any law,
statute, rule or regulation or issues any interpretation of any
existing law, statute, rule or regulation that, in our
reasonable judgment, might materially impair our ability to
proceed with the exchange offer; or
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any governmental approval or approval by holders of the
outstanding notes has not been obtained if we, in our reasonable
judgment, deem this approval necessary for the consummation of
the exchange offer.
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If we determine that any of these conditions are not satisfied,
we may:
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refuse to accept any outstanding notes and return all tendered
outstanding notes to the tendering holders, or, in the case of
outstanding notes tendered by book-entry transfer, credit those
outstanding notes to an account maintained with The Depository
Trust Company;
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extend the exchange offer and retain all outstanding notes
tendered before the expiration of the exchange offer, subject,
however, to the rights of holders who tendered the outstanding
notes to withdraw their outstanding notes; or
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waive unsatisfied conditions with respect to the exchange offer
and accept all properly tendered outstanding notes that have not
been withdrawn. If the waiver constitutes a material change to
the exchange offer, we will promptly disclose the waiver by
means of a prospectus supplement that will be distributed to the
registered holders of the outstanding notes, and we will extend
the exchange offer for a period of up to ten business days,
depending on the significance of the waiver and the manner of
disclosure of the registered holders of the outstanding notes,
if the exchange offer would otherwise expire during this period.
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Procedure
for tendering
To tender in the exchange offer, you must complete, sign and
date an original or facsimile letter of transmittal, have the
signatures guaranteed if required by the letter of transmittal,
and mail or otherwise deliver the letter of transmittal to the
exchange agent before the expiration date of the exchange offer.
You may also tender your outstanding notes by means of The
Depository Trust Companys Automatic Tenders Over the
Participant Terminal System, or ATOP, subject to the terms and
procedures of that system. If delivery is made through ATOP, you
must transmit any agents message to the exchange agent
account at The Depository Trust Company. The term
agents message means a message, transmitted to
The Depository Trust Company and received by the exchange
agent and forming a part of a book-entry transfer, that states
that The Depository Trust Company has received an express
acknowledgement that you agree to be bound by the letter of
transmittal and that we may enforce the letter of transmittal
against you. In addition:
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the exchange agent must receive certificates, if any, for the
outstanding notes, along with the letter of transmittal;
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the exchange agent must receive a timely confirmation of the
transfer by book-entry of those outstanding notes before the
expiration of the exchange offer, if the book-entry procedure is
available, into the exchange agents account at The
Depository Trust Company, as set forth in the procedure for
book-entry transfer described below; or
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you must comply with the guaranteed delivery procedures
described below.
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184
To be tendered effectively, the exchange agent must receive the
letter of transmittal and other required documents at the
address set forth below under Exchange
agent before the expiration of the exchange offer.
If you tender your outstanding notes and do not withdraw them
before the expiration date of the exchange offer, you will be
deemed to have an agreement with us in accordance with the terms
and subject to the conditions set forth in this prospectus and
in the letter of transmittal.
The method of delivery of outstanding notes and the letter of
transmittal and all other required documents to the exchange
agent is at your risk. Instead of delivery by mail, we recommend
that you use an overnight or hand delivery service, properly
insured. In all cases, you should allow sufficient time to
ensure delivery to the exchange agent before the expiration date
of the exchange offer. You should not send your letter of
transmittal or outstanding notes to us. You may request your
respective broker, dealers, commercial banks, trust companies or
nominees to effect the above transactions for you.
Any beneficial owner whose outstanding notes are registered in
the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender its outstanding notes
should contact the registered holder promptly and instruct that
registered holder to tender the outstanding notes on the
beneficial owners behalf. If the beneficial owner wishes
to tender its outstanding notes on the owners own behalf,
that owner must, before completing and executing the letter of
transmittal and delivering its outstanding notes, either make
appropriate arrangements to register ownership of the
outstanding notes in that owners name or obtain a properly
completed assignment from the registered holder. The transfer of
registered ownership of outstanding notes may take considerable
time.
Signatures on a letter of transmittal or a notice of withdrawal
must be guaranteed by an eligible institution unless the related
outstanding notes tendered are tendered:
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by a registered holder who has not completed the box entitled
Special Payment Instructions or Special
Delivery Instructions on the letter of transmittal; or
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for the account of an eligible institution.
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if signatures on a letter of transmittal or a notice of
withdrawal are required to be guaranteed, each of the following
is deemed an eligible institution:
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a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc.;
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a commercial bank;
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a trust company having an officer or correspondent in the United
States; or
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an eligible guarantor institution as provided by
Rule 17Ad-15
of the Exchange Act.
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If the letter of transmittal is signed by a person other than
the registered holder of any outstanding notes, the outstanding
notes must be endorsed or accompanied by a properly completed
bond power, signed by the registered holder as his, her or its
name appears on the outstanding notes.
If trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in
a fiduciary or representative capacity sign the letter of
transmittal or any outstanding notes or bond power, those
persons should so indicate when signing, and evidence
satisfactory to us of their authority to so act must be
submitted with the letter of transmittal unless we waive such
requirement.
We will determine all questions as to the validity, form,
eligibility, including time of receipt, acceptance of tendered
outstanding notes, and withdrawal of tendered outstanding notes,
in our sole discretion. All of these determinations by us will
be final and binding. We reserve the absolute right to reject
any and all outstanding notes not properly tendered or any
outstanding notes our acceptance of which would, in the opinion
of our counsel, be unlawful. We also reserve the right to waive
any defects, irregularities or conditions of tender as to
particular outstanding notes. Our interpretation of the terms
and conditions of the exchange offer, including the instructions
in the letter of transmittal, will be final and binding on all
parties. Unless
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waived, any defects or irregularities in connection with tenders
of outstanding notes must be cured within the time we determine.
Although we intend to notify holders of outstanding notes of
defects or irregularities with respect to tenders of outstanding
notes, neither we, nor the exchange agent, nor any other person
will incur any liability for failure to give this notification.
Tenders of outstanding notes will not be deemed to have been
made until defects or irregularities have been cured or waived.
Any outstanding notes received by the exchange agent that are
not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by
the exchange agent to the tendering holders of outstanding
notes, unless otherwise provided in the letter of transmittal,
promptly following the expiration date of the exchange offer.
In addition, we reserve the right, in our sole discretion, to
purchase or make offers for any outstanding notes that remain
outstanding subsequent to the expiration date of the exchange
offer or, as set forth above under
Conditions, to terminate the exchange
offer and, to the extent permitted by applicable law and the
terms of our agreements relating to our outstanding debt,
purchase outstanding notes in the open market, in privately
negotiated transactions or otherwise. The terms of any purchases
or offers could differ from the terms of the exchange offer.
If the holder of outstanding notes is a broker-dealer
participating in the exchange offer that will receive exchange
notes for its own account in exchange for outstanding notes that
were acquired as a result of market-making activities or other
trading activities, that broker-dealer will be required to
acknowledge in the letter of transmittal that it will deliver a
prospectus in connection with any resale of the exchange notes
and otherwise agree to comply with the procedures described
above under Resale of the exchange
notes; however, by so acknowledging and delivering a
prospectus, that broker-dealer will not be deemed to admit that
it is an underwriter within the meaning of the
Securities Act.
In all cases, issuance of exchange notes under the exchange
offer will be made only after timely receipt by the exchange
agent of certificates for the outstanding notes or a timely
confirmation of book-entry transfer of outstanding notes into
the exchange agents account at The Depository
Trust Company, a properly completed and duly executed
letter of transmittal, and all other required documents. If any
tendered outstanding notes are not accepted for any reason set
forth in the terms and conditions of the exchange offer or if
outstanding notes are submitted for a greater principal amount
of outstanding notes than the holder of the outstanding notes
desires to exchange, the unaccepted or portion of non-exchanged
outstanding notes will be returned as promptly as practicable
after the expiration or termination of the exchange offer, or,
in the case of outstanding notes tendered by book-entry transfer
into the exchange agents account at The Depository
Trust Company pursuant to the book-entry transfer
procedures described below, the unaccepted or portion of
non-exchanged outstanding notes will be credited to an account
maintained with The Depository Trust Company, without
expense to the tendering holder of outstanding notes.
Book-entry
transfer
The exchange agent will make a request to establish an account
with respect to the outstanding notes at The Depository
Trust Company for the purposes of the exchange offer within
two business days after the date of this prospectus, and any
financial institution that is a participant in The Depository
Trust Companys system may make book-entry delivery of
outstanding notes by causing The Depository Trust Company
to transfer the outstanding notes into the exchange agents
account at The Depository Trust Company in accordance with
The Depository Trust Companys procedures for
transfer. However, although delivery of outstanding notes may be
effected through book-entry transfer at The Depository
Trust Company, the letter of transmittal or facsimile
thereof, with any required signature guarantees and any other
required documents, must, in any case, be transmitted to and
received by the exchange agent at the address set forth below
under Exchange agent on or before the
expiration date of the exchange offer, unless the holder either
(1) complies with the guaranteed delivery procedures
described below or (2) sends an agents message
through ATOP.
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Guaranteed
delivery procedures
Holders who wish to tender their outstanding notes and
(1) whose outstanding notes are not immediately available
or (2) who cannot deliver their outstanding notes, the
letter of transmittal or any other required documents to the
exchange agent prior to the expiration date, may effect a tender
if:
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the tender is made through an eligible institution;
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before the expiration date of the exchange offer, the exchange
agent receives from the eligible institution a properly
completed and duly executed notice of guaranteed delivery, by
facsimile transmission, mail or hand delivery, setting forth the
name and address of the holder, the certificate number(s) of the
outstanding notes and the principal amount of outstanding notes
tendered and stating that the tender is being made thereby and
guaranteeing that, within three New York Stock Exchange trading
days after the expiration of the exchange offer, the letter of
transmittal, together with the certificate(s) representing the
outstanding notes in proper form for transfer or a confirmation
of book-entry transfer, as the case may be, and any other
documents required by the letter of transmittal will be
deposited by the eligible institution with the exchange
agent; and
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the exchange agent receives the properly completed and executed
letter of transmittal, as well as the certificate(s)
representing all tendered outstanding notes in proper form for
transfer and other documents required by the letter of
transmittal within three New York Stock Exchange trading days
after the expiration date of the exchange offer.
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Upon request to the exchange agent, a notice of guaranteed
delivery will be sent to holders who wish to tender their
outstanding notes according to the guaranteed delivery
procedures set forth above.
Withdrawal
of tenders
Except as otherwise provided, tenders of outstanding notes may
be withdrawn at any time before 8:00 a.m., New York City
time, on the expiration date of the exchange offer. To withdraw
a tender of outstanding notes in the exchange offer, a written
or facsimile transmission notice of withdrawal must be received
by the exchange agent at its address set forth herein prior to
8:00 a.m., New York City time, on the expiration date of
the exchange offer. Any notice of withdrawal must:
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specify the name of the person who deposited the outstanding
notes to be withdrawn;
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identify the outstanding notes to be withdrawn;
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be signed by the holder in the same manner as the original
signature on the letter of transmittal by which the outstanding
notes were tendered or be accompanied by documents of transfer
sufficient to have the exchange agent register the transfer of
the outstanding notes in the name of the person withdrawing the
tender; and
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specify the name in which any outstanding notes are to be
registered, if different from the name of the person who
deposited the outstanding notes to be withdrawn.
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We will determine all questions as to the validity, form and
eligibility of the notices, which determinations will be final
and binding on all parties. Any outstanding notes withdrawn will
be deemed not to have been validly tendered for purposes of the
exchange offer, and no exchange notes will be issued with
respect to those outstanding notes unless the outstanding notes
withdrawn are validly retendered.
Any outstanding notes that have been tendered but that are not
accepted for payment will be returned to the holder of those
outstanding notes, or in the case of outstanding notes tendered
by book-entry transfer, will be credited to an account
maintained with The Depository Trust Company, without cost
to the holder promptly after withdrawal, rejection of tender or
termination of the exchange offer. Properly withdrawn
outstanding notes may be retendered by following one of the
procedures described above under Procedure for
tendering at any time prior to the expiration date of the
exchange offer.
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Termination
of certain rights
All rights given to holders of outstanding notes under the
registration rights agreements will terminate upon the
consummation of the exchange offer except with respect to our
duty:
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to use reasonable best efforts to keep the registration
statement continuously effective during the
180-day
period following the closing of the exchange offer; and
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to provide copies of the latest version of this prospectus to
any broker-dealer that requests copies of this prospectus for
use in connection with any resale by that broker-dealer of
exchange notes received for its own account pursuant to the
exchange offer in exchange for outstanding notes acquired for
its own account as a result of market-making or other trading
activities, subject to the conditions described above under
Resale of the exchange notes.
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Exchange
agent
The Bank of New York has been appointed exchange agent for the
exchange offer. Questions and requests for assistance, requests
for additional copies of this prospectus or the letter of
transmittal, and requests for copies of the notice of guaranteed
delivery with respect to the outstanding notes should be
addressed to the exchange agent as follows:
By Hand or Overnight Delivery:
The Bank of New York/Mellon Corporation
Corporate Trust Operations
Reorganization Unit
101 Barclay Street 7 East
New York, New York 10286
Attention: Mrs. Evangeline R. Gonzales
By Registered or Certified Mail:
The Bank of New York/Mellon Corporation
Corporate Trust Operations
Reorganization Unit
101 Barclay Street 7 East
New York, New York 10286
Attention: Mrs. Evangeline R. Gonzales
By Facsimile (for Eligible Institutions only):
(212) 298-1915
By Telephone (to confirm receipt of facsimile): (212) 815-3738
Fees and
expenses
We will pay the expenses of soliciting tenders in connection
with the exchange offer. The principal solicitation is being
made by mail; however, additional solicitation may be made by
telecopier, telephone or in person by our officers and regular
employees and by officers and regular employees of our
affiliates.
We have not retained any dealer-manager in connection with the
exchange offer and will not make any payments to broker-dealers
or others soliciting acceptances of the exchange offer. We, will
however, pay the exchange agent reasonable and customary fees
for its services and will reimburse the exchange agent for its
reasonable out-of-pocket expenses in connection with the
exchange offer.
We estimate that our cash expenses in connection with the
exchange offer will be approximately $275,000. These expenses
include registration fees, fees and expenses of the exchange
agent, accounting and legal fees, and printing costs, among
others.
We will pay all transfer taxes, if any, applicable to the
exchange of the outstanding notes for exchange notes. The
tendering holder of outstanding notes, however, will pay
applicable taxes if certificates representing
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outstanding notes not tendered or accepted for exchange are to
be delivered to, or are to be issued in the name of, any person
other than the registered holder of outstanding notes tendered,
or:
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if tendered, the certificates representing outstanding notes are
registered in the name of any person other than the person
signing the letter of transmittal; or
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if a transfer tax is imposed for any reason other than the
exchange of the outstanding notes in the exchange offer.
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If satisfactory evidence of payment of the transfer taxes or
exemption from payment of transfer taxes is not submitted with
the letter of transmittal, the amount of the transfer taxes will
be billed directly to the tendering holder and the exchange
notes need not be delivered until the transfer taxes are paid.
Consequences
of failure to exchange
Participation in the exchange offer is voluntary. Holders of the
outstanding notes are urged to consult their financial and tax
advisors in making their own decisions on what action to take.
Outstanding notes that are not exchanged for the exchange notes
in the exchange offer will have only limited remaining rights
under the registration rights agreements and will remain
restricted securities for purposes of the federal securities
laws. Accordingly, such outstanding notes may not be offered,
sold, pledged or otherwise transferred except:
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to us or any of our subsidiaries;
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to a Qualified Institutional Buyer within the
meaning of Rule 144A under the Securities Act purchasing for its
own account or for the account of a qualified institutional
buyer in a transaction meeting the requirements of
Rule 144A;
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under an exemption from registration under the Securities Act
provided by Rule 144, if available;
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under an exemption from registration under the Securities Act
provided by Rule 904, if available; or
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under an effective registration statement under the Securities
Act,
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and in each case, in accordance with all other applicable
securities laws and the terms of the indenture governing the
outstanding notes.
Accounting
treatment
For accounting purposes, we will recognize no gain or loss as a
result of the exchange offer. The exchange notes will be
recorded at the same carrying value as the outstanding notes, as
reflected in our accounting records on the date of the exchange.
The expenses of the exchange offer will be amortized over the
remaining term of the exchange notes.
No
appraisal or dissenters rights
In connection with the exchange offer, you do not have any
appraisal or dissenters rights under the General
Corporation Law of the State of Delaware or the indenture
governing the notes. We intend to conduct the exchange offer in
accordance with the registration rights agreements, the
applicable requirements of the Exchange Act and the rules and
regulations of the SEC related to exchange offers.
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Description
of notes
You can find the definitions of certain terms used in this
description under the heading Certain
definitions. Defined terms used in this description but
not defined under the heading Certain
definitions or elsewhere in this description have the
meanings assigned to them in the Indenture (as defined below).
For purposes of this description, unless otherwise indicated,
references to RHD, we, our
and us refer only to R.H. Donnelley Corporation and
not its subsidiaries.
The notes were issued by R.H. Donnelley Corporation
(RHD) under an indenture (the Indenture)
between RHD and The Bank of New York, as trustee (the
Trustee), in private transactions that were not
subject to the registration requirements of the Securities Act.
The $1,000.0 million aggregate principal amount of notes
(the October 2 Notes) issued by RHD under the
Indenture on October 2, 2007 were the same series of notes
as the $500.0 million aggregate principal amount of notes
(the October 17 Notes) issued by RHD under the
Indenture on October 17, 2007. The terms of the
$500.0 million aggregate principal amount of the October 17
Notes are substantially identical in all respects to the October
2 Notes, except for the issue price and the issue date, and the
October 2 Notes and the October 17 Notes are treated as a single
class for all purposes of the Indenture, including, without
limitation, waivers, amendments, redemptions and offers to
purchase. The October 2 Notes have the same CUSIP number as the
October 17 Notes and trade as a single class of Notes. All
references in this section to Notes include the
October 2 Notes, the October 17 Notes and the exchange notes,
unless the context otherwise requires.
The following description is a summary of the material
provisions of the Indenture. It does not restate that agreement
in its entirety. We urge you to read the Indenture because it
may contain additional information and define your rights as a
noteholder. Copies of the Indenture and Registration Rights
Agreements are available upon request to RHD at the address
indicated under Additional information.
The Indenture and the Registration Rights Agreements contain
provisions which define your rights under the Notes. The terms
of the Notes include those stated in the Indenture and, upon
effectiveness of a registration statement with respect to the
Notes, those made part of the Indenture by reference to the
Trust Indenture Act of 1939.
We may, subject to compliance with the covenant described under
Certain covenants Limitation on Debt as
well as with the other covenants in the Indenture which are
described under Certain covenants, issue additional
Notes (the Additional Notes) in an unlimited
aggregate principal amount at any time and from time to time
under the Indenture. Any Additional Notes that we issue in the
future will be substantially identical in all respects to the
October 2 Notes and the October 17 Notes, and will be treated as
a single class for all purposes of the Indenture, including,
without limitation, waivers, amendments, redemptions and offers
to purchase, except that Additional Notes issued in the future
may have different issuance prices and will have different
issuance dates. We will issue Notes only in fully registered
form without coupons, in denominations of $2,000 and larger
integral multiples of $1,000.
Principal,
maturity and interest
The Notes will mature on October 15, 2017. The aggregate
principal amount of Notes is currently $1,235.3 million,
which may increase if we were to issue Additional Notes.
Interest on the Notes accrues at a rate of 8.875% per annum and
is payable semi-annually in arrears on April 15 and
October 15, commencing on April 15, 2008. We will pay
interest to those persons who are holders of record on April 1
or October 1 immediately preceding each interest payment date.
Interest on the Notes accrues from October 2, 2007, or, if
interest has already been paid, from the date it was most
recently paid. Interest is computed on the basis of a
360-day
year
comprised of twelve
30-day
months.
Methods
of receiving payments on the Notes
If a holder has given wire transfer instructions to RHD, all
principal, interest and additional interest, if any, on that
holders Notes will be paid in accordance with those
instructions. All other payments on the Notes
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will be made at the office or agency of the paying agent and
registrar unless RHD elects to make interest payments by check
mailed to the holders at their address set forth in the register
of holders.
Paying
agent and registrar
The Trustee will initially act as paying agent and registrar.
RHD may change the paying agent or registrar for the Notes
without prior notice to the holders of the Notes. RHD or any of
its Subsidiaries may act as paying agent or registrar.
Holding
company structure
RHD is a holding company and does not have any material assets
or operations other than ownership of the Capital Stock of its
subsidiaries, including RHDI Capital Stock and Dex Media Capital
Stock. All of its operations are conducted through its
Subsidiaries. As a result, RHD depends on the cash flow of its
Subsidiaries to meet its obligations, including its obligations
under the Notes. Claims of creditors of such Subsidiaries,
including trade creditors, and claims of preferred stockholders,
if any, of such Subsidiaries generally will have priority with
respect to the assets and earnings of such Subsidiaries over the
claims of RHDs creditors, including holders of the Notes.
The Notes, therefore, are structurally subordinated to
creditors, including trade creditors, and preferred
stockholders, if any, of our Subsidiaries, including RHDI and
Dex Media. The terms of the Subsidiary Credit Facilities and the
indentures governing the Dex Medias Subsidiaries Existing
Notes and other Subsidiaries indebtedness significantly
restrict the Subsidiaries from making distributions or loans or
otherwise transferring assets to RHD unless certain covenants
are satisfied. See Description of other
indebtedness. The laws under which the Subsidiaries are
organized may similarly restrict or prohibit the Subsidiaries
from making distributions or otherwise transferring assets to
RHD and the indenture governing the Notes will not contain
provisions that significantly limit the ability of the
Subsidiaries to enter into additional agreements or incur Debt
or other obligations in the future that contain similar
restrictions. In addition to limitations on the ability of the
Subsidiaries to make distributions or loans or otherwise
transfer assets to RHD, the terms of the Credit Facilities, the
indentures governing the Existing Notes and Subsidiaries
other Debt and any future agreements of RHD or its Subsidiaries
may prohibit or limit the ability of RHD or its Subsidiaries to,
among other things, dispose of assets, including the stock of
RHDs Subsidiaries, incur additional indebtedness, issue
equity securities or enter into other transactions that could
provide funds for making payments on the Notes. In addition,
even if such transactions were permitted, the ability of RHD to
use the proceeds therefrom to make payments on the Notes may be
prohibited or limited. Moreover, the indentures governing the
Notes and the RHD Existing Senior Notes do not impose any
limitation on the incurrence by the Restricted Subsidiaries of
liabilities that are not considered Debt under such indentures.
See Risk factors.
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. This includes $1,235.3 million of the
Notes, $2,144.9 million of the RHD Existing Notes,
approximately $1,920.5 million of debt at RHDI (which is
comprised of the RHDI notes and borrowings under the RHDI Credit
Facility) and approximately $4,656.5 million of debt at Dex
Media and its subsidiaries (which is comprised of
$1,101.9 million under the Dex Media East Credit Facility,
$1,080.0 million under the Dex Media West Credit Facility,
$1,245.5 million of Dex Media Existing Notes and
$1,229.1 million of Dex Media Subsidiaries Existing Notes,
including $99.5 million of fair market value adjustments
required by purchase accounting). All such debt of RHDI and its
Subsidiaries and Dex Media and its subsidiaries is structurally
senior to the Notes and the RHD Existing Notes. An additional
$174.7 million would have been available to RHDI for
revolver borrowings under the RHDI Credit Facility and
$95.1 million and $94.9 million would have been
available to Dex Media for revolver borrowings under the Dex
Media East Credit Facility and Dex Media West Credit Facility,
respectively. Borrowings under the Subsidiary Credit Facilities
are secured and structurally senior to the Notes and the RHD
Existing Notes. The borrowings under the RHDI Credit Facility
are secured by a pledge of the stock of RHDI and substantially
all the assets of RHDI and its Subsidiaries, the borrowings
under the Dex Media East Credit Facility are secured by a pledge
of the stock of Dex Media East and substantially all the assets
of Dex Media East and its Subsidiaries, and the
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borrowings under the Dex Media West Credit Facility are secured
by a pledge of the stock of Dex Media West and substantially all
the assets of Dex Media West and its Subsidiaries.
The terms of the Subsidiary Credit Facilities and the indentures
governing the Existing Notes, other than the RHD Existing Notes,
significantly restrict the Subsidiaries from paying dividends
and otherwise transferring assets to RHD. There are no specific
exceptions in such Debt to this restriction on making restricted
payments that would permit funds to be distributed to RHD to
make interest payments on the Notes. The Indenture does not
significantly restrict RHDs Subsidiaries from entering
into agreements which have provisions preventing the
distribution of funds from such Subsidiaries to RHD.
In addition to the limitations on distributions, dividends or
loans to RHD by any of RHDs Subsidiaries, the indentures
governing the Existing Notes, and the terms of RHDs other
indebtedness, including the terms of the Credit Facilities and
the terms of the Notes, or any future agreements may prohibit or
limit RHDs and its Subsidiaries ability to, among
other things, dispose of assets (including the stock of
RHDs 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, even if such transactions were permitted, use of the
proceeds therefrom for payment on the Notes may be prohibited or
limited by agreements governing RHDs or RHDs
Subsidiaries current and future debt. Moreover, the
Indenture does not impose any limitation on the incurrence by
Restricted Subsidiaries of liabilities that are not considered
Debt under the Indenture. See Risk factors.
Guarantees
The Notes will not be guaranteed.
Ranking
The indebtedness evidenced by the Notes are senior unsecured
obligations of RHD and rank senior in right of payment to all
future Subordinated Obligations of RHD and equally with any of
RHDs existing and future senior unsecured Debt, including
the RHD Existing Notes. The Notes are effectively subordinated
to any of RHDs Secured Debt, including the Subsidiary
Credit Facilities, to the extent of the value of the assets
securing such Secured Debt, and are structurally subordinated to
any debt of RHDI and its Subsidiaries and any debt of Dex Media
and its Subsidiaries.
Optional
redemption
Except as set forth in the following two paragraphs, the Notes
are not redeemable at the option of RHD prior to
October 15, 2012. Starting on that date, RHD may redeem all
or any portion of the Notes, at any time or from time to time,
after giving the required notice under the Indenture. The Notes
may be redeemed at the redemption prices set forth below plus
accrued and unpaid interest, if any, to the redemption date
(subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest
payment date). The following prices are for Notes redeemed
during the
12-month
period commencing on October 15 of the years set forth below,
and are expressed as percentages of principal amount:
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Redemption Year
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Price
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2012
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104.438%
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2013
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102.958%
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2014
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101.479%
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2015 and thereafter
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100.000%
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From time to time prior to October 15, 2010, RHD may redeem
up to 40% of the aggregate principal amount of the Notes
(including any Additional Notes) issued under the Indenture,
with the proceeds of one or more Qualified Equity Offerings, at
a redemption price equal to 108.875% of the principal amount
thereof, plus accrued and unpaid interest thereon, if any, to
the redemption date (subject to the right of holders of record
on the relevant record date to receive interest due on the
relevant interest payment date);
provided, however,
that,
after giving effect to any such redemption, at least 60% of the
aggregate principal amount of
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Notes (including any Additional Notes) issued under the
Indenture remains outstanding. Any such redemption shall be made
within 90 days of such Qualified Equity Offering upon not
less than 30 nor more than 60 days prior notice.
At any time prior to October 15, 2012, RHD may also redeem
all or a part of the Notes, upon not less than 30 nor more than
60 days prior notice, at a redemption price equal to
100% of the principal amount of the Notes redeemed on the
redemption date plus the Applicable Premium as of, and accrued
and unpaid interest thereon, if any, to the redemption date
(subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest
payment date).
Any notice to holders of Notes of a redemption needs to include
the appropriate calculation of the redemption price, but does
not need to include the redemption price itself. The actual
redemption price, calculated as described above, must be set
forth in an Officers Certificate delivered to the Trustee
no later than two Business Days prior to the redemption date.
Sinking
fund
RHD is not required to make any sinking fund payments with
respect to the Notes.
Selection
and notice of redemption
If RHD redeems less than all the Notes at any time, the Trustee
will select Notes on a pro rata basis, by lot or by such other
method as the Trustee in its sole discretion shall deem to be
fair and appropriate.
RHD will redeem Notes of $2,000 principal amount or less in
whole and not in part. RHD will cause notices of redemption to
be mailed by first-class mail at least 30 but not more than
60 days before the redemption date to each holder of Notes
to be redeemed at its registered address.
If any Note is to be redeemed in part only, the notice of
redemption that relates to that Note will state the portion of
the principal amount thereof to be redeemed. RHD will issue a
new Note in a principal amount equal to the unredeemed portion
of the original Note in the name of the holder upon cancellation
of the original Note. Notes called for redemption become due on
the date fixed for redemption. On and after such date, interest
ceases to accrue on the Notes or portions thereof called for
such redemption.
Repurchase
at the option of holders upon a Change of Control
Upon the occurrence of a Change of Control, each holder of Notes
will have the right to require RHD to repurchase all or any part
of such holders Notes pursuant to the offer described
below (the Change of Control Offer) at a purchase
price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the purchase date
(subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest
payment date (the Change of Control Purchase
Price));
provided, however,
that notwithstanding
the occurrence of a Change of Control, RHD shall not be
obligated to purchase the Notes pursuant to this section in the
event that it has mailed the notice to exercise its right to
redeem all the Notes under the terms of the section titled
Optional redemption at any time prior to
the requirement to consummate the Change of Control and redeem
the Notes in accordance with such notice.
Within 30 days following any Change of Control, or, at
RHDs option, prior to the consummation of such Change of
Control but after it is publicly announced, RHD shall send, by
first-class mail, with a copy to the Trustee, to each holder of
Notes, at such holders address appearing in the Notes
register, a notice stating:
(1) that a Change of Control has occurred or will occur and
a Change of Control Offer is being made pursuant to the covenant
described under Repurchase at the option of
holders upon a Change of Control and that all Notes timely
tendered will be accepted for payment;
(2) the Change of Control Purchase Price and the purchase
date (the Change of Control Payment Date), which
shall be, subject to any contrary requirements of applicable
law, a Business Day and a point in time occurring after the
consummation of the Change of Control and not later than
60 days from the date such notice is mailed;
193
(3) the circumstances and relevant facts regarding the
Change of Control;
(4) if the notice is mailed prior to a Change of Control,
that the Change of Control Offer is conditioned on the Change of
Control occurring; and
(5) the procedures that holders of Notes must follow in
order to tender their Notes (or portions thereof) for payment,
and the procedures that holders of Notes must follow in order to
withdraw an election to tender Notes (or portions thereof) for
payment.
Holders electing to have a Note purchased shall be required to
surrender the Note, with an appropriate form duly completed, to
RHD or its agent at the address specified in the notice at least
three Business Days prior to the Change of Control Payment Date.
Holders shall be entitled to withdraw their election if the
Trustee or RHD receives, not later than one Business Day prior
to the Change of Control Payment Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the
holder, the principal amount of the Note that was delivered for
purchase by the holder and a statement that such holder is
withdrawing its election to have such Note purchased.
On or prior to the Change of Control Payment Date, RHD shall
irrevocably deposit with the Trustee or with the Paying Agent
(or, if RHD or any of its Subsidiaries is acting as the Paying
Agent, segregate and hold in trust) in cash an amount equal to
the Change of Control Purchase Price payable to the holders
entitled thereto, to be held for payment in accordance with the
provisions of this covenant. On the Change of Control Payment
Date, RHD shall deliver to the Trustee the Notes or portions
thereof that have been properly tendered to and are to be
accepted by RHD for payment. The Trustee or the Paying Agent
shall, on the Change of Control Payment Date, mail or deliver
payment to each tendering holder of the Change of Control
Purchase Price. In the event that the aggregate Change of
Control Purchase Price is less than the amount delivered by RHD
to the Trustee or the Paying Agent, the Trustee or the Paying
Agent, as the case may be, shall deliver the excess to RHD
immediately after the Change of Control Payment Date.
We will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other
applicable securities laws or regulations in connection with the
repurchase of Notes pursuant to a Change of Control Offer,
including any applicable securities laws of the United States.
To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant
described hereunder, we will comply with the applicable
securities laws and regulations and will not be deemed to have
breached our obligations under this covenant by virtue of such
compliance with these securities laws or regulations.
The Change of Control repurchase feature is a result of
negotiations between us and the Initial Purchasers. Management
has no present intention to engage in a transaction involving a
Change of Control, although it is possible that management of
RHD would decide to do so in the future. Subject to certain
covenants described below, management of RHD could, in the
future, enter into certain transactions, including acquisitions,
refinancings or other recapitalizations, that would not
constitute a Change of Control under the Indenture, but that
could increase the amount of debt outstanding at such time or
otherwise affect our capital structure or credit ratings. The
definition of Change of Control includes a phrase relating to
the sale, transfer, assignment, lease, conveyance or other
disposition of all or substantially all of our
assets. Although there is a developing body of case law
interpreting the phrase substantially all, there is
no precise established definition of the phrase under applicable
law. Accordingly, if we dispose of less than all our assets by
any of the means described above, the ability of a holder of
Notes to require us to repurchase its Notes may be uncertain. In
such a case, holders of the Notes may not be able to resolve
this uncertainty without resorting to legal action.
The RHDI Credit Facility and the Dex Media Credit Facilities do
not permit RHDIs subsidiaries and Dex Medias
subsidiaries, respectively, to make distributions to us in the
event of a Change of Control which would enable us to purchase
any Notes without first obtaining the consent of the lenders
party thereto and also provides that the occurrence of certain
of the events that would constitute a Change of Control would
constitute a default under each such Credit Facility. In
addition, future debt of RHD or its Subsidiaries may contain
prohibitions of certain events which would constitute a Change
of Control or require such debt to be repurchased upon a Change
of Control. Moreover, the exercise by holders of Notes of their
right to require us
194
to repurchase such Notes could cause a default under existing or
future debt of RHD or its Subsidiaries, even if the Change of
Control itself does not, due to the financial effect of such
repurchase on us. Finally, our ability to pay cash to holders of
Notes upon a repurchase may be limited by our financial
resources at that time. We cannot assure you that sufficient
funds will be available when necessary to make any required
repurchases. Our failure to purchase Notes in connection with a
Change of Control would result in a default under the Indenture.
Such a default would, in turn, constitute a default under our
existing debt, and may constitute a default under future debt as
well. Our obligation to make an offer to repurchase the Notes as
a result of a Change of Control may be waived or modified at any
time prior to the occurrence of such Change of Control with the
written consent of the holders of a majority in principal amount
of the Notes. See Amendments and waivers.
RHD will not be required to make a Change of Control Offer upon
a Change of Control if a third party makes the Change of Control
Offer in the manner, at the times and otherwise in compliance
with the requirements set forth in the Indenture applicable to a
Change of Control Offer made by RHD and purchases all Notes
properly tendered and not withdrawn under the Change of Control
Offer.
Certain
covenants
Suspension of Covenants.
From and after the
first date that: (i) the Notes have Investment Grade
Ratings from one of the Rating Agencies and (ii) no Default
or Event of Default has occurred and is continuing under the
Indenture (the occurrence of the events described in the
foregoing clauses (i) and (ii) being collectively
referred to as a Covenant Suspension Event), RHD and
the Restricted Subsidiaries will not be subject to the following
provisions of the Indenture:
(1) Limitation on restricted
payments;
(2) Limitation on debt;
(3) Limitation on transactions with
affiliates;
(4) Limitation on asset sales;
(5) Limitation on lines of
business, and
(6) clause (e) of the first paragraph of Merger,
consolidation and sale of property (collectively, the
Suspended Covenants).
Upon the occurrence of a Covenant Suspension Event (the
Suspension Date), the amount of Excess Proceeds from
net proceeds shall be set at zero. In the event that RHD and the
Restricted Subsidiaries are not subject to the Suspended
Covenants for any period of time as a result of the foregoing,
and on any subsequent date (the Reversion Date) in
the event that only one Rating Agency had previously provided an
Investment Grade Rating on the Notes, then one of the Rating
Agencies withdraws its Investment Grade Rating or lowers the
rating assigned to the Notes below an Investment Grade Rating
or, in the event that both of the Rating Agencies have
previously provided Investment Grade Ratings on the Notes, then
both of the Rating Agencies withdraw their Investment Grade
Rating or lower the Investment Grade Rating assigned to the
Notes below an Investment Grade Rating or a Default or Event of
Default occurs and is continuing, then RHD and the Restricted
Subsidiaries will thereafter again be subject to the Suspended
Covenants with respect to future events. The period of time
between the Suspension Date and the Reversion Date is referred
to in this description as the Suspension Period.
Notwithstanding that the Suspended Covenants may be reinstated,
no Default or Event of Default will be deemed to have occurred
as a result of a failure to comply with the Suspended Covenants
during the Suspension Period (or upon termination of the
Suspension Period or after that time based solely on events that
occurred during the Suspension Period).
On the Reversion Date, all Debt incurred during the Suspension
Period will be classified to have been incurred pursuant to the
first paragraph of Limitation on debt
below or one of the clauses set forth in the second paragraph of
Limitation on debt below (to the extent
such Debt would be permitted to be incurred or issued thereunder
as of the Reversion Date and after giving effect to Debt
incurred prior to the Suspension Period and outstanding on the
Reversion Date). To the extent such Debt would not be so
permitted to be
195
incurred or issued pursuant to the first or second paragraph of
Limitation on debt, such Debt will be
deemed to have been outstanding on the Issue Date, so that it is
classified as permitted under clause (o) of the second
paragraph of Limitation on debt.
Calculations made after the Reversion Date of the amount
available to be made as Restricted Payments under
Limitation on restricted payments will
be made as though the covenant described under
Limitation on restricted payments had
been in effect since the Issue Date and throughout the
Suspension Period. Accordingly, Restricted Payments made during
the Suspension Period will reduce the amount available to be
made as Restricted Payments under the first paragraph of
Limitation on restricted payments.
Limitation on debt.
RHD shall not, and shall
not permit any Restricted Subsidiary to, Incur any Debt;
provided, however,
that RHD and its Restricted
Subsidiaries may Incur Debt and Acquired Debt if, after giving
effect to the Incurrence of such Debt and the application of the
proceeds therefrom, the Leverage Ratio of RHD would not exceed
7.25 to 1.0.
Notwithstanding the immediately preceding paragraph, any or all
of the following Debt (collectively, Permitted Debt)
may be Incurred:
(a) Debt under the Subsidiary Credit Facilities and
Guarantees of such Debt by RHD, in the case of the RHDI Credit
Facility, and other Guarantors under the Subsidiary Credit
Facilities;
provided
that the aggregate principal amount
of all such Debt under the Subsidiary Credit Facilities in the
aggregate shall not exceed $6.0 billion
less
the
amount of any permanent mandatory repayments made under the
Subsidiary Credit Facilities (and, in the case of any revolving
subfacility thereunder, permanent commitment reductions) with
Net Available Cash from Asset Sales;
(b) the Notes (excluding any Additional Notes (as such term
is defined in the Indenture)) and any notes issued in exchange
for such Notes pursuant to the Registration Rights Agreement;
(c) Debt of RHD or any Restricted Subsidiary in respect of
Capital Lease Obligations and Purchase Money Debt,
provided
that:
(1) the aggregate principal amount of such Debt secured
thereby does not exceed the Fair Market Value (on the date of
the Incurrence thereof) of the Property acquired, constructed or
leased, and
(2) the aggregate principal amount of all Debt Incurred and
then outstanding pursuant to this clause (c) (together with all
Permitted Refinancing Debt Incurred and then outstanding in
respect of Debt previously Incurred pursuant to this clause (c))
does not exceed $150 million;
(d) Debt of RHD owing to and held by any Restricted
Subsidiary or Debt of a Restricted Subsidiary owing to and held
by RHD or any Restricted Subsidiary;
provided, however
,
that (1) any subsequent issue or transfer of Capital Stock
or other event that results in any such Restricted Subsidiary
ceasing to be a Restricted Subsidiary or any subsequent transfer
of any such Debt (except to RHD or a Restricted Subsidiary)
shall be deemed, in each case, to constitute the Incurrence of
such Debt by the issuer thereof not permitted by this
clause (d) and (2) such Debt shall be expressly
subordinated to the prior payment in full in cash of all
obligations under the Notes;
(e) Debt under Interest Rate Agreements entered into by RHD
or a Restricted Subsidiary for the purpose of limiting interest
rate risk in the ordinary course of the financial management of
RHD or any Restricted Subsidiary and not for speculative
purposes;
provided
that the obligations under such
agreements are directly related to payment obligations on Debt
otherwise permitted by the terms of this covenant;
(f) Debt under Currency Exchange Protection Agreements
entered into by RHD or a Restricted Subsidiary for the purpose
of limiting currency exchange rate risks directly related to
transactions entered into by RHD or any Restricted Subsidiary in
the ordinary course of the financial management of RHD or any
Restricted Subsidiary and not for speculative purposes;
196
(g) Debt under Commodity Price Protection Agreements
entered into by RHD or a Restricted Subsidiary in the ordinary
course of the financial management of RHD or any Restricted
Subsidiary and not for speculative purposes;
(h) Debt of RHD or any Restricted Subsidiary in connection
with (1) one or more standby letters of credit issued by
RHD or a Restricted Subsidiary in the ordinary course of
business and with respect to trade payables relating to the
purchase of materials by RHD or a Restricted Subsidiary and
(2) other letters of credit, surety, performance, appeal or
similar bonds, bankers acceptance, completion guarantees
or similar instruments issued in the ordinary course of business
of RHD or a Restricted Subsidiary, including letters of credit
or similar instruments pursuant to self- insurance and
workers compensation obligations;
provided
that
upon the drawing of such letters of credit or other instrument,
such obligations are reimbursed within 30 days following
such drawing;
provided, further
, that with respect to
clauses (1) and (2), such Debt is not in connection with
the borrowing of money or the obtaining of advances or credit;
(i) Debt of RHD or any Restricted Subsidiary arising from
the honoring by a bank or other financial institution of a
check, draft or similar instrument inadvertently drawn against
insufficient funds in the ordinary course of business;
provided
that such Debt is extinguished within five
Business Days of Incurrence of such Debt;
(j) Debt of RHD or any Restricted Subsidiary arising from
agreements for indemnification and purchase price adjustment
obligations Incurred or assumed in connection with any
acquisition or disposition of any assets including Capital
Stock;
provided
that the maximum assumable liability in
respect of all such obligations shall at no time exceed the
gross proceeds actually received by RHD and any Restricted
Subsidiary, including the Fair Market Value of noncash proceeds;
(k) Debt Incurred by a Securitization Entity in connection
with a Qualified Securitization Transaction that is Non-recourse
Debt with respect to RHD and its Restricted Subsidiaries;
provided, however
, that in the event such Securitization
Entity ceases to qualify as a Securitization Entity or such Debt
ceases to constitute such Non-recourse Debt, such Debt will be
deemed, in each case, to be Incurred at such time;
(l) Debt of RHD or a Restricted Subsidiary consisting of a
Guarantee of or a Lien securing Debt of RHD or a Restricted
Subsidiary,
provided
that such Debt constitutes Debt that
is permitted to be Incurred pursuant to this covenant, but
subject to compliance with the other provisions described under
Certain covenants;
(m) Debt in respect of netting services, overdraft
protection and otherwise in connection with deposit accounts;
provided
that such Debt remains outstanding for five
Business Days or less;
(n) the Existing Notes and their related Guarantees, if any;
(o) Debt of RHD or any Restricted Subsidiary outstanding on
the Issue Date not otherwise described in clauses (a)
through (n) above;
(p) Guarantees in the ordinary course of business of the
obligations of suppliers, customers, franchisers and licensees;
(q) Permitted Refinancing Debt; and
(r) Debt of RHD or any Restricted Subsidiary or the
issuance of Disqualified Stock in a principal amount or
liquidation value, as applicable, outstanding at any one time
not to exceed $400 million in the aggregate for all such
Debt and Disqualified Stock.
For the purposes of determining compliance with this covenant,
in the event that an item of Debt meets the criteria of more
than one of the types of Debt permitted by this covenant or is
entitled to be Incurred pursuant to the first paragraph of the
covenant, RHD in its sole discretion shall be permitted to
classify on the date of its Incurrence, or later reclassify, all
or a portion of such item of Debt in any manner that complies
with this covenant.
197
Debt permitted by this covenant need not be permitted solely by
reference to one provision permitting such Debt but may be
permitted in part by one such provision and in part by one or
more other provisions of this covenant permitting such Debt.
For the purposes of determining any particular amount of Debt
under this covenant, (a) Guarantees, Liens, obligations
with respect to letters of credit and other obligations
supporting Debt otherwise included in the determination of a
particular amount will not be included and (b) any Liens
granted to the holders of the Notes that are permitted in the
covenant described under Limitation on
liens will not be treated as Debt.
For purposes of determining compliance with any
dollar-denominated restriction on the incurrence of Debt, with
respect to any Debt which is denominated in a foreign currency,
the dollar-equivalent principal amount of such Debt incurred
pursuant thereto shall be calculated based on the relevant
currency exchange rate in effect on the date that such Debt was
incurred, and any such foreign denominated Debt may be
refinanced or replaced or subsequently refinanced or replaced in
an amount equal to the dollar-equivalent principal amount of
such Debt on the date of such refinancing or replacement whether
or not such amount is greater or less than the dollar equivalent
principal amount of the Debt on the date of initial incurrence.
If obligations in respect of letters of credit are incurred
pursuant to the Credit Facilities and are being treated as
incurred pursuant to clause (a) of the second paragraph of
this covenant and the letters of credit relate to other Debt
then such other Debt shall be deemed not incurred.
Limitation on restricted payments.
RHD shall
not make, and shall not permit any Restricted Subsidiary to
make, any Restricted Payment if at the time of, and after giving
effect to, such proposed Restricted Payment,
(a) a Default or Event of Default shall have occurred and
be continuing,
(b) RHD could not Incur at least $1.00 of additional Debt
pursuant to the first paragraph of the covenant described under
Limitation on debt or
(c) the aggregate amount of such Restricted Payment and all
other Restricted Payments declared or made since
December 3, 2002 (the amount of any Restricted Payment, if
made other than in cash, to be based upon Fair Market Value)
would exceed an amount equal to the sum of:
(1) 100% of EBITDA accrued on a cumulative basis during the
period (treated as one accounting period) from October 1,
2002 to the end of the most recent fiscal quarter ended prior to
the date of such proposed Restricted Payment for which financial
statements are available and have been either filed with the
Commission or with the Trustee pursuant to Reports
below (or if the aggregate amount of EBITDA for such period
shall be a deficit, minus 100% of such deficit) less 1.4 times
Consolidated Interest Expense, plus
(2) 100% of Capital Stock Sale Proceeds and cash capital
contributions to RHD, plus (without duplication)
(3) the sum of:
(A) the aggregate net cash proceeds received by RHD or any
Restricted Subsidiary from the issuance or sale after
December 3, 2002 of convertible or exchangeable Debt or
Disqualified Stock that has been converted into or exchanged for
Capital Stock (other than Disqualified Stock) of RHD, and
(B) the aggregate amount by which Debt (other than
Subordinated Obligations) of RHD or any Restricted Subsidiary is
reduced on RHDs consolidated balance sheet on or after
December 3, 2002 upon the conversion or exchange of any
Debt issued or sold on or after December 3, 2002 that is
convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of RHD, together with, in the cases of both
(A) and (B), the aggregate net cash proceeds received by
RHD at the time of such conversion or exchange, but excluding,
in the case of clause (A) or (B): (x) any such Debt
issued or sold to RHD or a Restricted Subsidiary of RHD or an
employee stock ownership plan or trust established by RHD or
such Restricted Subsidiary for
198
the benefit of its employees and (y) the aggregate amount
of any cash or other Property distributed by RHD or any
Restricted Subsidiary upon any such conversion or exchange, plus
(without duplication)
(4) an amount equal to the sum of:
(A) the net reduction in Investments in any Person other
than RHD or a Restricted Subsidiary resulting from dividends,
repayments of loans or advances or other transfers of Property
or any other disposition or repayment of such Investments, in
each case to RHD or any Restricted Subsidiary from any Person
(other than RHD or a Restricted Subsidiary), less the cost of
the disposition of such Investments, and
(B) the Fair Market Value of the Investment of RHD and any
Restricted Subsidiary in an Unrestricted Subsidiary at the time
such Unrestricted Subsidiary is designated a Restricted
Subsidiary;
provided, however,
that the foregoing sum described in
this clause (4) shall not exceed the amount of Investments
previously made (and treated as a Restricted Payment) by RHD or
any Restricted Subsidiary in such Person.
Notwithstanding the foregoing limitation, RHD may:
(i) pay dividends on its Capital Stock within 60 days
of the declaration thereof if, on said declaration date, such
dividends could have been paid in compliance with the Indenture
(for the avoidance of doubt, such dividend shall be included in
the calculation of the amount of Restricted Payments);
(ii) purchase, repurchase, redeem, legally defease, acquire
or retire for value Capital Stock of RHD or options, warrants or
other rights to acquire such Capital Stock or Subordinated
Obligations in exchange for, or out of the proceeds of the
substantially concurrent sale of, Capital Stock of RHD (other
than Disqualified Stock) or options, warrants or other rights to
acquire such Capital Stock (other than any such Capital Stock
(or options, warrants or other rights to acquire such Capital
Stock) issued or sold to a Restricted Subsidiary of RHD or an
employee stock ownership plan or trust established by RHD or any
such Restricted Subsidiary for the benefit of its employees and
except to the extent that any purchase made pursuant to such
issuance or sale is financed by RHD or any Restricted
Subsidiary) or a capital contribution to RHD;
provided,
however,
that such purchase, repurchase, redemption, legal
defeasance, acquisition or retirement shall not be included in
the calculation of the amount of Restricted Payments and the
Capital Stock Sale Proceeds from such exchange or sale shall not
be included in the calculation pursuant to clause (c)(2) above;
(iii) purchase, repurchase, redeem, legally defease,
acquire or retire for value any Subordinated Obligations in
exchange for or out of the proceeds of the substantially
concurrent sale of Capital Stock of RHD (other than Disqualified
Stock) or options, warrants or other rights to acquire such
Capital Stock (other than any such Capital Stock (or options,
warrants or other rights to acquire such Capital Stock) issued
or sold to a Restricted Subsidiary of RHD or an employee stock
ownership plan or trust established by RHD or any such
Restricted Subsidiary for the benefit of its employees and
except to the extent that any purchase made pursuant to such
issuance or sale is financed by RHD or any Restricted
Subsidiary) or a capital contribution to RHD or Subordinated
Obligations;
provided
that such purchase, repurchase,
redemption, legal defeasance, acquisition or retirement shall
not be included in the calculation of the amount of Restricted
Payments and the Capital Stock Sale Proceeds from such exchange
or sale shall not be included in the calculation pursuant to
clause (c)(2) above;
(iv) purchase, repurchase, redeem, legally defease, acquire
or retire for value any Subordinated Obligations of RHD in
exchange for, or out of the proceeds of the substantially
concurrent sale of, Permitted Refinancing Debt;
provided
that such purchase, repurchase, redemption, legal
defeasance, acquisition or retirement shall not be included in
the calculation of the amount of Restricted Payments;
(v) so long as no Default has occurred and is continuing,
repurchase or otherwise acquire shares of, or options to
purchase shares of, Capital Stock of RHD or any of its
Subsidiaries from employees, former
199
employees, directors or former directors, consultants or former
consultants of RHD or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or
former directors), pursuant to the terms of agreements
(including employment agreements) or plans (or amendments
thereto) approved by the Board of Directors of RHD under which
such individuals purchase or sell, or are granted the option to
purchase or sell, shares of such Capital Stock;
provided
that the aggregate amount of such repurchases and other
acquisitions shall not exceed $20 million in any calendar
year plus any proceeds received by RHD in respect of
key-man life insurance (any such amounts not used in
a calendar year shall be available for use in any subsequent
year);
provided, further,
that such repurchase and other
acquisition shall be excluded in the calculation of the amount
of Restricted Payments and the Capital Stock Sale Proceeds from
such sales shall not be included in the calculation pursuant to
clause (c)(2) or (ii) above;
(vi) make cash payments in lieu of issuance of fractional
shares in connection with the exercise of warrants, options or
other securities convertible into or exchangeable for equity
interests of RHD (for the avoidance of doubt, such payments
shall be included in the amount of Restricted Payments);
(vii) repurchase Capital Stock to the extent such
repurchase is deemed to occur upon a cashless exercise of stock
options; provided that all such repurchases shall not be
included in the calculation of Restricted Payments and no
proceeds in respect of the issuance of Capital Stock shall be
deemed to have been received for the purposes of clause (c)(2)
above;
(viii) so long as no Default or Event of Default shall have
occurred and be continuing, repurchase any Subordinated
Obligations or Disqualified Stock of RHD at a purchase price not
greater than 101% of the principal amount or liquidation
preference of such Subordinated Obligation or Disqualified Stock
in the event of a Change of Control pursuant to a provision
similar to Repurchase at the option of holders
upon a Change of Control in the documents governing such
Subordinated Obligation or Disqualified Stock;
provided
that prior to consummating any such repurchase, RHD has made
the Change of Control Offer required by the Indenture and has
repurchased all notes validly tendered for payment in connection
with such Change of Control Offer;
provided, further
that
such payments shall be included in the calculation of Restricted
Payments;
(ix) so long as no Default or Event of Default shall have
occurred and be continuing, following an Asset Sale, to the
extent permitted by the covenant under
Limitation on asset sales, and using the
Net Available Cash generated from such Asset Sale, repurchase
any Subordinated Obligation or Disqualified Stock of RHD at a
purchase price not greater than 100% of the principal amount or
liquidation preference of such Subordinated Obligation or
Disqualified Stock pursuant to a provision similar to the
Limitation on asset sales covenant in
the documents governing such Subordinated Obligation or
Disqualified Stock;
provided
that prior to consummating
any such repurchase, RHD has made the Prepayment Offer required
by the Indentures and has repurchased all notes validly tendered
for payment in connection with such Prepayment Offer;
provided, further
that such payments shall be included in
the calculation of Restricted Payments;
(x) make any other Restricted Payment which, together with
all other Restricted Payments made pursuant to this
clause (x) since the Issue Date, does not exceed
$100 million,
provided
that no Default or Event of
Default shall have occurred and be continuing immediately after
making such Restricted Payment;
provided, further,
that
such payments shall be excluded in the calculation of Restricted
Payments;
(xi) so long as no Default or Event of Default shall have
occurred and be continuing, pay cash dividends on RHDs
common stock or equivalent in an amount not to exceed a Dividend
Yield of 3% (for the avoidance of doubt, such dividend shall be
included in the calculation of the amount of Restricted
Payments); and
(xii) repurchase or redeem preferred stock purchase rights
issued in connection with any shareholders rights plan of RHD.
200
The amount of any non-cash Restricted Payment shall be deemed to
be equal to the Fair Market Value thereof at the date of making
such Restricted Payment.
Limitation on liens.
RHD shall not, and shall
not permit any Restricted Subsidiary to, Incur or suffer to
exist, any Lien (other than Permitted Liens) upon any of its
Property (including Capital Stock of a Restricted Subsidiary and
intercompany notes), whether owned on the Issue Date or
thereafter acquired, or any interest therein or any income or
profits therefrom that secures Debt, unless
(1) in the case of a Lien securing Subordinated
Obligations, the Notes are secured by a Lien on such Property or
such interest therein or such income or profits therefrom that
is senior in priority to the Lien securing such Subordinated
Obligations for so long as such Subordinated Obligations are so
secured; and
(2) in all other cases, the Notes are equally and ratably
secured by a Lien on such Property or such interest therein or
profits therefrom for so long as such Debt is so secured.
Limitation on asset sales.
RHD shall not, and
shall not permit any Restricted Subsidiary to, consummate any
Asset Sale unless:
(a) RHD or such Restricted Subsidiary receives
consideration at the time of such Asset Sale at least equal to
the Fair Market Value of the Property subject to such Asset Sale;
(b) in the case of Asset Sales which are not Permitted
Asset Swaps, at least 75% of the consideration paid to RHD or
such Restricted Subsidiary in connection with such Asset Sale is
in the form of (1) cash or cash equivalents; (2) the
assumption by the purchaser of liabilities of RHD or any
Restricted Subsidiary (other than liabilities that are by their
terms subordinated to the Notes) as a result of which RHD and
the Restricted Subsidiaries are no longer obligated with respect
to such liabilities; (3) any securities, notes or other
obligations received by RHD or any such Restricted Subsidiary
from such transferee that are converted by RHD or such
Restricted Subsidiary into cash (to the extent of the cash
received) within 90 days after receipt; or (4) a
combination of the consideration specified in clauses (1)
through (3); and
(c) RHD delivers an Officers Certificate to the
Trustee certifying that such Asset Sale complies with the
foregoing clauses (a) and (b).
The Net Available Cash (or any portion thereof) from Asset Sales
may be applied by RHD or a Restricted Subsidiary, to the extent
RHD or such Restricted Subsidiary elects (or is required by the
terms of any Debt):
(a) to permanently prepay or permanently repay (i) any
Subsidiary Credit Facilities Debt (and to correspondingly reduce
commitments with respect thereto), (ii) Debt that ranks
pari passu with the Notes (provided that if RHD shall so reduce
obligations under such Debt, it will equally and ratably reduce
obligations under the Notes by making an offer (in accordance
with the procedures set forth below for a Prepayment Offer (as
defined below) to all holders of Notes to purchase at a purchase
price equal to 100% of the principal amount thereof, plus
accrued and unpaid interest and additional interest, if any, the
pro rata principal amount of the Notes), (iii) Indebtedness
of a Restricted Subsidiary, in each case other than Indebtedness
owed to RHD or an Affiliate of RHD; provided that, if an offer
to purchase any Debt of RHDI or any of its Restricted
Subsidiaries is made in accordance with the terms of such Debt,
the obligation to permanently reduce Debt of a Restricted
Subsidiary will be deemed to be satisfied to the extent of the
amount of the offer, whether or not accepted by the holders
thereof, and no Excess Proceeds in the amount of such offer will
be deemed to exist following such offer or (iv) Debt which
shall have been secured by the assets sold in the relevant Asset
Sale (except as provided in clauses (i), (ii) or (iii));
and/or
(b) to reinvest in Additional Assets (including by means of
an Investment in Additional Assets by a Restricted Subsidiary
with Net Available Cash received by RHD or another Restricted
Subsidiary).
Any Net Available Cash from an Asset Sale not applied in
accordance with the preceding paragraph within 365 days
from the date of the receipt of such Net Available Cash shall
constitute Excess Proceeds.
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Pending the final application of the Net Available Cash, RHD or
any Restricted Subsidiary may temporarily reduce Debt under the
revolving Subsidiary Credit Facilities or otherwise invest such
Net Available Cash in Temporary Cash Investments.
When the aggregate amount of Excess Proceeds exceeds
$100 million, RHD will be required to make an offer to
purchase (the Prepayment Offer) the Notes and any
other
pari passu
Debt outstanding with similar provisions
requiring an offer to purchase such Debt with such proceeds,
which offer shall be in the amount of the Allocable Excess
Proceeds, on a
pro rata
basis according to principal
amount or accreted value, at a purchase price equal to 100% of
the principal amount thereof, plus accrued and unpaid interest,
if any, to the purchase date (subject to the right of holders of
record on the relevant record date to receive interest due on
the relevant interest payment date), in accordance with the
procedures (including prorating in the event of
oversubscription) set forth herein. To the extent that any
portion of the amount of Net Available Cash remains after
compliance with the preceding sentence and
provided
that
all holders of Notes have been given the opportunity to tender
their Notes for purchase in accordance with the Indenture, RHD
or such Restricted Subsidiary may use such remaining amount for
any purpose not restricted by the Indenture and the amount of
Excess Proceeds will be reset to zero.
The term Allocable Excess Proceeds will mean the
product of:
(a) the Excess Proceeds and
(b) a fraction,
(1) the numerator of which is the aggregate principal
amount of the Notes outstanding on the date of the Prepayment
Offer, together with any accrued and unpaid interest, including
additional interest, if any, and
(2) the denominator of which is the sum of the aggregate
principal amount of the Notes outstanding on the date of the
Prepayment Offer, together with any accrued and unpaid interest
and the aggregate principal amount or accreted value of other
Debt of RHD outstanding on the date of the Prepayment Offer that
is
pari passu
in right of payment with the Notes and
subject to terms and conditions in respect of Asset Sales
similar in all material respects to the covenant described
hereunder and requiring RHD to make an offer to purchase such
Debt at substantially the same time as the Prepayment Offer
(subject to proration in the event that such amount is less than
the aggregate offer price of all Notes tendered).
Within 45 Business Days after RHD is obligated to make a
Prepayment Offer as described in the preceding paragraph, RHD
shall send a written notice, by first-class mail, to the holders
of Notes, accompanied by such information regarding RHD and its
Subsidiaries as RHD in good faith believes will enable such
holders to make an informed decision with respect to such
Prepayment Offer. Such notice shall state, among other things,
the purchase price and the purchase date (the Purchase
Date), which shall be, subject to any contrary
requirements of applicable law, a Business Day no earlier than
30 days nor later than 60 days from the date such
notice is mailed.
Not later than the date upon which written notice of a
Prepayment Offer is delivered to the Trustee as provided above,
RHD shall deliver to the Trustee an Officers Certificate
as to (i) the amount of the Prepayment Offer (the
Offer Amount), (ii) the allocation of the Net
Available Cash from the Asset Sales pursuant to which such
Prepayment Offer is being made and (iii) the compliance of
such allocation with the provisions of the second paragraph of
this covenant. On or before the Purchase Date, RHD shall also
irrevocably deposit with the Trustee or with the Paying Agent
(or, if RHD or a Wholly Owned Subsidiary is the Paying Agent,
shall segregate and hold in trust) in Temporary Cash Investments
(other than in those enumerated in clause (b) of the
definition of Temporary Cash Investments), maturing on the last
day prior to the Purchase Date or on the Purchase Date if funds
are immediately available by open of business, an amount equal
to the Offer Amount to be held for payment in accordance with
the provisions of this covenant. Upon the expiration of the
period for which the Prepayment Offer remains open (the
Offer Period), RHD shall deliver to the Trustee for
cancellation the Notes or portions thereof that have been
properly tendered to and are to be accepted by RHD. The Trustee
or the Paying Agent shall, on the Purchase Date, mail or deliver
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payment to each tendering holder in the amount of the purchase
price. In the event that the aggregate purchase price of the
Notes delivered by RHD to the Trustee is less than the Offer
Amount, the Trustee or the Paying Agent shall deliver the excess
to RHD immediately after the expiration of the Offer Period for
application in accordance with this covenant.
Holders electing to have a Note purchased shall be required to
surrender the Note, with an appropriate form duly completed, to
RHD or its agent at the address specified in the notice at least
three Business Days prior to the Purchase Date. Holders shall be
entitled to withdraw their election if the Trustee or RHD
receives not later than one Business Day prior to the Purchase
Date a telegram, telex, facsimile transmission or letter setting
forth the name of the holder, the principal amount of the Note
that was delivered for purchase by the holder and a statement
that such holder is withdrawing its election to have such Note
purchased. If at the expiration of the Offer Period the
aggregate principal of Notes surrendered by holders exceeds the
Offer Amount, RHD shall select the Notes to be purchased on pro
rata basis for all Notes (with such adjustments as may be deemed
appropriate by RHD so that only Notes in denominations of
$2,000, or larger integral multiples of $1,000, shall be
purchased). Holders whose Notes are purchased only in part shall
be issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered.
At the time RHD delivers Notes to the Trustee that are to be
accepted for purchase, RHD shall also deliver an Officers
Certificate stating that such Notes are to be accepted by RHD
pursuant to and in accordance with the terms of this covenant. A
Note shall be deemed to have been accepted for purchase at the
time the Trustee or the Paying Agent mails or delivers payment
therefor to the surrendering holder.
RHD will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other
applicable securities laws or regulations in connection with the
repurchase of Notes pursuant to the covenant described
hereunder, including any applicable securities laws of the
United States. To the extent that the provisions of any
securities laws or regulations conflict with provisions of the
covenant described hereunder, RHD will comply with the
applicable securities laws and regulations and will not be
deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
Limitation on transactions with
affiliates.
RHD shall not, and shall not permit
any Restricted Subsidiary to, conduct any business or enter into
or suffer to exist any transaction or series of transactions
(including the purchase, sale, transfer, assignment, lease,
conveyance or exchange of any Property or the rendering of any
service) with, or for the benefit of, any Affiliate of RHD (an
Affiliate Transaction), unless:
(a) the terms of such Affiliate Transaction are:
(1) set forth in writing, and
(2) no less favorable to RHD or such Restricted Subsidiary,
as the case may be, than those that could be obtained in a
comparable arms-length transaction with a Person that is
not an Affiliate of RHD,
(b) if such Affiliate Transaction involves aggregate
payments or value in excess of $20 million, each of the
Board of Directors of RHD (including a majority of the
disinterested members of the Board of Directors of RHD or, if
there is only one disinterested director, such disinterested
director) approves such Affiliate Transaction and, in its good
faith judgment, believes that such Affiliate Transaction
complies with clause (a)(2) of this covenant as evidenced by a
Board Resolution, and
(c) if such Affiliate Transaction involves aggregate
payments or value in excess of $100 million, RHD obtains a
written opinion from an Independent Financial Advisor to the
effect that the consideration to be paid or received in
connection with such Affiliate Transaction is fair, from a
financial point of view, to RHD and the Restricted Subsidiaries,
taken as a whole.
Notwithstanding the foregoing limitation, RHD or any Restricted
Subsidiary may make, enter into or suffer to exist the following:
(a) any transaction or series of transactions between RHD
and one or more Restricted Subsidiaries or between two or more
Restricted Subsidiaries;
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(b) any Restricted Payment permitted to be made pursuant to
the covenant described under Limitation on
restricted payments or any Permitted Investment;
(c) the payment of compensation (including awards or grants
in cash, securities or other payments) for the personal services
of officers, directors, consultants and employees of RHD or any
of the Restricted Subsidiaries in the ordinary course of
business;
(d) payments pursuant to employment agreements, collective
bargaining agreements, employee benefit plans, or arrangements
for employees, officers or directors, including vacation plans,
health and life insurance plans, deferred compensation plans,
directors and officers indemnification agreements
and retirement or savings plans, stock option, stock ownership
and similar plans so long as the Board of Directors of RHD in
good faith shall have approved the terms thereof and deemed the
services theretofore or thereafter to be performed for such
compensation to be fair consideration therefor;
(e) loans and advances to officers, directors or employees
(or guarantees of third party loans to officers, directors or
employees) made in the ordinary course of business,
provided
that such loans and advances do not exceed $50 million
in the aggregate at any one time outstanding;
(f) any agreement as in effect on the Issue Date or any
amendment to any such agreement (so long as any such amendment
is not disadvantageous to the holders of the Notes in any
material respect) or any transaction contemplated thereby;
(g) transactions with customers, clients, suppliers or
purchasers or sellers of goods or services, in each case in the
ordinary course of business and otherwise in compliance with the
terms of the Indenture which are fair to RHD or its Restricted
Subsidiaries or are on terms no less favorable as might
reasonably have been obtained at such time from an unaffiliated
party;
provided
that such transactions are approved by a
majority of the Board of Directors of RHD in good faith
(including a majority of disinterested directors of the Board of
Directors of RHD, or if there is only one disinterested
director, such director);
(h) the issuance and sale of Capital Stock (other than
Disqualified Stock) of RHD; and
(i) sales or transfer of dispositions of Receivables and
Related Assets to a Securitization Entity and acquisitions of
Investments in connection therewith.
Designation of Restricted and Unrestricted
Subsidiaries.
The Board of Directors of RHD may
designate any Subsidiary of RHD to be an Unrestricted Subsidiary
if:
(a) the Subsidiary to be so designated does not own any
Capital Stock or Debt of, or own or hold any Lien on any
Property of, RHD or any other Restricted Subsidiary, and
(b) RHD would be permitted under the covenant described
under Limitation on restricted payments
to make a Restricted Payment in an amount equal to the Fair
Market Value of the Investment in such Subsidiary. For the
purposes of this provision, in the event the Fair Market Value
of such assets exceeds $100 million, such Fair Market Value
shall be determined by an Independent Financial Advisor.
Unless so designated as an Unrestricted Subsidiary, any Person
that becomes a Subsidiary of RHD will be classified as a
Restricted Subsidiary.
Except as provided in the preceding paragraph, no Restricted
Subsidiary may be redesignated as an Unrestricted Subsidiary. In
addition, neither RHD nor any Restricted Subsidiary shall at any
time be directly or indirectly liable for any Debt that provides
that the holder thereof may (with the passage of time or notice
or both) declare a default thereon or cause the payment thereof
to be accelerated or payable prior to its Stated Maturity upon
the occurrence of a default with respect to any Debt, Lien or
other obligation of any Unrestricted Subsidiary (including any
right to take enforcement action against such Unrestricted
Subsidiary) except to the extent permitted under the covenant
described under Limitation on restricted
payments and provided that RHD or any Restricted
Subsidiary may pledge Capital Stock or Debt or assets of any
Unrestricted Subsidiary on a nonrecourse basis as long as the
pledgee has no claim whatsoever against RHD or any Restricted
Subsidiary other than to obtain that pledged property.
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The Board of Directors of RHD may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary if, immediately after
giving pro forma effect to such designation,
(x) RHD could Incur at least $1.00 of additional Debt
pursuant to the first paragraph of the covenant described under
Limitation on debt, and
(y) no Default or Event of Default shall have occurred and
be continuing or would result therefrom.
Any such designation or redesignation by the Board of Directors
of RHD will be evidenced to the Trustee by filing with the
Trustee a Board Resolution giving effect to such designation or
redesignation and an Officers Certificate that:
(a) certifies that such designation or redesignation
complies with the foregoing provisions, and
(b) gives the effective date of such designation or
redesignation,
such filing with the Trustee to occur on or before the time
financial statements are filed with the Commission or the
Trustee pursuant to Reports below in respect of the
fiscal quarter of RHD in which such designation or redesignation
is made (or, in the case of a designation or redesignation made
during the last fiscal quarter of RHDs fiscal year, on or
before the time financial statements in respect of such fiscal
year are filed with the Commission or the Trustee pursuant to
Reports below).
Limitation on RHDs business.
RHD shall
not, and shall not permit any Restricted Subsidiary to, engage
in any business other than the business RHD and its Restricted
Subsidiaries is engaged in on the Issue Date or a Related
Business.
Merger,
consolidation and sale of property
RHD shall not merge, consolidate or amalgamate with or into any
other Person (other than a merger of a Restricted Subsidiary
into RHD) or sell, transfer, assign, lease, convey or otherwise
dispose of all or substantially all its Property in any one
transaction or series of transactions, unless:
(a) RHD shall be the surviving Person (the Surviving
Person) or the Surviving Person (if other than RHD) formed
by such merger, consolidation or amalgamation or to which such
sale, transfer, assignment, lease, conveyance or disposition is
made which is substituted for RHD as the issuer of the Notes
shall be a corporation organized and existing under the laws of
the United States of America, any State thereof or the District
of Columbia;
(b) the Surviving Person (if other than RHD) expressly
assumes, by supplemental indenture in form reasonably
satisfactory to the Trustee, executed and delivered to the
Trustee by such Surviving Person, the due and punctual payment
of the principal amount of the Notes, any accrued and unpaid
interest on such principal amount, according to their tenor, and
the due and punctual performance and observance of all the
covenants and conditions of the Indenture to be performed by RHD;
(c) in the case of a sale, transfer, assignment, lease,
conveyance or other disposition of all or substantially all the
Property of RHD, such Property shall have been transferred as an
entirety or virtually as an entirety to one Person;
(d) immediately before and after giving effect to such
transaction or series of transactions on a pro forma basis (and
treating, for purposes of this clause (d) and
clauses (e) and (f) below, any Debt that becomes, or
is anticipated to become, an obligation of the Surviving Person
or any Restricted Subsidiary as a result of such transaction or
series of transactions as having been Incurred by the Surviving
Person or such Restricted Subsidiary at the time of such
transaction or series of transactions), no Default or Event of
Default shall have occurred and be continuing;
(e) immediately after giving effect to such transaction or
series of transactions on a pro forma basis, RHD or the
Surviving Person, as the case may be, would be able to Incur at
least $1.00 of additional Debt pursuant to the first paragraph
of the covenant described under Limitation on
debt; and
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(f) the Surviving Person shall deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably
satisfactory to the Trustee, an Officers Certificate and
an Opinion of Counsel, each stating that such transaction and
the supplemental indenture, if any, in respect thereto comply
with this covenant and that all conditions precedent herein
provided for relating to such transaction have been satisfied.
The Surviving Person shall succeed to, and be substituted for,
and may exercise every right and power of RHD under the
Indenture, but the predecessor company in the case of:
(a) a sale, transfer, assignment, conveyance or other
disposition (unless such sale, transfer, assignment, conveyance
or other disposition is of all the assets of RHD as an entirety
or virtually as an entirety) of substantially all of the assets
of RHD and its Restricted Subsidiaries, or
(b) a lease,
shall not be released from any obligation to pay the principal
amount of the Notes, any accrued and unpaid interest.
Reports
Whether or not RHD is then subject to Section 13(a) or
15(d) of the Exchange Act, RHD will electronically file with the
Commission, so long as the Notes are outstanding, the annual
reports, quarterly reports and other periodic reports that RHD
would be required to file with the Commission pursuant to
Section 13(a) or 15(d) if RHD were so subject, and such
documents will be filed with the Commission on or prior to the
respective dates (the Required Filing Dates) by
which RHD would be required so to file such documents if RHD
were so subject, unless, in any case, such filings are not then
permitted by the Commission.
If such filings with the Commission are not then permitted by
the Commission, or such filings are not generally available on
the Internet free of charge, RHD will, without charge to the
holders, within 15 days of each Required Filing Date,
transmit by mail to holders, as their names and addresses appear
in the Note register, and file with the Trustee copies of the
annual reports, quarterly reports and other periodic reports
that RHD would be required to file with the Commission pursuant
to Section 13(a) or 15(d) of the Exchange Act if RHD were
subject to such Section 13(a) or 15(d) and, promptly upon
written request, supply copies of such documents to any
prospective holder or beneficial owner at RHDs cost.
So long as any of the Notes remain restricted under
Rule 144, RHD will make available upon request to any
prospective purchaser of Notes or beneficial owner of Notes in
connection with any sale thereof the information required by
Rule 144A(d)(4) under the Securities Act.
Events of
default
The following events shall be Events of Default:
(1) RHD defaults in any payment of interest on any Note
when the same becomes due and payable and such default continues
for a period of 30 days;
(2) RHD defaults in the payment of the principal amount of
any Note when the same becomes due and payable at its Stated
Maturity, upon acceleration, redemption, optional redemption,
required repurchase or otherwise;
(3) RHD fails to comply with the covenant described under
Merger, consolidation and sale of property,
Repurchase at the option of holders upon a Change of
Control or Certain covenants Limitation
on asset sales;
(4) RHD fails to comply with any covenant or agreement in
the Notes or in the Indenture (other than a failure that is the
subject of the foregoing clauses (1), (2) or (3)) and such
failure continues for 60 days after written notice is given
to RHD as specified below;
206
(5) a default by RHD or any Restricted Subsidiary under any
Debt of RHD or any Restricted Subsidiary which results in
acceleration of the maturity of such Debt, or the failure to pay
any such Debt at maturity, in an aggregate principal amount in
excess of $40 million, unless RHD is contesting such
acceleration in good faith;
(6) RHD, RHDI or any other Significant Subsidiary takes any
of the following actions pursuant to or within the meaning of
any Bankruptcy Law:
(A) commences a voluntary insolvency proceeding;
(B) consents to the entry of an order for relief against it
in an involuntary insolvency proceeding;
(C) consents to the appointment of a Custodian of it or for
any substantial part of its property; or
(D) makes a general assignment for the benefit of its
creditors;
or takes any comparable action under any foreign laws relating
to insolvency; provided, however, that the liquidation of any
Restricted Subsidiary into another Restricted Subsidiary or RHD
other than as part of a credit reorganization, shall not
constitute an Event of Default under this clause (6);
(7) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(A) is for relief against RHD, RHDI or any other
Significant Subsidiary in an involuntary insolvency proceeding;
(B) appoints a Custodian of RHD, RHDI or any other
Significant Subsidiary or for any substantial part of its
property;
(C) orders the winding up or liquidation of RHD, RHDI or
any other Significant Subsidiary; or
(D) grants any similar relief under any foreign laws;
and in each such case the order or decree remains unstayed and
in effect for 90 days; or
(8) any judgment or judgments for the payment of money in
an unsecured aggregate amount (net of any amount covered by
insurance issued by a reputable and creditworthy insurer that
has not contested coverage or reserved rights with respect to
the underlying claim and that continues to make payments
pursuant to the terms of the relevant policy) in excess of
$40 million at the time entered against RHD or any
Restricted Subsidiary and shall not be waived, satisfied or
discharged for any period of 60 consecutive days during which a
stay of enforcement shall not be in effect or otherwise payable.
The foregoing will constitute Events of Default whatever the
reason for any such Event of Default and whether it is voluntary
or involuntary or is effected by operation of law or pursuant to
any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body.
A Default under clause (4) is not an Event of Default until
the Trustee or the holders of at least 25% in aggregate
principal amount of the Notes then outstanding notify RHD (and
in the case of such notice by holders, the Trustee) of the
Default and RHD does not cure such Default within the time
specified after receipt of such notice. Such notice must specify
the Default, demand that it be remedied and state that such
notice is a Notice of Default.
RHD shall deliver to the Trustee, within 30 days after the
occurrence thereof, written notice in the form of an
Officers Certificate of any Event of Default and any event
that with the giving of notice or the lapse of time would become
an Event of Default, its status and what action RHD is taking or
proposes to take with respect thereto.
RHD shall immediately notify the Trustee if a meeting of the
Board of Directors of RHD is convened to consider any action
mandated by a petition for debt settlement proceedings or
bankruptcy proceedings. RHD
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shall also promptly advise the Trustee of the approval of the
filing of a debt settlement or bankruptcy petition prior to the
filing of such petition.
If an Event of Default with respect to the Notes (other than an
Event of Default resulting from certain events involving
bankruptcy, insolvency or reorganization with respect to RHD)
shall have occurred and be continuing, the Trustee or the
registered holders of not less than 25% in aggregate principal
amount of the Notes then outstanding may declare to be
immediately due and payable the principal amount of all the
Notes then outstanding by written notice to RHD and the Trustee,
plus accrued but unpaid interest to the date of acceleration. In
case an Event of Default resulting from certain events of
bankruptcy, insolvency or reorganization with respect to RHD
shall occur, such amount with respect to all the Notes shall be
due and payable immediately without any declaration or other act
on the part of the Trustee or the holders of the Notes. After
any such acceleration, but before a judgment or decree based on
acceleration is obtained by the Trustee, the registered holders
of a majority in aggregate principal amount of the Notes then
outstanding may, under certain circumstances, rescind and annul
such acceleration if all Events of Default, other than the
nonpayment of accelerated principal, premium or interest, have
been cured or waived as provided in the Indenture.
In the event of a declaration of acceleration of the Notes
because an Event of Default described in clause (5) has
occurred and is continuing, the declaration of acceleration of
the Notes shall be automatically annulled if the payment default
or other default triggering such Event of Default pursuant to
clause (5) shall be remedied or cured by RHD or a
Restricted Subsidiary or waived by the holders of the relevant
Debt within the grace period provided applicable to such default
provided for in the documentation governing such Debt and if
(a) the annulment of the acceleration of the Notes would
not conflict with any judgment or decree of a court of competent
jurisdiction and (b) all existing Events of Default, except
nonpayment of principal, premium or interest on the Notes that
became due solely because of the acceleration of the Notes, have
been cured or waived.
Subject to the provisions of the Indenture relating to the
duties of the Trustee, in case an Event of Default shall occur
and be continuing, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the
request or direction of any of the holders of the Notes, unless
such holders shall have offered to the Trustee reasonable
indemnity. Subject to such provisions for the indemnification of
the Trustee, the holders of a majority in aggregate principal
amount of the Notes then outstanding will have the right to
direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust
or power conferred on the Trustee with respect to the Notes.
No holder of Notes will have any right to institute any
proceeding with respect to the Indenture, or for the appointment
of a receiver or trustee, or for any remedy thereunder, unless:
(a) such holder has previously given to the Trustee written
notice of a continuing Event of Default,
(b) the registered holders of at least 25% in aggregate
principal amount of the Notes then outstanding have made written
request and offered reasonable indemnity to the Trustee to
institute such proceeding as trustee, and
(c) the Trustee shall not have received from the registered
holders of a majority in aggregate principal amount of the Notes
then outstanding a direction inconsistent with such request and
shall have failed to institute such proceeding, within
60 days after such notice, request and offer.
However, such limitations do not apply to a suit instituted by a
holder of any Note for enforcement of payment of the principal
of, and premium, if any, or interest on, such Note on or after
the respective due dates expressed in such Note.
Amendments
and waivers
Subject to certain exceptions, the Indenture may be amended with
the consent of the registered holders of a majority in aggregate
principal amount of the Notes then outstanding (including
consents obtained in connection with a tender offer or exchange
offer for the Notes) and any past default or compliance with any
208
provisions may also be waived (except a default in the payment
of principal, premium or interest and certain covenants and
provisions of the Indenture which cannot be amended without the
consent of each holder of an outstanding Note) with the consent
of the registered holders of at least a majority in aggregate
principal amount of the Notes then outstanding. However, without
the consent of each holder of an outstanding Note, no amendment
may, among other things,
(1) reduce the amount of Notes whose holders must consent
to an amendment, supplement or waiver,
(2) reduce the rate of or change the time for payment of
interest on any Note,
(3) reduce the principal of or change the Stated Maturity
of any Note,
(4) make any Note payable in money other than that stated
in the Note,
(5) impair the right of any holder of the Notes to receive
payment of principal of and interest on such holders Notes
on or after the due dates therefor or to institute suit for the
enforcement of any payment on or with respect to such
holders Notes, or
(6) release any security interest that may have been
granted in favor of the holders of the Notes pursuant to the
covenant described under Limitation on
liens other than pursuant to the terms of the Indenture.
Without the consent of any holder of the Notes, RHD and the
Trustee may amend the Indenture to:
(1) cure any ambiguity, omission, defect or inconsistency,
(2) comply with the covenant described under Merger,
consolidation and sale of property,
(3) provide for uncertificated Notes in addition to or in
place of certificated Notes,
(4) add Guarantees with respect to the Notes,
(5) secure the Notes,
(6) add to the covenants of RHD for the benefit of the
holders of the Notes or to surrender any right or power
conferred upon RHD,
(7) make any change that does not adversely affect the
rights of any holder of the Notes,
(8) comply with any requirement of the Commission in
connection with the qualification of the Indenture under the
Trust Indenture Act,
(9) provide for the issuance of Additional Notes in
accordance with the Indenture, including the issuance of
Additional Notes as restricted securities under the Securities
Act and substantially identical Additional Notes pursuant to an
Exchange Offer registered with the Commission,
(10) evidence and provide the acceptance of the appointment
of a successor trustee under the Indenture, or
(11) conform the text of the Indenture or the Notes to any
provision of this Description of notes to the extent
that such provision in this Description of notes is
intended to be a verbatim recitation of a provision of the
Indenture or the Notes.
The consent of the holders of the Notes is not necessary to
approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the
proposed amendment. After an amendment that requires the consent
of the holders of Notes becomes effective, RHD is required to
mail to each registered holder of the Notes at such
holders address appearing in the security register a
notice briefly describing such amendment. However, the failure
to give such notice to all holders of the Notes, or any defect
therein, will not impair or affect the validity of the amendment.
209
No
personal liability of directors, officers, employees and
stockholders
No director, officer, employee or stockholder of RHD shall have
any liability for any obligations of RHD under the Notes or the
Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each holder of Notes by
accepting a Note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of
the Notes. The waiver may not be effective to waive liabilities
under the U.S. federal securities laws.
Defeasance
RHD at any time may terminate some or all of its obligations
under the Notes and the Indenture (legal
defeasance), except for certain obligations, including
those respecting the defeasance trust and obligations to
register the transfer or exchange of the Notes and to replace
mutilated, destroyed, lost or stolen Notes, to maintain a
registrar and paying agent in respect of the Notes. RHD at any
time may terminate:
(1) its obligations under the covenants described under
Repurchase at the option of holders upon a
Change of Control, Certain
covenants and Reports;
(2) the operation of the cross-acceleration provisions, the
judgment default provisions and the bankruptcy provisions with
respect to Significant Subsidiaries described under
Events of default above; and
(3) the limitations contained in clauses (e) and
(f) under the first paragraph of Merger,
consolidation and sale of property (collectively,
covenant defeasance)
and thereafter any omission to comply with any covenant referred
to in clause (1) above will not constitute a Default or an
Event of Default with respect to the Notes.
RHD may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option.
If RHD exercises its legal defeasance option, payment of the
Notes may not be accelerated because of an Event of Default with
respect thereto. If RHD exercises its covenant defeasance
option, payment of the Notes may not be accelerated because of
an Event of Default specified in clause (3) (with respect to the
covenants listed under clause (3) of the first paragraph
under Defeasance), clause (4) (with
respect to the covenants listed under clause (1) of the
first paragraph under Defeasance), (5),
(6), (7) (with respect only to Significant Subsidiaries in the
case of clauses (6) and (7)) or (8) under
Events of default above or because of
the failure of RHD to comply with clause (e) under the
first paragraph of, or with the second paragraph of
Merger, consolidation and sale of
property above.
The legal defeasance option or the covenant defeasance option
may be exercised only if:
(a) RHD irrevocably deposits in trust with the Trustee
money or Government Obligations, or a combination thereof, for
the payment of principal of and interest on the Notes to
maturity or redemption, as the case may be;
(b) RHD delivers to the Trustee a certificate from an
internationally recognized firm of independent certified public
accountants expressing their opinion that the payments of
principal, premium, if any, and interest when due and without
reinvestment on the deposited Government Obligations plus any
deposited money without investment will provide cash at such
times and in such amounts as will be sufficient to pay
principal, premium, if any, and interest when due on all the
Notes to maturity or redemption, as the case may be;
(c) 123 days pass after the deposit is made and during
the
123-day
period no Default described in clause (7) under
Events of default occurs with respect to
RHD or any other Person making such deposit which is continuing
at the end of the period;
(d) no Default or Event of Default has occurred and is
continuing on the date of such deposit and after giving effect
thereto;
210
(e) such deposit does not constitute a default under any
other material agreement or instrument binding on RHD;
(f) RHD delivers to the Trustee an Opinion of Counsel to
the effect that the trust resulting from the deposit does not
constitute, or is qualified as, a regulated investment company
under the Investment Company Act of 1940;
(g) in the case of the legal defeasance option, RHD
delivers to the Trustee an Opinion of Counsel stating that:
(1) RHD has received from, or there has been published by,
the Internal Revenue Service a ruling; or
(2) since the date of the Indenture there has been a change
in the applicable U.S. federal income tax law,
to the effect, in either case, that, and based thereon such
Opinion of Counsel shall confirm that, the holders of the Notes
will not recognize income, gain or loss for U.S. federal
income tax purposes as a result of such defeasance and will be
subject to U.S. federal income tax on the same amounts, in
the same manner and at the same time as would have been the case
if such defeasance has not occurred;
(h) in the case of the covenant defeasance option, RHD
delivers to the Trustee an Opinion of Counsel to the effect that
the holders of the Notes will not recognize income, gain or loss
for U.S. federal income tax purposes as a result of such
covenant defeasance and will be subject to U.S. federal
income tax on the same amounts, in the same manner and at the
same times as would have been the case if such defeasance had
not occurred; and
(i) RHD delivers to the Trustee an Officers
Certificate and an Opinion of Counsel, each stating that all
conditions precedent to the defeasance and discharge of the
Notes have been complied with as required by the Indenture.
Satisfaction
and discharge
The Indenture will be discharged and will cease to be of further
effect as to all Notes issued thereunder, when:
(1) either
(a) all Notes that have been authenticated, except lost,
stolen or destroyed Notes that have been replaced or paid and
Notes for whose payment money has been deposited in trust and
thereafter repaid to RHD, have been delivered to the Trustee for
cancellation; or
(b) all Notes that have not been delivered to the Trustee
for cancellation have become due and payable by reason of the
mailing of a notice of redemption or otherwise or will become
due and payable within one year and RHD has irrevocably
deposited or caused to be deposited with the Trustee as trust
funds in trust solely for the benefit of holders, cash in
U.S. dollars, non-callable Government Obligations, or a
combination of cash in U.S. dollars and non-callable
Government Obligations, in amounts as will be sufficient without
consideration of any reinvestment of interest, to pay and
discharge the entire indebtedness on the Notes not delivered to
the Trustee for cancellation for principal, premium, if any, and
accrued interest to the date of maturity or redemption.
(2) no Default or Event of Default has occurred and is
continuing on the date of the deposit;
(3) RHD has paid or caused to be paid all sums payable by
it under the Indenture; and
(4) RHD has delivered irrevocable instructions to the
Trustee under the Indenture to apply the deposited money toward
the payment of the Notes at maturity or the redemption date, as
the case may be.
211
In addition, RHD must deliver an Officers Certificate and
an Opinion of Counsel to the Trustee stating that all conditions
precedent to satisfaction and discharge have been satisfied.
Governing
law
The Indenture and the Notes are governed by the laws of the
State of New York.
The
Trustee
The Bank of New York is the Trustee under the Indenture, and is
also the trustee under the indentures relating to the RHD
Existing Notes and the RHDI Existing Notes.
Except during the continuance of an Event of Default, the
Trustee will perform only such duties as are specifically set
forth in the Indenture. The Trustee will exercise such of the
rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise as a prudent
person would exercise under the circumstances in the conduct of
such persons own affairs.
Additional
information
Anyone who receives this prospectus may obtain a copy of the
Indenture and the Registration Rights Agreements without charge
by writing to RHD, attention: Investor Relations, 1001 Winstead
Drive, Cary, North Carolina 27513.
Certain
definitions
Set forth below is a summary of certain of the defined terms
used in the Indenture. Reference is made to the Indenture for
the full definition of all such terms as well as any other
capitalized terms used herein for which no definition is
provided. Unless the context otherwise requires, an accounting
term not otherwise defined has the meaning assigned to it in
accordance with GAAP.
Acquired Debt
means Debt of a Person existing
at the time such Person becomes a Restricted Subsidiary, other
than Debt Incurred in connection with, or in contemplation of,
such Person becoming a Restricted Subsidiary. Acquired Debt
shall be deemed to be Incurred on the date the acquired Person
becomes a Restricted Subsidiary.
Acquisition
means (1) the consummation
of the acquisition by RHD of Centel Directory Company, a
Delaware corporation, DirectoriesAmerica, Inc., a Kansas
corporation, and Sprint Publishing & Advertising,
Inc., a Kansas corporation pursuant to the stock purchase
agreement dated as of September 21, 2002, as amended, by
and between Sprint Corporation, a Kansas corporation, Centel
Directories LLC, a Delaware limited liability company, and RHD,
(2) the acquisition by RHD of SBC Communications
Inc.s directory publishing business in Illinois and
northwest Indiana pursuant to the Purchase Agreement by and
among Ameritech Corporation, Ameritech Publishing, Inc. and RHD
as of July 28, 2004, as amended, (3) the acquisition
by RHD of Dex Media pursuant to the Agreement and Plan of
Merger, dated as of October 3, 2005, by and among Dex
Media, RHD and Forward Acquisition Corp., a Delaware
corporation, as amended, (4) the acquisition by RHD of
Business.com, Inc., pursuant to the Agreement and Plan of
Merger, dated as of July 25, 2007, by and among,
Business.com, Inc., RHD and Patriot Acquisition Merger Sub.
Corp., a Delaware corporation, as amended, and (5) the
purchase by RHD or any of its Restricted Subsidiaries of any
Capital Stock, bonds, notes, debentures or other debt securities
of any Person in a directory publishing business so that such
Person becomes a Restricted Subsidiary of RHD and any of its
Restricted Subsidiaries or the merger into or consolidation with
any such Person so that such Person becomes a Restricted
Subsidiary of RHD, or the purchase of any assets constituting a
business unit of any Person in the directory publishing business.
Additional Assets
means:
(a) any Property (other than cash, cash equivalents and
securities) to be owned by RHD or any Restricted Subsidiary and
used in a Related Business; or
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(b) Capital Stock of a Person that is or becomes a
Restricted Subsidiary upon or as a result of the acquisition of
such Capital Stock by RHD or another Restricted Subsidiary from
any Person other than RHD or an Affiliate of RHD;
provided,
however
that, in the case of this clause (b), such
Restricted Subsidiary is primarily engaged in a Related Business.
Affiliate
of any specified Person means:
(a) any other Person directly or indirectly controlling or
controlled by or under direct or indirect common control with
such specified Person, or
(b) any other Person who is a director or officer of:
(1) such specified Person,
(2) any Subsidiary of such specified Person, or
(3) any Person described in clause (a) above.
For the purposes of this definition, control when
used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract
or otherwise; and the terms controlling and
controlled have meanings correlative to the
foregoing. For purposes of the covenants described under
Certain covenants Limitation on
asset sales and Certain
covenants Limitation on transactions with
affiliates and the definition of Additional
Assets only, Affiliate shall also mean any
beneficial owner of shares representing 10% or more of the total
voting power of the Voting Stock (on a fully diluted basis) of
RHD or of rights or warrants to purchase such Voting Stock
(whether or not currently exercisable) and any Person who would
be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
Applicable Premium
means, with respect to a
Note on any redemption date, the greater of:
(1) 1.0% of the then outstanding principal amount of the
Note; and
(2) the excess of:
(a) the present value at such redemption date of
(i) the redemption price of the Note at October 15,
2012 (such redemption price being set forth in the table
appearing below the caption Optional
redemption) plus (ii) all required interest payments
due on the Note through October 15, 2012 (excluding accrued
and unpaid interest to the redemption date), computed using a
discount rate equal to the Treasury Rate of such redemption date
plus 50 basis points; over
(b) the then outstanding principal amount of the Note.
Asset Sale
means any sale, lease, transfer,
issuance or other disposition (or series of related sales,
leases, transfers, issuances or dispositions) by RHD or any
Restricted Subsidiary, including any disposition by means of a
merger, consolidation or similar transaction (each referred to
for the purposes of this definition as a
disposition), of
(a) any shares of Capital Stock of a Restricted Subsidiary
(other than directors qualifying shares or shares required
by applicable law to be held by a Person other than RHD or a
Restricted Subsidiary),
(b) all or substantially all of the properties and assets
of any division or line of business of RHD or any Restricted
Subsidiary, or
(c) any other assets of RHD or any Restricted Subsidiary
outside of the ordinary course of business of RHD or such
Restricted Subsidiary;
other than, in the case of clause (a), (b) or
(c) above,
(1) any disposition by RHD or a Restricted Subsidiary to
RHD, a Restricted Subsidiary or any Person (if after giving
effect to such transfer such other Person becomes a Restricted
Subsidiary),
213
(2) any disposition that constitutes a Permitted Investment
or Restricted Payment permitted by the covenant described under
Certain covenants Limitation on
restricted payments,
(3) any disposition effected in compliance with the
covenant described under Merger, consolidation
and sale of property,
(4) any disposition of Temporary Cash Investments in the
ordinary course of business,
(5) any disposition of obsolete, worn out or permanently
retired equipment or facilities or other property that are no
longer useful in the conduct of the business of RHD or any
Restricted Subsidiary,
(6) any disposition of Receivables and Related Assets in a
Qualified Securitization Transaction for the Fair Market Value
thereof including cash or Temporary Cash Investments in an
amount at least equal to 75% of the Fair Market Value thereof,
(7) for purposes of the covenant described under
Certain covenants Limitation on
asset sales, any disposition the net proceeds of which to
RHD and its Restricted Subsidiaries do not exceed
$5 million in any transaction or series of related
transactions,
(8) the licensing or sublicensing of intellectual property
or other general intangibles and licenses, leases or subleases
of other property in the ordinary course of business which do
not materially interfere with the business of RHD and its
Restricted Subsidiaries,
(9) the sale or other disposition of cash or cash
equivalents, and
(10) any release of intangible claims or rights in
connection with the loss or settlement of a bona fide lawsuit,
dispute or other controversy.
Average Life
means, as of any date of
determination, with respect to any Debt or Preferred Stock, the
quotient obtained by dividing:
(a) the sum of the products of (1) the number of years
(rounded to the nearest one-twelfth of one year) from the date
of determination to the dates of each successive scheduled
principal payment of such Debt or redemption or similar payment
with respect to such Preferred Stock multiplied by (2) the
amount of such payment by
(b) the sum of all such payments.
Bankruptcy Law
means Title 11, United
States Code, or any similar U.S. Federal or state law.
Board of Directors
means, with respect to any
Person, the board of directors, or any equivalent management
entity, of such Person or any committee thereof duly authorized
to act on behalf of such board.
Board Resolution
means, with respect to any
Person, a copy of a resolution of such Persons Board of
Directors, certified by the Secretary or an Assistant Secretary,
or an equivalent officer, of such Person to have been duly
adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification.
Business Day
means a day other than a
Saturday, Sunday or other day on which commercial banking
institutions in New York City are authorized or required by law
to close.
Capital Lease Obligations
means any
obligation under a lease that is required to be capitalized for
financial reporting purposes in accordance with GAAP; and the
amount of Debt represented by such obligation shall be the
capitalized amount of such obligations determined in accordance
with GAAP; and the Stated Maturity thereof shall be the date of
the last payment of rent or any other amount due under such
lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty. For
purposes of the covenant described under
Certain covenants Limitation on
liens, a Capital Lease Obligation shall be deemed secured
by a Lien on the Property being leased.
Capital Stock
means, with respect to any
Person, any shares or other equivalents (however designated) of
any class of corporate stock or partnership interests or any
other participations, rights, warrants, options or
214
other interests in the nature of an equity interest in such
Person, including Preferred Stock, but excluding any debt
security convertible or exchangeable into such equity interest.
Capital Stock Sale Proceeds
means the
aggregate cash proceeds received by RHD from the issuance or
sale (other than to a Restricted Subsidiary of RHD or an
employee stock ownership plan or trust established by RHD or a
Restricted Subsidiary for the benefit of their employees and
except to the extent that any purchase made pursuant to such
issuance or sale is financed by RHD or any Restricted
Subsidiary) by RHD of its Capital Stock (including upon the
exercise of options, warrants or rights) (other than
Disqualified Stock) or warrants, options or rights to purchase
its Capital Stock (other than Disqualified Stock) after the
Issue Date, net of attorneys fees, accountants fees,
underwriters or placement agents fees, discounts or
commissions and brokerage, consultant and other fees actually
Incurred in connection with such issuance or sale and net of
taxes paid or payable as a result thereof.
Change of Control
means the occurrence of any
of the following events:
(1) any person (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the beneficial owner (as defined in
Rules 13d-3
and
13d-5
under the Exchange Act), directly or indirectly, of 50% or more
of the total voting power of the Voting Stock of RHD (for the
purpose of this clause (1) a Person shall be deemed to
beneficially own the Voting Stock of a corporation that is
beneficially owned (as defined above) by another corporation (a
parent corporation) if such Person beneficially owns
(as defined above) at least 50% of the aggregate voting power of
all classes of Voting Stock of such parent corporation);
(2) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of
Directors of RHD (together with any new directors whose election
by such Board of Directors or whose nomination for election by
the applicable shareholders was approved or ratified by a vote
of
66
2
/
3
%
of the Board of Directors of RHD then still in office who were
either directors at the beginning of such period or whose
election or nomination for election was previously so approved
or ratified) cease for any reason to constitute a majority of
such Board of Directors then in office;
(3) the adoption of a plan relating to the liquidation or
dissolution of RHD; or
(4) the merger or consolidation of RHD with or into another
Person or the merger of another Person with or into RHD, or the
sale of all or substantially all the assets of RHD to another
Person, and, in the case of any such merger or consolidation,
the securities of RHD that are outstanding immediately prior to
such transaction and that represent 100% of the aggregate voting
power of the Voting Stock of RHD are changed into or exchanged
for cash, securities or property, unless pursuant to such
transaction such securities are changed into or exchanged for,
in addition to any other consideration, securities of the
surviving corporation that represent immediately after such
transaction, at least a majority of the aggregate voting power
of the Voting Stock of the surviving corporation;
Notwithstanding the foregoing, a Change of Control shall not be
deemed to have occurred if, following such event, the surviving
entity has an Investment Grade Rating by both agencies and, in
the event that a person acquires Voting Stock of RHD, such
person has an Investment Grade Rating prior to such acquisition.
Commission
means the U.S. Securities and
Exchange Commission.
Commodity Price Protection Agreement
means,
in respect of a Person, any forward contract, commodity swap
agreement, commodity option agreement or other similar agreement
or arrangement designed to protect such Person against
fluctuations in commodity prices.
Consolidated Incremental Depreciation and
Amortization
means, for any period, the total amount
of depreciation and amortization related to the step up in basis
required under purchase accounting with respect to the
transactions contemplated by any Acquisition, for such period on
a consolidated basis in accordance with GAAP.
Consolidated Interest Expense
means, for any
period, without duplication and in each case determined on a
consolidated basis in accordance with GAAP, the total interest
expense of RHD and its consolidated
215
Restricted Subsidiaries, plus, to the extent not included in
such total interest expense, and to the extent Incurred by
either RHD or its Restricted Subsidiaries:
(a) the interest component of Capital Lease Obligations
paid, accrued
and/or
scheduled to be paid or accrued during such period,
(b) amortization of debt discount and debt issuance cost,
including commitment fees,
(c) capitalized interest,
(d) non-cash interest expense,
(e) commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers acceptance
financing,
(f) net costs associated with Hedging Obligations
(including amortization of discounts or fees);
provided,
however,
such costs shall not include any unrealized gain or
loss implicit in Hedging Obligations,
(g) the sum of (x) all Disqualified Stock Dividends
and (y) Preferred Stock Dividends with respect to Capital
Stock of Subsidiaries,
(h) interest accruing or paid on any Debt of any other
Person to the extent such Debt is Guaranteed by RHD or any
Restricted Subsidiary, or is secured by a Lien on RHDs or
any Restricted Subsidiarys assets, whether or not such
interest is paid by RHD or such Restricted Subsidiary,
(i) the cash contributions to any employee stock ownership
plan or similar trust to the extent such contributions are used
by such plan or trust to pay interest or fees to any Person
(other than RHD) in connection with Debt Incurred by such plan
or trust,
(j) interest accruing in connection with a Qualified
Securitization Transaction, and
(k) the interest portion of any deferred payment obligation.
Consolidated Net Income
means, for any
period, the consolidated net income (loss) of RHD for such
period on a consolidated basis prior to any adjustment to net
income for any preferred stock (other than Disqualified Stock)
as determined in accordance with GAAP;
provided, however
,
that there shall not be included in such Consolidated Net Income:
(a) any net income (loss) of any Person (other than RHD) if
such Person is not a Restricted Subsidiary, except that:
(1) RHDs equity in the net income of any such Person
for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash distributed by such
Person during such period to RHD or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a
dividend or other distribution to a Restricted Subsidiary, to
the limitations contained in clause (c) below), and
(2) RHDs equity in a net loss of any such Person for
such period shall be included in determining such Consolidated
Net Income,
(3) the revenue participation income received in connection
with Revenue Participation Agreement shall not be
excluded, and
(b) any net income (loss) of any Restricted Subsidiary if
such Restricted Subsidiary is subject to contractual
restrictions, directly or indirectly, on the payment of
dividends or the making of distributions, directly or
indirectly, to the RHD, except that:
(1) RHDs equity in the net income of any such
Restricted Subsidiary for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash
distributed by such Restricted Subsidiary during such period to
RHD or another Restricted Subsidiary as a dividend or
216
other distribution (subject, in the case of a dividend or other
distribution to another Restricted Subsidiary, to the limitation
contained in this clause), and
(2) RHDs equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such
Consolidated Net Income,
(c) any net gain or loss realized upon the sale or other
disposition of any Property of RHD or any of its consolidated
Subsidiaries (including pursuant to any sale and leaseback
transaction) that is not sold or otherwise disposed of in the
ordinary course of business,
(d) any net after-tax extraordinary gain or loss,
(e) the cumulative effect of a change in accounting
principles,
(f) any non-cash compensation expense realized for grants
of stock appreciation or similar rights, stock options or other
rights to officers, directors and employees of RHD or any
Restricted Subsidiary,
provided
that such rights (if
redeemable), options or other rights can be redeemed at the
option of the holder only for Capital Stock of RHD (other than
Disqualified Stock) or Capital Stock of a direct or indirect
parent of RHD,
(g) 50% of Consolidated Incremental Depreciation and
Amortization,
(h) any non-cash impact attributable to the reduction in
deferred revenue or reduction in deferred costs to balance sheet
accounts as a result of the fair value exercise undertaken as
required by purchase accounting for the transactions
contemplated by any Acquisition, in accordance with GAAP, during
the eighteen consecutive months following the consummation of
such Acquisition, and
(i) to the extent non-cash, any unusual, non-operating or
non-recurring gain or loss (including to the extent related to
any Acquisitions).
Notwithstanding the foregoing, for purposes of the covenant
described under Certain covenants
Limitation on restricted payments only, there shall be
excluded from Consolidated Net Income any dividends, repayments
of loans or advances or other transfers of assets from
Unrestricted Subsidiaries to RHD or a Restricted Subsidiary to
the extent such dividends, repayments or transfers increase the
amount of Restricted Payments permitted under such covenant
pursuant to clause (c)(4) thereof.
Credit Facilities
means the RHD Credit
Agreement, the RHDI Credit Facility and the Dex Media Credit
Facilities.
Currency Exchange Protection Agreement
means,
in respect of a Person, any foreign exchange contract, currency
swap agreement, futures contract, currency option, synthetic cap
or other similar agreement or arrangement designed to protect
such Person against fluctuations in currency exchange rates.
Custodian
means any receiver, trustee,
assignee, liquidator, custodian or similar official under any
Bankruptcy Law.
Debt
means, with respect to any Person on any
date of determination (without duplication):
(a) the principal of and premium (if any, but only in the
event such premium has become due) in respect of:
(1) debt of such Person for money borrowed, and
(2) debt evidenced by notes, debentures, bonds or other
similar instruments for the payment of which such Person is
responsible or liable;
(b) all Capital Lease Obligations of such Person;
(c) all obligations of such Person issued or assumed as the
deferred purchase price of Property, all conditional sale
obligations of such Person and all obligations of such Person
under any title retention agreement (but excluding trade
accounts payable for goods and services arising in the ordinary
course of business);
217
(d) all obligations of such Person for the reimbursement of
any obligor on any letter of credit, bankers acceptance or
similar credit transaction (other than obligations with respect
to letters of credit, performance bonds or surety bonds securing
obligations (other than obligations described in
(a) through (c) above) provided in the ordinary course
of business of such Person to the extent such letters of credit
and bonds are not drawn upon or, if and to the extent drawn
upon, such drawing is reimbursed no later than the fifth
Business Day following receipt by such Person of a demand for
reimbursement following payment on the letter of credit or bond);
(e) the amount of all obligations of such Person with
respect to the Repayment of any Disqualified Stock or, with
respect to any Subsidiary of such Person, any Preferred Stock
(measured, in each case, at the greatest of its voluntary or
involuntary maximum fixed repurchase price or liquidation value
but excluding, in each case, any accrued dividends for any
current period not yet payable);
(f) all obligations of the type referred to in
clauses (a) through (e) above of other Persons and all
dividends of other Persons for the payment of which, in either
case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by
means of any Guarantee;
(g) all obligations of the type referred to in
clauses (a) through (f) above of other Persons, the
payment of which is secured by any Lien on any Property of such
Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the
lesser of the Fair Market Value of such Property or the amount
of the obligation so secured; and
(h) to the extent not otherwise included in this
definition, Hedging Obligations of such Person (the amount of
any such obligations to be equal at any time to the termination
value of such agreement or arrangement giving rise to such
obligation that would be payable by such Person at such time).
The amount of Debt of any Person at any date shall be the amount
necessary to extinguish in full as of such date the outstanding
balance at such date of all unconditional obligations as
described above and the maximum liability, upon the occurrence
of the contingency giving rise to the obligation, of any
contingent obligations at such date including, without
limitation, all interest that has been capitalized, and without
giving effect to any call premiums in respect thereof. The
amount of Debt represented by a Hedging Obligation shall be
equal to:
(1) zero if such Hedging Obligation has been Incurred
pursuant to clause (e), (f) or (g) of the second
paragraph of the covenant described under
Certain covenants Limitation on
debt, or
(2) the marked-to-market value of such Hedging Obligation
to the counterparty thereof if not Incurred pursuant to such
clauses.
For purposes of this definition, the maximum fixed repurchase
price of any Disqualified Stock that does not have a fixed
redemption, repayment or repurchase price will be calculated in
accordance with the terms of such Disqualified Stock as if such
Disqualified Stock were purchased on any date on which Debt will
be required to be determined pursuant to the Indenture at its
Fair Market Value if such price is based upon, or measured by,
the fair market value of such Disqualified Stock;
provided,
however
, that if such Disqualified Stock is not then
permitted in accordance with the terms of such Disqualified
Stock to be redeemed, repaid or repurchased, the redemption,
repayment or repurchase price shall be the book value of such
Disqualified Stock as reflected in the most recent financial
statements of such Person.
Default
means any event which is, or after
notice or passage of time or both would be, an Event of Default.
Dex Media
means Dex Media, Inc.
Dex Media Credit Facilities
means the Dex
Media East Credit Facility and the Dex Media West Credit
Facility.
Dex Media East Credit Facility
means that
certain Credit Agreement, dated as of November 8, 2002 as
amended and restated as of January 31, 2006, among Dex
Media, Inc., Dex Media East, Inc., Dex Media East LLC, as
borrower, the lenders parties thereto and JPMorgan Chase Bank,
N.A., as administrative agent and
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collateral agent, as amended by the First Amendment, dated as of
April 24, 2006, among Dex Media, Inc., Dex Media East,
Inc., Dex Media East LLC, as borrower, the lenders parties
thereto, JPMorgan Chase Bank, N.A., as administrative agent and
collateral agent, and the other agents parties thereto, as such
may be further amended, modified or supplemented from time to
time, or one or more debt or commercial paper facilities or
other instruments with banks or other institutional lenders
providing for revolving credit loans, term loans, receivables or
inventory financing (including through the sale of receivables
or inventory to such lenders or to special purpose, bankruptcy
remote entities formed to borrow from such lenders against such
receivables or inventory) or trade letters of credit, or other
forms of guarantees or assurances that one or more times
refinances, replaces, supplements, modifies or amends such
credit facility or debentures or other debt securities.
Dex Media Existing Notes
means the Dex Media,
Inc. 9% Senior Discount Notes due 2013 and Dex Media
8% Senior Notes due 2013, in each case outstanding on the
Issue Date.
Dex Media Subsidiaries Existing Notes
means
the Dex Media West 8.5% Senior Notes due 2010, Dex Media
West 9.875% Senior Subordinated Notes due 2013, Dex Media
West 5.875% Senior Notes due 2011, Dex Media East
9.875% Senior Notes due 2009 and Dex Media East
12.125% Senior Subordinated Notes due 2012, in each case,
outstanding on the Issue Date.
Dex Media West Credit Facility
means that
certain Credit Agreement, dated as of September 9, 2003 as
amended and restated as of January 31, 2006, among Dex
Media, Inc., Dex Media West, Inc., Dex Media West LLC, as
borrower, the lenders parties thereto and JPMorgan Chase Bank,
N.A., as administrative agent and collateral agent, as amended
by the First Amendment, dated as of April 24, 2006, among
Dex Media, Inc., Dex Media West, Inc., Dex Media LLC, as
borrower, the lenders party thereto, JPMorgan Chase Bank, N.A.,
as administrative agent and collateral agent, and the other
agents parties thereto, as such may be further amended, modified
or supplemented from time to time, or one or more debt or
commercial paper facilities or other instruments with banks or
other institutional lenders providing for revolving credit
loans, term loans, receivables or inventory financing (including
through the sale of receivables or inventory to such lenders or
to special purpose, bankruptcy remote entities formed to borrow
from such lenders against such receivables or inventory) or
trade letters of credit, or other forms of guarantees or
assurances that one or more times refinances, replaces,
supplements, modifies or amends such credit facility or
debentures or other debt securities.
Disqualified Stock
means, with respect to any
Person, any Capital Stock that by its terms (or by the terms of
any security into which it is convertible or for which it is
exchangeable, in either case at the option of the holder
thereof) or upon the happening of an event:
(a) matures or is mandatorily redeemable pursuant to a
sinking fund obligation or otherwise,
(b) is or may become redeemable or repurchaseable at the
option of the holder thereof, in whole or in part, or
(c) convertible or exchangeable at the option of the holder
thereof for Debt or Disqualified Stock,
on or prior to, in the case of clause (a), (b) or (c), the
first anniversary of the Stated Maturity of the Notes;
provided
that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders the
right to require RHD to repurchase or redeem such Capital Stock
upon the occurrence of a Change of Control occurring prior to
the first anniversary of the Stated Maturity of the Notes shall
not constitute Disqualified Stock if the change of control
provisions applicable to such Disqualified Stock are no more
favorable to the holders of such Capital Stock than the
provisions of the Indenture with respect to a Change of Control
and such Capital Stock specifically provides that RHD will not
repurchase or redeem any such Capital Stock pursuant to such
provisions prior to RHDs completing a Change of Control
Offer.
Disqualified Stock Dividends
means all
dividends with respect to Disqualified Stock of RHD held by
Persons other than a Wholly Owned Restricted Subsidiary.
Dividend Yield
means the aggregate dollar
amount of the cash dividends paid on RHDs common stock or
equivalent, per share, during any
12-month
period divided by the Market Price per share of RHDs
common
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stock or equivalent averaged over the trading days of such
period up to and including the trading day before the date of a
resolution of the Board of Directors of RHD declaring the
payment of the cash dividend.
EBITDA
means, with respect to any Person for
any period:
(a) the sum of an amount equal to Consolidated Net Income
of such Person for such period, plus (without duplication) the
following to the extent Consolidated Net Income has been reduced
thereby for such period:
(1) the provisions for taxes based on income or profits or
utilized in computing net loss,
(2) Consolidated Interest Expense,
(3) depreciation,
(4) amortization,
(5) non-recurring losses or expenses, and
(6) any other non-cash items (
provided
that any such
non-cash item that represents an accrual of or reserve for cash
expenditures in any future period shall be deducted in such
future period);
minus
(b) (x) all non-cash items increasing Consolidated Net
Income for such period (other than any such non-cash item to the
extent that it will result in the receipt of cash payments in
any future period) and (y) all non-recurring gains for such
period.
Notwithstanding the foregoing clause, the provision for taxes
and the depreciation, amortization and non-cash items of a
Restricted Subsidiary shall be added to Consolidated Net Income
to compute EBITDA only to the extent (and in the same
proportion) that the net income of such Restricted Subsidiary
was included in calculating Consolidated Net Income. The
calculation of EBITDA shall not include any non-cash impact
attributable to the reduction in deferred revenue or reduction
in deferred costs to balance sheet accounts as a result of the
fair value exercise undertaken as required by purchase
accounting in accordance with GAAP, during the eighteen
consecutive months following the consummation of the relevant
Acquisition (it being understood that clause (h) of
Consolidated Net Income shall not apply) (without duplication).
Event of Default
has the meaning set forth
under Events of default.
Exchange Act
means the U.S. Securities
Exchange Act of 1934, as amended.
Existing Notes
mean the RHD Existing Notes,
the RHDI Existing Notes, the Dex Media Existing Notes and the
Dex Media Subsidiaries Existing Notes.
Fair Market Value
means, with respect to any
Property, the price that could be negotiated in an
arms-length free market transaction, for cash, between a
willing seller and a willing buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair
Market Value shall be determined, except as otherwise provided,
(a) if such Property has a Fair Market Value equal to or
less than $25 million, by any Officer of RHD, or
(b) if such Property has a Fair Market Value in excess of
$25 million, by a majority of the Board of Directors of RHD
and evidenced by a Board Resolution dated within 30 days of
the relevant transaction.
GAAP
means United States generally accepted
accounting principles as in effect on the Issue Date, including
those set forth:
(a) in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public
Accountants,
(b) in the statements and pronouncements of the Financial
Accounting Standards Board,
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(c) in such other statements by such other entity as
approved by a significant segment of the accounting
profession, and
(d) the rules and regulations of the Commission governing
the inclusion of financial statements (including pro forma
financial statements) in periodic reports required to be filed
pursuant to Section 13 of the Exchange Act, including
opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the
Commission.
Government Obligations
means any security
issued or guaranteed as to principal or interest by the United
States, or by a person controlled or supervised by and acting as
an instrumentality of the government of the United States
pursuant to authority granted by the Congress of the United
States; or any certificate of deposit for any of the foregoing.
Guarantee
means any obligation, contingent or
otherwise, of any Person directly or indirectly guaranteeing any
Debt of any other Person and any obligation, direct or indirect,
contingent or otherwise, of such Person:
(a) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Debt of such other Person (whether
arising by virtue of partnership arrangements, or by agreements
to keep-well, to purchase assets, goods, securities or services,
to take-or-pay or to maintain financial statement conditions or
otherwise), or
(b) entered into for the purpose of assuring in any other
manner the obligee against loss in respect thereof (in whole or
in part);
provided, however
, that the term Guarantee
shall not include:
(1) endorsements for collection or deposit in the ordinary
course of business, or
(2) a contractual commitment by one Person to invest in
another Person for so long as such Investment is reasonably
expected to constitute a Permitted Investment under
clause (a) of the definition of Permitted
Investment.
The term Guarantee used as a verb has a
corresponding meaning. The term Guarantor shall mean
any Person Guaranteeing any obligation,
Hedging Obligations
of any Person means any
obligation of such Person pursuant to any Interest Rate
Agreement, Currency Exchange Protection Agreement, Commodity
Price Protection Agreement or any other similar agreement or
arrangement.
holder
or noteholder means the
Person in whose name an Note is registered.
Incur
means, with respect to any Debt or
other obligation of any Person, to create, issue, incur (by
merger, conversion, exchange or otherwise), extend, assume,
Guarantee or become liable in respect of such Debt or other
obligation or the recording, as required pursuant to GAAP or
otherwise, of any such Debt or obligation on the balance sheet
of such Person (and Incurrence and
Incurred shall have meanings correlative to the
foregoing);
provided, however
, that a change in GAAP that
results in an obligation of such Person that exists at such
time, and is not theretofore classified as Debt, becoming Debt
shall not be deemed an Incurrence of such Debt;
provided
further, however
, that any Debt or other obligations of a
Person existing at the time such Person becomes a Restricted
Subsidiary (whether by merger, consolidation, acquisition or
otherwise) shall be deemed to be Incurred by such Restricted
Subsidiary at the time it becomes a Restricted Subsidiary; and
provided further, however
, that amortization of debt
discount, accrual or capitalization of dividends and interest,
including the accrual of deferred accrued interest, the
accretion of principal, and the payment of interest or dividends
in the form of additional securities shall not, in any such
case, be deemed to be the Incurrence of Debt,
provided
that in the case of Debt or Preferred Stock sold at a
discount or for which interest or dividends is capitalized or
accrued or accreted, the amount of such Debt or outstanding
Preferred Stock Incurred shall at all times be the then current
accreted value or shall include all capitalized interest.
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Independent Financial Advisor
means an
accounting, appraisal or investment banking firm of national
standing or any third party appraiser or recognized expert with
experience in appraising the terms and conditions of the type of
transaction or series of related transactions for which an
opinion is required,
provided
that such firm or appraiser
is not an Affiliate of RHD.
Initial Purchasers
means J.P. Morgan
Securities Inc., Banc of America Securities LLC, Bear,
Stearns & Co. Inc., Credit Suisse Securities (USA)
LLC, Deutsche Bank Securities Inc., Wachovia Capital Markets,
LLC, Barclays Capital Inc., BNP Paribas Securities Corp., GE
Capital Markets, Inc., Greenwich Capital Markets, Inc., ING
Financial Markets LLC and Scotia Capital (USA) Inc.
Interest Rate Agreement
means, for any
Person, any interest rate swap agreement, interest rate cap
agreement, interest rate collar agreement, interest rate option
agreement, interest rate future agreement or other similar
agreement designed to protect against fluctuations in interest
rates.
Investment
by any Person means any loan
(other than advances and extensions of credit and receivables in
the ordinary course of business that are recorded as accounts
receivable on the balance sheet of such Person or acquired as
part of the assets acquired in connection with an acquisition of
assets otherwise permitted by the Indenture), advance or other
extension of credit or capital contribution (by means of
transfers of cash or other Property to others or payments for
Property or services for the account or use of others, or
otherwise) (excluding commission, travel and similar advances to
officers and employees in the ordinary course of business) to,
or Incurrence of a Guarantee of any obligation of, or purchase
or acquisition of Capital Stock, bonds, notes, debentures or
other securities or evidence of Debt issued by, any other
Person. For purposes of the covenants described under
Certain covenants Limitation on
restricted payments and Certain
covenants Designation of Restricted and Unrestricted
Subsidiaries, and the definition of Restricted
Payment, Investment shall include the Fair
Market Value of the Investment of RHD and any Restricted
Subsidiary in any Subsidiary of RHD at the time that such
Subsidiary is designated an Unrestricted Subsidiary;
provided, however
, that upon a redesignation of an
Unrestricted Subsidiary as a Restricted Subsidiary, RHD shall be
deemed to continue to have a permanent Investment in
an Unrestricted Subsidiary (proportionate to RHDs equity
interest in such Subsidiary) of an amount (if positive) equal to:
(a) RHDs Investment in such Subsidiary at
the time of such redesignation, less
(b) the portion (proportionate to RHDs equity
interest in such Subsidiary) of the Fair Market Value of the
Investment of RHD and any Restricted Subsidiary in such
Subsidiary at the time of such redesignation.
In determining the amount of any Investment made by transfer of
any Property other than cash, such Property shall be valued at
its Fair Market Value at the time of such Investment.
Investment Grade Rating
means a rating equal
to or higher than Baa3 (with a stable or better outlook) (or the
equivalent) by Moodys or BBB- (with a stable or better
outlook) (or the equivalent) by S&P.
Issue Date
means October 2, 2007.
Leverage Ratio
means the ratio of:
(a) the outstanding Debt of RHD and its Restricted
Subsidiaries as of the date of calculation on a consolidated
basis in accordance with GAAP, to
(b) the LTM Pro Forma EBITDA.
Lien
means, with respect to any Property of
any Person, any mortgage or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not
materially impairing usefulness or marketability), encumbrance,
preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever on or with respect
to such Property (including any Capital Lease Obligation,
conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing
or any sale and leaseback transaction).
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LTM Pro Forma EBITDA
means Pro Forma EBITDA
for the four most recent consecutive fiscal quarters prior to
the date of determination for which financial statements are
available and have been filed with the Commission or the Trustee
pursuant to Reports.
Market Price
of RHDs common stock or
equivalent (the security) on any date of
determination means:
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the closing sale price (or, if no closing sale price is
reported, the last reported sale price) of a security (regular
way) on the New York Stock Exchange on that date;
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if that security is not listed on the New York Stock Exchange on
that date, the closing sale price as reported in the composite
transactions for the principal U.S. securities exchange on
which that security is listed;
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if that security is not so listed on a U.S. national or
regional securities exchange, the closing sale price as reported
by the Nasdaq National Market;
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if that security is not so reported, the last price quoted by
Interactive Data Corporation for that security or, if
Interactive Data Corporation is not quoting such price, a
similar quotation service selected by RHD;
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if that security is not so quoted, the average of the mid-point
of the last bid and ask prices for that security from at least
two dealers recognized as market-makers for that
security; or
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if that security is not so quoted, the average of that last bid
and ask prices for that security from a dealer engaged in the
trading of such securities.
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Money Market Funds
means shares of an
investment company registered under the Investment Company Act
of 1940 that holds itself out as a money market fund, seeks to
maintain a net asset value of $1.00 per share and has the
highest investment rating by S&P and Moodys and, in
either case, any successor rating agency thereto.
Moodys
means Moodys Investors
Service, Inc. and any successor to its rating agency business.
Net Available Cash
from any Asset Sale means
cash payments received therefrom (including any cash payments
received by way of deferred payment of principal pursuant to a
note or installment receivable or otherwise, but only, in each
case, as and when received, but excluding any other
consideration received in the form of assumption by the
acquiring Person of Debt or other obligations relating to the
Property that is the subject of such Asset Sale or received in
any other non-cash form), in each case net of:
(a) all legal, title and recording tax expenses,
commissions and other fees and expenses Incurred, and all
U.S. Federal, state, provincial, foreign and local taxes
required to be accrued as a liability under GAAP, as a
consequence of such Asset Sale,
(b) all payments made on any Debt that is secured by any
Property subject to such Asset Sale, in accordance with the
terms of any Lien upon or other security agreement of any kind
with respect to such Property, or which must by its terms, or in
order to obtain a necessary consent to such Asset Sale, or by
applicable law, be repaid out of the proceeds from such Asset
Sale,
(c) all distributions and other payments required to be
made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Sale,
(d) brokerage commissions and other reasonable fees and
expenses (including fees and expenses of counsel, accountants
and investment bankers) related to such Asset Sale; and
(e) the deduction of appropriate amounts provided by the
seller as a reserve, in accordance with GAAP, against any
liabilities associated with the Property disposed in such Asset
Sale and retained by RHD or any Restricted Subsidiary after such
Asset Sale including, without limitation, pension and other
post-employment benefit liabilities, liabilities relating to
environmental matters and liabilities under any
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indemnification obligations associated with such Asset Sale and
any deductions relating to escrowed amounts.
Non-Recourse Debt
means debt as to which
neither RHD nor any Restricted Subsidiary
(a) provides any guarantee or credit support of any kind
(including any undertaking, guarantee, indemnity, agreement or
instrument that would constitute Debt) or is directly or
indirectly liable (as a guarantor or otherwise) or as to which
there is any recourse to the assets of RHD or its Restricted
Subsidiaries; and
(b) no default with respect to which (including any rights
that the holders thereof may have to take enforcement action
against an Unrestricted Subsidiary) would permit (upon notice,
lapse of time or both) any holder of any other Debt of RHD or
any Restricted Subsidiary to declare a default under such other
Debt or cause the payment thereof to be accelerated or payable
prior to its stated maturity.
Officer
means the Chief Executive Officer,
the President, the Chief Financial Officer or any Vice
President, the Treasurer or the Secretary of RHD.
Officers Certificate
means a
certificate signed by an Officer of RHD, and delivered to the
Trustee.
Opinion of Counsel
means a written opinion
from legal counsel who is acceptable to the Trustee. The counsel
may be an employee of or counsel to RHD.
Permitted Asset Swap
means any transfer of
properties or assets by RHD or any of its Restricted
Subsidiaries in which at least 90% of the consideration received
by the transferor consists of properties or assets (other than
cash) that will be used in a Related Business;
provided
that the aggregate fair market value (as determined in good
faith by the Board of Directors of RHD) of the property or
assets being transferred by RHD or such Restricted Subsidiary is
not greater than the aggregate fair market value (as determined
in good faith by the Board of Directors of RHD) of the property
or assets received by RHD or such Restricted Subsidiary in such
exchange.
Permitted Investment
means any Investment by
RHD or a Restricted Subsidiary in:
(a) RHD, any Restricted Subsidiary or any Person that will,
upon the making of such Investment, become a Restricted
Subsidiary,
provided
that the primary business of such
Restricted Subsidiary is a Related Business, including, without
limitation, any Acquisition,
(b) Temporary Cash Investments,
(c) receivables owing to RHD or a Restricted Subsidiary, if
created or acquired in the ordinary course of business and
payable or dischargeable in accordance with customary trade
terms;
provided, however,
that such trade terms may
include such concessionary trade terms as RHD or such Restricted
Subsidiary deems reasonable under the circumstances,
(d) payroll, travel, commission and similar advances to
cover matters that are expected at the time of such advances
ultimately to be treated as expenses for accounting purposes and
that are made in the ordinary course of business,
(e) loans and advances to employees, directors and
consultants made in the ordinary course of business consistent
with past practices of RHD or such Restricted Subsidiary, as the
case may be,
provided
that such loans and advances do not
exceed $10 million at any one time outstanding,
(f) stock, obligations or other securities received in
settlement or good faith compromise of debts created in the
ordinary course of business and owing to RHD or a Restricted
Subsidiary or in satisfaction of judgments or pursuant to any
plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of a debtor,
(g) any Person to the extent such Investment represents the
non-cash portion of the consideration received in connection
with an Asset Sale consummated in compliance with the covenant
described under Certain covenants
Limitation on asset sales,
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(h) the Notes and the Existing Notes from time to time
outstanding (including any additional such notes issued after
the Issue Date),
(i) Interest Rate Agreements, Currency Exchange Protection
Agreements, Hedging Obligations and Commodity Price Protection
Agreement, in each case, permitted under the covenant described
under Certain covenants Limitation
on debt,
(j) Investments in existence on the Issue Date and any
permitted Refinancing thereof,
(k) a Securitization Entity in connection with a Qualified
Securitization Transaction, which Investment consists of the
transfer of Receivables and Related Assets,
(l) in any Person to the extent that the consideration for
such Investment consists of Capital Stock of RHD,
(m) Investments in prepaid expenses, negotiable instruments
held for collection and lease utility and workers
compensation, performance and other similar deposits provided to
third parties in the ordinary course of business,
(n) other Investments that do not exceed $500 million
outstanding at any one time in the aggregate,
(o) any Person where such Investment was acquired by RHD or
any of its Restricted Subsidiaries (1) in exchange for any
other Investment or accounts receivable held by RHD or any such
Restricted Subsidiary in connection with or as a result of a
bankruptcy, workout, reorganization or recapitalization of the
issuer of such other Investment or accounts receivable or
(2) as a result of a foreclosure by RHD or any of its
Restricted Subsidiaries with respect to any secured Investment
or such other transfer of title with respect to any secured
Investment in default,
(p) a Securitization Entity or any Investment by
Securitization Entity in any other Person, in each case in
connection with a Qualified Securitization Transaction,
provided, however
, that any Investment in a
Securitization Entity is in the form of (1) a Purchase
Money Note; (2) any equity interests; (3) obligations
of the Securitization Entity to pay the purchase price for
assets transferred to it; or (4) interests in accounts
receivable generated by RHD or Restricted Subsidiary and
transferred to any Person in connection with a Qualified
Securitization Transaction or any such Person owning such
amounts receivable, and
(q) negotiable instruments held for deposit or collection
in the ordinary course of business.
Permitted Liens
means:
(a) Liens securing the Notes;
(b) Liens to secure Debt of a Restricted Subsidiary
Incurred pursuant to the first paragraph of the covenant
described under Certain covenants
Limitation on debt or Guarantees by RHD of any such Debt;
(c) Liens to secure Debt Incurred under clause (a) of
the second paragraph of the covenant described under
Certain covenants Limitation on
debt;
(d) Liens to secure Debt permitted to be Incurred under
clause (c) of the second paragraph of the covenant
described under Certain covenants
Limitation on debt,
provided
that any such Lien may
not extend to any Property of RHD or any Restricted Subsidiary,
other than the Property acquired, constructed or leased with the
proceeds of such Debt and any improvements or accessions to such
Property;
(e) Liens on the Capital Stock or Property of a Restricted
Subsidiary securing Debt of a Restricted Subsidiary permitted to
be secured under the Indenture;
(f) Liens for taxes, assessments or governmental charges or
levies on the Property of the Company or any Restricted
Subsidiary if the same shall not at the time be delinquent or
thereafter can be paid without penalty, or are being contested
in good faith and by appropriate proceedings promptly instituted
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and diligently concluded,
provided
that any reserve or
other appropriate provision that shall be required in conformity
with GAAP shall have been made therefor;
(g) Liens imposed by law, such as statutory Liens of
landlords carriers, warehousemens and
mechanics Liens and other similar Liens, on the Property
of RHD or any Restricted Subsidiary arising in the ordinary
course of business and securing payment of obligations that are
not more than 60 days past due or are being contested in
good faith and by appropriate proceedings or Liens arising
solely by virtue of any statutory or common law provisions
relating to bankers liens, rights of set-off or similar
rights and remedies as to deposit accounts or other funds
maintained with a creditor depositary institution;
(h) Liens on the Property of RHD or any Restricted
Subsidiary Incurred in the ordinary course of business to secure
performance of obligations with respect to statutory or
regulatory requirements, performance bids, trade contracts,
letters of credit performance or return-of-money bonds, surety
bonds or other obligations of a like nature and Incurred in a
manner consistent with industry practice, in each case which are
not Incurred in connection with the borrowing of money, the
obtaining of advances or credit or the payment of the deferred
purchase price of Property and which do not in the aggregate
impair in any material respect the use of Property in the
operation of the business of RHD and the Restricted Subsidiaries
taken as a whole;
(i) Liens on Property at the time RHD or any Restricted
Subsidiary acquired such Property, including any acquisition by
means of a merger or consolidation with or into RHD or any
Restricted Subsidiary;
provided, however
, that any such
Lien may not extend to any other Property of RHD or any
Restricted Subsidiary;
provided further, however
, that
such Liens shall not have been Incurred in anticipation of or in
connection with the transaction or series of transactions
pursuant to which such Property was acquired by RHD or any
Restricted Subsidiary;
(j) Liens on the Property of a Person at the time such
Person becomes a Restricted Subsidiary;
provided,
however
, that any such Lien may not extend to any other
Property of RHD or any other Restricted Subsidiary that is not a
direct or, prior to such time, indirect Subsidiary of such
Person;
provided further, however
, that any such Lien was
not Incurred in anticipation of or in connection with the
transaction or series of transactions pursuant to which such
Person became a Restricted Subsidiary;
(k) pledges or deposits by RHD or any Restricted Subsidiary
under workmens compensation laws, unemployment insurance
laws or similar legislation, or good faith deposits in
connection with bids, tenders, contracts (other than for the
payment of Debt) or leases to which RHD or any Restricted
Subsidiary is party, or deposits to secure public or statutory
obligations of RHD or any Restricted Subsidiary, or deposits for
the payment of rent, in each case Incurred in the ordinary
course of business;
(l) utility easements, building restrictions and such other
encumbrances or charges against real Property as are of a nature
generally existing with respect to properties of a similar
character;
(m) any provision for the retention of title to any
Property by the vendor or transferor of such Property which
Property is acquired by RHD or a Restricted Subsidiary in a
transaction entered into in the ordinary course of business of
RHD or a Restricted Subsidiary and for which kind of transaction
it is normal market practice for such retention of title
provision to be included;
(n) Liens arising by means of any judgment, decree or order
of any court, to the extent not otherwise resulting in a
Default, and any Liens that are required to protect or enforce
rights in any administrative, arbitration or other court
proceedings in the ordinary course of business;
(o) any Lien securing Debt permitted to be Incurred under
any Hedging Obligations pursuant to the covenant described under
Certain covenants Limitation on
debt or any collateral for such Debt to which the Hedging
Obligations relate;
(p) liens on and pledges of the Capital Stock of any
Unrestricted Subsidiary to secure Debt of that Unrestricted
Subsidiary;
226
(q) (1) mortgages, liens, security interests,
restrictions, encumbrances or any other matters of record that
have been placed by any developer, landlord or other third party
on property over which RHD or any Restricted Subsidiary has
easement rights or on any real property leased by RHD or any
Restricted Subsidiary or similar agreements relating thereto and
(2) any condemnation or eminent domain proceedings or
compulsory purchase order affecting real property;
(r) Liens existing on the Issue Date not otherwise
described in clauses (a) through (q) above;
(s) Liens in favor of RHD or any Restricted Subsidiary;
(t) Liens on assets of a Securitization Entity Incurred in
connection with a Qualified Securitization Transaction; and
(u) Liens on the Property of RHD or any Restricted
Subsidiary to secure any Refinancing of Debt, in whole or in
part, secured by any Lien described in the foregoing clauses
(h), (i) or (r),
provided
that any such Lien is
limited to all or part of the same property or assets (plus
improvements, accessions, proceeds or dividends or distributions
in respect thereof) that secured the Debt being Refinanced.
Permitted Refinancing Debt
means any Debt
that Refinances any other Debt, including any successive
Refinancings, so long as:
(a) such Debt is in an aggregate principal amount (or if
Incurred with original issue discount, an aggregate issue price)
not in excess of the sum of:
(1) the aggregate principal amount (or if Incurred with
original issue discount, the aggregate accreted value) and any
accrued but unpaid interest then outstanding of the Debt being
Refinanced, and
(2) an amount necessary to pay any fees and expenses,
including premiums, tender and defeasance costs, related to such
Refinancing,
(b) in the case of the Refinancing of term Debt, the
Average Life of such Debt is equal to or greater than the
Average Life of the Debt being Refinanced,
(c) in the case of the Refinancing of term Debt, the Stated
Maturity of the Debt being Incurred is no earlier than the
Stated Maturity of the Debt being Refinanced, and
(d) in the case of the Refinancing of Debt of RHD:
(1) the new Debt shall not be senior in right of payment of
the Debt being Refinanced; and
(2) if the Debt being Refinanced constitutes Subordinated
Obligations of RHD, the new Debt shall be subordinated to the
Notes at least to the same extent as the Subordinated
Obligations;
provided, however, that Permitted Refinancing Debt shall not
include:
(x) Debt of a Restricted Subsidiary that Refinances Debt of
RHD, or
(y) Debt of RHD or a Restricted Subsidiary that Refinances
Debt of an Unrestricted Subsidiary.
Person
means any individual, corporation,
company (including any limited liability company), association,
partnership, joint venture, trust, unincorporated organization,
government or any agency or political subdivision thereof or any
other entity.
Preferred Stock
means any Capital Stock of a
Person, however designated, which entitles the holder thereof to
a preference with respect to the payment of dividends, or as to
the distribution of assets upon any voluntary or involuntary
liquidation or dissolution of such Person, over shares of any
other class of Capital Stock issued by such Person.
Preferred Stock Dividends
means all dividends
with respect to Preferred Stock of Restricted Subsidiaries held
by Persons other than RHD or a Wholly Owned Restricted
Subsidiary.
227
pro forma
means, with respect to any
calculation made or required to be made pursuant to the terms
hereof a calculation performed in accordance with the terms of
the Indenture and (to the extent not conflicting with such
terms) Article 11 of
Regulation S-X
promulgated under the Securities Act (as in effect on the Issue
Date).
Pro Forma EBITDA
means, for any period, the
EBITDA of RHD and its consolidated Restricted Subsidiaries after
making the following adjustments (without duplication):
(a) pro forma effect shall be given to any Asset Sales or
Investment (by merger or otherwise) in any Restricted Subsidiary
(or any Person which becomes a Restricted Subsidiary) or any
other acquisition of Property at any time on or subsequent to
the first day of the period and on or prior to the date of
determination as if such Asset Sale, Investment or other
acquisition had occurred on the first day of the period. Any
such pro forma calculations may include operating expense
reductions (net of associated expenses) for such period
resulting from the acquisition or other Investment which is
being given pro forma effect that would be permitted pursuant to
Rule
11-02
of
Regulation S-X
under the Securities Act (as in effect on the Issue Date). In
addition, since the beginning of the period, if any Person that
subsequently became a Restricted Subsidiary or was merged with
or into such Person or any Restricted Subsidiary since the
beginning of the period shall have made any Investment in any
Person or made any acquisition, disposition, merger or
consolidation that would have required adjustment pursuant to
this definition, then Pro Forma EBITDA shall be calculated
giving pro forma effect thereto for such period as if such
Investment, acquisition, disposition, merger or consolidation
had occurred at the beginning of the applicable period; and
(b) in the event that pro forma effect is being given to
any Repayment of Debt, Pro Forma EBITDA for such period shall be
calculated as if such Person or such Restricted Subsidiary had
not earned any interest income actually earned during such
period in respect of the funds used to Repay such Debt.
Property
means, with respect to any Person,
any interest of such Person in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible,
including Capital Stock in, and other securities of, any other
Person. For purposes of any calculation required pursuant to the
Indenture, the value of any Property shall be its Fair Market
Value.
Purchase Money Debt
means Debt secured by a
Lien:
(a) consisting of the deferred purchase price of property,
conditional sale obligations, obligations under any title
retention agreement, other purchase money obligations and
obligations in respect of industrial revenue bonds, in each case
where the maturity of such Debt does not exceed the anticipated
useful life of the Property being financed, and
(b) Incurred to finance the acquisition, construction or
lease by RHD or a Restricted Subsidiary of such Property,
including additions and improvements thereto;
provided, however,
that such Debt is Incurred within
180 days after the acquisition, completion of the
construction or lease of such Property by RHD or such Restricted
Subsidiary.
Qualified Equity Offering
means any public or
private offering for cash of Capital Stock (other than
Disqualified Stock) of RHD other than (i) public offerings
of Capital Stock registered on
Form S-8
or (ii) other issuances upon the exercise of options of
employees of RHD or any of its Subsidiaries.
Qualified Securitization Transaction
means
any transaction or series of transactions that may be entered
into by RHD or any Restricted Subsidiary pursuant to which RHD
or any Restricted Subsidiary may sell, convey or otherwise
transfer to (a) a Securitization Entity (in the case of a
transfer by RHD or of any Restricted Subsidiary) and
(b) any other Person (in the case of a transfer by a
Securitization Entity), or may grant a security interest in,
Receivables and Related Assets.
Rating Agencies
mean Moodys or S&P
or, if neither Moodys nor S&P shall make a rating
publicly available, on the Notes, a nationally recognized
statistical rating agency or agencies, as the case may be,
selected by RHD which shall be substituted for Moodys or
S&P or both, as the case may be.
228
Receivables and Related Assets
means any
account receivable (whether now existing or arising thereafter)
of RHD or any Restricted Subsidiary, and any assets related
thereto including all collateral securing such accounts
receivable, all contracts and contract rights and all Guarantees
or other obligations in respect of such accounts receivable,
proceeds of such accounts receivable and other assets which are
customarily transferred or in respect of which security interest
are customarily granted in connection with asset securitization
transaction involving accounts receivable.
Refinance
means, in respect of any Debt, to
refinance, extend, renew, refund, repay, prepay, repurchase,
redeem, defease or retire, or to issue other Debt, in exchange
or replacement for, such Debt. Refinanced and
Refinancing shall have correlative meanings.
Registration Rights Agreements
means the
Registration Rights Agreements by and among the Initial
Purchasers and RHD entered into in connection with the offering
of the Notes.
Related Business
means any business that is
related, ancillary or complementary to the business of RHD or
any of its Subsidiaries on the Issue Date or any reasonable
extension, development or expansion of the business of RHD or
its Subsidiaries, including any business acquired pursuant to
any Acquisition.
Repay
means, in respect of any Debt, to
repay, prepay, repurchase, redeem, legally defease or otherwise
retire such Debt. Repayment and Repaid
shall have correlative meanings. For purposes of the covenant
described under Certain covenants
Limitation on Asset Sales and the definition of
Leverage Ratio, Debt shall be considered to have
been Repaid only to the extent the related loan commitment, if
any, shall have been permanently reduced in connection therewith.
Restricted Payment
means:
(a) any dividend or distribution (whether made in cash,
securities or other Property) declared or paid by RHD or any
Restricted Subsidiary on or with respect to any shares of
Capital Stock of RHD or any Restricted Subsidiary, except for
any dividend or distribution that is made solely to RHD or a
Restricted Subsidiary (and, if such Restricted Subsidiary is not
a Wholly Owned Restricted Subsidiary, to the other shareholders
of such Restricted Subsidiary on a
pro rata
basis or on a
basis that results in the receipt by RHD or a Restricted
Subsidiary of dividends or distributions of greater value than
it would receive on a
pro rata
basis) or any dividend or
distribution payable solely in shares of Capital Stock (other
than Disqualified Stock) of RHD or in options, warrants or other
rights to acquire shares of Capital Stock (other than
Disqualified Stock) of RHD;
(b) the purchase, repurchase, redemption, acquisition or
retirement for value of any Capital Stock of RHD or any
Restricted Subsidiary (other than from RHD or a Restricted
Subsidiary or any entity that becomes a Restricted Subsidiary as
a result of such transactions) or securities exchangeable for or
convertible into any such Capital Stock, including the exercise
of any option to exchange any Capital Stock (other than for or
into Capital Stock of RHD that is not Disqualified Stock);
(c) the purchase, repurchase, redemption, acquisition or
retirement for value, prior to the date for any scheduled
maturity, sinking fund or amortization or other installment
payment, of any Subordinated Obligation (other than the
purchase, repurchase or other acquisition of any Subordinated
Obligation purchased in anticipation of satisfying a scheduled
maturity, sinking fund or amortization or other installment
obligation, in each case due within one year of the date of
acquisition);
(d) any Investment (other than Permitted Investments and
Guarantees by Restricted Subsidiaries of Debt Incurred pursuant
to the covenant described under Certain
covenants Limitation on debt) in any
Person; or
(e) the issuance, sale or other disposition of Capital
Stock of any Restricted Subsidiary to a Person (other than RHD
or another Restricted Subsidiary) if the result thereof is that
such Restricted Subsidiary shall cease to be a Subsidiary of
RHD, in which event the amount of such Restricted
Payment shall be the Fair Market Value of the remaining
interest, if any, in such former Restricted Subsidiary held by
RHD and the other Restricted Subsidiaries.
229
Restricted Subsidiary
means any Subsidiary of
RHD other than an Unrestricted Subsidiary.
Revenue Participation Agreement
means the
Revenue Participation Agreement, dated as of August 19,
1997, between Apil Partners Partnership and RHD.
RHD Credit Agreement
means that certain
Credit Agreement, dated as of August 23, 2007, among RHD,
as borrower, JPMorgan Chase Bank, N.A., as administrative agent,
and the several banks and other financial institutions or
entities from time to time party thereto used to finance the
acquisition of Business.com, Inc., as such may be further
amended, modified or supplemented from time to time, or one or
more debt or commercial paper facilities or other instruments
with banks or other institutional lenders providing for
revolving credit loans, term loans, receivables or inventory
financing (including through the sale of receivables or
inventory to such lenders or to special purpose, bankruptcy
remote entities formed to borrow from such lenders against such
receivables or inventory) or trade letters of credit, or other
forms of guarantees or assurances that one or more times
refinances, replaces, supplements, modifies or amends such
credit facility or debentures or other debt securities.
RHD Existing Notes
means the
6.875% Senior Notes due 2013 issued on January 14,
2005 outstanding on the Issue Date, the 6.875%
Series A-1
Senior Discount Notes due 2013 issued on January 27, 2006
outstanding on the Issue Date, the 6.875%
Series A-2
Senior Discount Notes due 2013 issued on January 27, 2006
outstanding on the Issue Date and the 8.875%
Series A-3
Senior Notes due 2016 issued on January 27, 2006
outstanding on the Issue Date.
RHDI
means R.H. Donnelley Inc.
RHDI Credit Facility
means that certain
Second Amended and Restated Credit Agreement, dated as of
December 13, 2005, by and among, R.H. Donnelley Inc., as
borrower, the Company, the lenders from time to time parties
thereto, J.P. Morgan Securities Inc. and Deutsche Bank
Trust Company Americas, as co-lead arrangers and joint
bookrunners, J.P. Morgan Chase Bank, N.A., as syndication
agent, Bear Stearns Corporate Lending Inc., Credit Suisse,
Cayman Islands Branch, Goldman Sachs Credit Partners L.P., UBS
Securities LLC and Wachovia Bank, National Association, as
co-documentation agents and Deutsche Bank Trust Company
Americas, as administrative agent, as amended by the First
Amendment, dated as of April 24, 2006, among the RHD, RHDI,
the several banks and other financial institutions or entities
from time to time parties thereto as lenders, and Deutsche Bank
Trust Company Americas, as administrative agent, as such
may be further amended, modified or supplemented from time to
time, or one or more debt or commercial paper facilities or
other instruments with banks or other institutional lenders
providing for revolving credit loans, term loans, receivables or
inventory financing (including through the sale of receivables
or inventory to such lenders or to special purpose, bankruptcy
remote entities formed to borrow from such lenders against such
receivables or inventory) or trade letters of credit, or other
forms of guarantees or assurances that one or more times
refinances, replaces, supplements, modifies or amends such
credit facility or debentures or other debt securities.
RHDI Existing Notes
means the RHDI Senior
Notes and the RHDI Senior Subordinated Notes.
RHDI Senior Notes
means the
8
7
/
8
% Senior
Secured Notes due 2010 issued by RHDI to the extent outstanding.
RHDI Senior Subordinated Notes
means the
10
7
/
8
% Senior
Subordinated Notes due 2012 issued by RHDI outstanding on the
Issue Date.
S&P
means Standard and Poors
Ratings Group and any successor to its rating agency business.
Secured Debt
means any Debt secured by a Lien.
Securities Act
means the U.S. Securities
Act of 1933, as amended.
Securitization Entity
means a Wholly Owned
Restricted Subsidiary (or a Wholly Owned Subsidiary of another
Person in which RHD or any Subsidiary of RHD makes an Investment
and to which RHD or any Subsidiary of RHD transfers Receivables
and Related Assets) that engages in no activities other than in
230
connection with the financing of accounts receivable and that is
designated by the Board of Directors of RHD (as provided below)
as a Securitization Entity and:
(a) no portion of the Debt or any other obligations
(contingent or otherwise) of which:
(1) is guaranteed by RHD or any Restricted Subsidiary
(excluding Guarantees (other than the principal of, and interest
on, Debt) pursuant to Standard Securitization Undertakings);
(2) is recourse to or obligates RHD or any Restricted
Subsidiary (other than such Securitization Entity) in any way
other than pursuant to Standard Securitization
Undertakings; or
(3) subjects any property or asset of RHD or any Restricted
Subsidiary (other than such Securitization Entity), directly or
indirectly, contingently or otherwise, to the satisfaction
thereof, other than pursuant to Standard Securitization
Undertakings;
(b) with which neither RHD nor any Restricted Subsidiary
(other than such Securitization Entity) has any material
contract, agreement, arrangement or understanding other than on
terms no less favorable to RHD or such Restricted Subsidiary
than those that might be obtained at the time from Persons that
are not Affiliates of RHD, other than fees payable in the
ordinary course of business in connection with servicing
accounts receivable of such entity; and
(c) to which neither RHD nor any Restricted Subsidiary
(other than such Securitization Entity) has any obligation to
maintain or preserve such entitys financial condition or
cause such entity to achieve certain levels of operating results.
Any designation of a Subsidiary as a Securitization Entity shall
be evidenced to the Trustee by filing with the Trustee a
certified copy of the resolution of the Board of Directors of
RHD giving effect to the designation and an Officers
Certificate certifying that the designation complied with the
preceding conditions and was permitted by the Indenture.
Significant Subsidiary
means any Subsidiary
that would be a significant subsidiary of RHD within
the meaning of
Rule 1-02
under
Regulation S-X
promulgated by the Commission.
Standard Securitization Undertakings
means
representations, warranties, covenants and indemnities entered
into by RHD or any Restricted Subsidiary that are reasonably
customary in an accounts receivable securitization transaction,
including, without limitation, servicing of the obligations
thereunder.
Stated Maturity
means (a) with respect
to any debt security, the date specified in such security as the
fixed date on which the payment of principal of such security is
due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof
upon the happening of any contingency beyond the control of RHD
unless such contingency has occurred) and (b) with respect
to any scheduled installment of principal of any debt security,
the date specified in such debt security as the fixed date on
which such installment is due and payable.
Subordinated Obligation
means any Debt of RHD
(whether outstanding on the Issue Date or thereafter Incurred)
that is subordinate or junior in right of payment to the Notes,
in each case pursuant to a written agreement to that effect.
Subsidiary
means, in respect of any Person,
any corporation, company (including any limited liability
company), association, partnership, joint venture or other
business entity of which a majority of the total voting power of
the Voting Stock is at the time owned or controlled, directly or
indirectly, by:
(a) such Person,
(b) such Person and one or more Subsidiaries of such
Person, or
(c) one or more Subsidiaries of such Person.
Subsidiary Credit Facilities
means the RHDI
Credit Facility and the Dex Media Credit Facilities.
231
Temporary Cash Investments
means:
(a) any Government Obligation, maturing not more than one
year after the date of acquisition, issued by the United States
or an instrumentality or agency thereof, and constituting a
general obligation of the United States;
(b) any certificate of deposit, maturing not more than one
year after the date of acquisition, issued by, or time deposit
of, a commercial banking institution that is a member of the
U.S. Federal Reserve System and that has combined capital
and surplus and undivided profits of not less than
$500 million, whose debt has a rating, at the time as of
which any investment therein is made, of
P-1
(or higher) according to Moodys or any successor rating
agency or
A-1
(or higher) according to S&P, or any successor rating
agency (or, in the case of foreign Subsidiaries of RHD, any
local office of any commercial bank organized under the laws of
the relevant jurisdiction or any political subdivision thereof
which has a combined capital surplus and undivided profits in
excess of $500 million (or the foreign currency equivalent
thereof);
(c) commercial paper, maturing not more than one year after
the date of acquisition, issued by a corporation (other than an
Affiliate or Subsidiary of RHD) organized and existing under the
laws of the United States, any state thereof or the District of
Columbia with a rating, at the time as of which any investment
therein is made, of
P-1
(or higher) according to Moodys or
A-1
(or higher) according to S&P;
(d) any money market deposit accounts issued or offered by
a commercial bank organized in the United States having capital
and surplus and undivided profits in excess of
$500 million;
provided
that the short-term debt of
such commercial bank has a rating, at the time of Investment, of
P-1
(or higher) according to Moodys or
A-1
(or higher) according to S&P;
(e) repurchase obligations and reverse repurchase
obligations with a term of not more than 30 days for
underlying securities of the types described in clause (a)
or (b) entered into with a bank meeting the qualifications
described in clause (b) above;
(f) investments in securities with maturities of one year
or less from the date of acquisition issued or fully guaranteed
by any state, commonwealth or territory of the United States, or
by any political subdivision or taxing authority thereof, and
rated at least
A-1
by S&P or
P-1
by Moodys;
(g) interests in funds investing substantially all their
assets in securities of the types described in clauses (a)
through (f); and
(h) interests in mutual funds with a rating of AAA- or
higher that invest all of their assets in short-term securities,
instruments and obligations which carry a minimum rating of
A-2
or
P-2
and which are managed by a bank meeting the qualifications in
clause (b) above.
Treasury Rate
means, as of any redemption
date, the yield to maturity as of such redemption date of United
States Treasury securities with a constant maturity (as compiled
and published in the most recent Federal Reserve Statistical
Release H.15 (519) that has become publicly available at
least two business days prior to the redemption date (or, if
such Statistical Release is no longer published, any publicly
available source of similar market data)) most nearly equal to
the period from the redemption date to October 15, 2012;
provided, however
, that if the period from the redemption
date to October 15, 2012, is less than one year, the weekly
average yield on actually traded United States Treasury
securities adjusted to a constant maturity of one year will be
used.
Unrestricted Subsidiary
means:
(a) any Subsidiary of RHD that at the time of determination
will be designated as an Unrestricted Subsidiary as permitted or
required pursuant to the covenant described under
Certain covenants Designation of
Restricted and Unrestricted Subsidiaries and is not
thereafter redesignated as a Restricted Subsidiary as permitted
pursuant thereto; and
(b) any Subsidiary of an Unrestricted Subsidiary.
232
Voting Stock
of any Person means all classes
of Capital Stock or other interests (including partnership
interests) of such Person then outstanding and normally entitled
(without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof.
Wholly Owned Restricted Subsidiary
means, at
any time, a Restricted Subsidiary all the Voting Stock of which
(except directors qualifying shares and shares required by
applicable law to be held by a person other than RHD or a
Restricted Subsidiary) is at such time owned, directly or
indirectly, by RHD and its other Wholly Owned Subsidiaries.
233
Book-entry,
delivery and form
The exchange notes will be issued in registered, global form in
minimum denominations of $2,000 and greater integral multiples
of $1,000 in excess of $1,000.
The exchange notes initially will be represented by notes in
registered, global form without interest coupons (the
Global Notes). The Global Notes will be deposited
upon issuance with the Trustee as custodian for The Depository
Trust Company (DTC), in New York, New York, and
registered in the name of DTC or its nominee, in each case, for
credit to an account of a direct or indirect participant in DTC
as described below.
Except as set forth below, the Global Notes may be transferred,
in whole and not in part, only to another nominee of DTC or to a
successor of DTC or its nominee. Beneficial interests in the
Global Notes may not be exchanged for definitive notes in
registered certificated form (Certificated Notes)
except in the limited circumstances described below. See
Exchange of Global Notes for Certificated
Notes. Except in the limited circumstances described
below, owners of beneficial interests in the Global Notes will
not be entitled to receive physical delivery of notes in
certificated form.
Depository
procedures
The following description of the operations and procedures of
DTC, Euroclear and Clearstream are provided solely as a matter
of convenience. These operations and procedures are solely
within the control of the respective settlement systems and are
subject to changes by them. RHD takes no responsibility for
these operations and procedures and urges investors to contact
the system or their participants directly to discuss these
matters.
DTC has advised RHD that DTC is a limited-purpose trust company
created to hold securities for its participating organizations
(collectively, the Participants) and to facilitate
the clearance and settlement of transactions in those securities
between the Participants through electronic book-entry changes
in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial
Purchasers), banks, trust companies, clearing corporations and
certain other organizations. Access to DTCs system is also
available to other entities such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly
(collectively, the Indirect Participants). Persons
who are not Participants may beneficially own securities held by
or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interests in, and transfers
of ownership interests in, each security held by or on behalf of
DTC are recorded on the records of the Participants and Indirect
Participants.
DTC has also advised RHD that, pursuant to procedures
established by it:
(1) upon deposit of the Global Notes, DTC will credit the
accounts of the Participants designated by the Initial
Purchasers with portions of the principal amount of the Global
Notes; and
(2) ownership of these interests in the Global Notes will
be shown on, and the transfer of ownership of these interests
will be effected only through, records maintained by DTC (with
respect to the Participants) or by the Participants and the
Indirect Participants (with respect to other owners of
beneficial interest in the Global Notes).
Investors in the Global Notes who are Participants may hold
their interests therein directly through DTC. Investors in the
Global Notes who are not Participants may hold their interests
therein indirectly through organizations (including Euroclear
and Clearstream) which are Participants. All interests in a
Global Note, including those held through Euroclear or
Clearstream, may be subject to the procedures and requirements
of DTC. Those interests held through Euroclear or Clearstream
may also be subject to the procedures and requirements of such
systems. The laws of some states require that certain Persons
take physical delivery in definitive form of securities that
they own. Consequently, the ability to transfer beneficial
interests in a Global Note to such Persons will be limited to
that extent. Because DTC can act only on behalf of the
Participants, which in turn act on behalf of the Indirect
Participants, the ability of a Person having beneficial
interests in a
234
Global Note to pledge such interests to Persons that do not
participate in the DTC system, or otherwise take actions in
respect of such interests, may be affected by the lack of a
physical certificate evidencing such interests.
Except as described below, owners of interests in the Global
Notes will not have notes registered in their names, will not
receive physical delivery of notes in certificated form and will
not be considered the registered owners or holders
thereof under the indenture for any purpose.
Payments in respect of the principal of, and interest and
premium, if any, and additional interest, if any, on, a Global
Note registered in the name of DTC or its nominee will be
payable to DTC in its capacity as the registered holder under
the indenture. Under the terms of the indenture, RHD and the
Trustee will treat the Persons in whose names the notes,
including the Global Notes, are registered as the owners of the
notes for the purpose of receiving payments and for all other
purposes. Consequently, none of RHD, the Trustee or any agent of
RHD or the Trustee has or will have any responsibility or
liability for:
(1) any aspect of DTCs records or any
Participants or Indirect Participants records
relating to or payments made on account of beneficial ownership
interest in the Global Notes or for maintaining, supervising or
reviewing any of DTCs records or any Participants or
Indirect Participants records relating to the beneficial
ownership interests in the Global Notes; or
(2) any other matter relating to the actions and practices
of DTC or any of its Participants or Indirect Participants.
DTC has advised RHD that its current practice, upon receipt of
any payment in respect of securities such as the notes
(including principal and interest), is to credit the accounts of
the relevant Participants with the payment on the payment date
unless DTC has reason to believe that it will not receive
payment on such payment date. Each relevant Participant is
credited with an amount proportionate to its beneficial
ownership of an interest in the principal amount of the relevant
security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial
owners of notes will be governed by standing instructions and
customary practices and will be the responsibility of the
Participants or the Indirect Participants and will not be the
responsibility of DTC, the Trustee or RHD. Neither RHD nor the
Trustee will be liable for any delay by DTC or any of the
Participants or the Indirect Participants in identifying the
beneficial owners of the notes, and RHD and the Trustee may
conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
Transfers between the Participants will be effected in
accordance with DTCs procedures, and will be settled in
same-day
funds, and transfers between participants in Euroclear and
Clearstream will be effected in accordance with their respective
rules and operating procedures.
DTC has advised RHD that it will take any action permitted to be
taken by a holder of notes only at the direction of one or more
Participants to whose account DTC has credited the interests in
the Global Notes and only in respect of such portion of the
aggregate principal amount of the notes as to which such
Participant or Participants has or have given such direction.
However, if there is an Event of Default under the notes, DTC
reserves the right to exchange the Global Notes for legended
notes in certificated form, and to distribute such notes to its
Participants.
Although DTC, Euroclear and Clearstream have agreed to the
foregoing procedures to facilitate transfers of interests in the
Global Notes among participants in DTC, Euroclear and
Clearstream, they are under no obligation to perform or to
continue to perform such procedures, and may discontinue such
procedures at any time. None of RHD, the Trustee or any of their
respective agents will have any responsibility for the
performance by DTC, Euroclear or Clearstream or their respective
participants or indirect participants of their respective
obligations under the rules and procedures governing their
operations.
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Exchange
of Global Notes for Certificated Notes
A Global Note is exchangeable for Certificated Notes if:
(1) DTC (a) notifies RHD that it is unwilling or
unable to continue as depositary for the Global Notes or
(b) has ceased to be a clearing agency registered under the
Exchange Act and, in either case, RHD fails to appoint a
successor depositary;
(2) RHD, at its option, notifies the Trustee in writing
that it elects to cause the issuance of the Certificated
Notes; or
(3) there has occurred and is continuing a Default or Event
of Default with respect to the notes.
In addition, beneficial interests in a Global Note may be
exchanged for Certificated Notes upon prior written notice given
to the Trustee by or on behalf of DTC in accordance with the
indenture. In all cases, Certificated Notes delivered in
exchange for any Global Note or beneficial interests in Global
Notes will be registered in the names, and issued in any
approved denominations, requested by or on behalf of the
depositary (in accordance with its customary procedures).
Exchange
of Certificated Notes for Global Notes
Certificated Notes may not be exchanged for beneficial interests
in any Global Note unless the transferor first delivers to the
Trustee a written certificate (in the form provided in the
indenture) to the effect that such transfer will comply with the
appropriate transfer restrictions applicable to such notes.
Same day
settlement and payment
RHD will make payments in respect of the notes represented by
the Global Notes (including principal, premium, if any, interest
and additional interest, if any) by wire transfer of immediately
available funds to the accounts specified by DTC or its nominee.
RHD will make all payments of principal, interest and premium,
if any, and additional interest, if any, with respect to
Certificated Notes by wire transfer of immediately available
funds to the accounts specified by the holders of the
Certificated Notes or, if no such account is specified, by
mailing a check to each such holders registered address.
The notes represented by the Global Notes trade in The
PORTAL
sm
Market and to trade in DTCs
Same-Day
Funds Settlement System, and any permitted secondary market
trading activity in such notes will, therefore, be required by
DTC to be settled in immediately available funds. RHD expects
that secondary trading in any Certificated Notes will also be
settled in immediately available funds.
Because of time zone differences, the securities account of a
Euroclear or Clearstream participant purchasing an interest in a
Global Note from a Participant will be credited, and any such
crediting will be reported to the relevant Euroclear or
Clearstream participant, during the securities settlement
processing day (which must be a business day for Euroclear and
Clearstream) immediately following the settlement date of DTC.
DTC has advised RHD that cash received in Euroclear or
Clearstream as a result of sales of interests in a Global Note
by or through a Euroclear or Clearstream participant to a
Participant will be received with value on the settlement date
of DTC but will be available in the relevant Euroclear or
Clearstream cash account only as of the business day for
Euroclear or Clearstream following DTCs settlement date.
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Material
U.S. federal income tax considerations
The following discussion sets forth a summary of the material
U.S. federal income tax considerations relating to the
purchase, ownership and disposition of the exchange notes.
This summary:
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does not purport to be a complete analysis of all of the
potential tax consequences that may be important to an investor
based on the investors particular tax situation;
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is based on the existing provisions of the Code, the existing
applicable federal income tax regulations promulgated or
proposed under the Code, or the Treasury
Regulations, judicial authority and current administrative
rulings and practice, all of which are subject to change,
possibly with retroactive effect, and which are subject to
differing interpretations;
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is applicable only to initial beneficial owners of exchange
notes who purchase exchange notes at their issue
price, as defined in section 1273 of the Code, and
will hold their exchange notes as capital assets,
within the meaning of section 1221 of the Code, and does
not discuss the tax consequences applicable to subsequent
purchasers of the exchange notes;
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does not discuss any state, local or
non-U.S. taxes
and any U.S. federal tax other than the income tax,
including but not limited to, the U.S. federal gift tax and
estate tax;
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does not discuss any reporting requirements of or other
consequences under the Treasury Regulations relating to certain
tax shelter transactions; and
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does not address tax consequences applicable to particular
holders in light of their circumstances, including but not
limited to:
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holders subject to special tax rules, such as holders subject to
the alternative minimum tax, banks, insurance companies,
financial institutions, tax-exempt organizations, pension funds,
regulated investment companies, real estate investment trusts,
nonresident aliens subject to the tax on expatriates under
section 877 of the Code, dealers in securities or
currencies, traders in securities that elect to use a mark to
market method of accounting for their securities holdings and
partnerships or other pass through entities;
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U.S. holders that have a functional currency
other than the U.S. dollar;
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persons that will hold the exchange notes as a position in a
hedging or constructive sale transaction, straddle,
conversion or other integrated transaction for
U.S. federal income tax purposes; and
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non-U.S. holders
subject to special rules under the Code, such as
controlled foreign corporations and passive
foreign investment companies.
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Prospective investors are urged to consult their own tax
advisors regarding the U.S. federal, state, local and
non-U.S. income
and other tax consequences of the purchase, ownership, sale and
other disposition of the exchange notes. We have not sought and
will not seek any rulings from the Internal Revenue Service with
respect to any matter discussed herein. The Internal Revenue
Service may not agree with the statements made and conclusions
reached in the discussion and may successfully asset a contrary
position.
As used in this summary, the term U.S. holder
means a beneficial owner of an exchange note (other than a
partnership) that is, for U.S. federal income tax purposes:
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an individual citizen or resident of the United States;
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a corporation or other entity taxable as a corporation that is
organized in or under the laws of the United States, any state
thereof or the District of Columbia;
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an estate, the income of which is subject to U.S. federal
income taxation regardless of its source; or
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a trust, if a court within the United States is able to exercise
primary supervision over the trusts administration and one
or more United States persons, as defined in
section 7701(a)(30) of the Code, have the authority to
control all substantial decisions of the trust.
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Notwithstanding the preceding sentence, certain electing trusts
in existence on August 20, 1996 that were treated as United
States persons prior to such date may also be treated as
U.S. holders.
The term
non-U.S. holder
means any beneficial owner of an exchange note that is neither a
U.S. holder nor a partnership or other entity or
arrangement treated as a partnership for U.S. federal
income tax purposes.
If a partnership, including any entity treated as a partnership
for U.S. federal income tax purposes, holds exchange notes,
then the tax treatment of a partner in such partnership will
generally depend on the status of the partner and the activities
of the partnership. Such partners and partnerships should
consult their own tax advisors concerning the U.S. federal
income tax consequences of the purchase, ownership and
disposition of the exchange notes.
U.S.
holders
This discussion is a summary of the material U.S. federal
income tax consequences that will apply to U.S. holders.
Certain U.S. federal income tax consequences applicable to
non-U.S. holders
of exchange notes are described under the heading
Non-U.S. Holders
below.
Interest
Interest on the exchange notes generally will be taxable to a
U.S. holder as ordinary interest income at the time it is
paid or accrued in accordance with such holders regular
method of accounting for U.S. federal income tax purposes.
Sale,
exchange, redemption or other taxable disposition of exchange
notes
Upon the sale, exchange, redemption or other taxable disposition
of an exchange note, other than pursuant to the exchange offer,
which is described under the heading The exchange
offer above, a U.S. holder generally will recognize
taxable gain or loss. The amount of such gain or loss generally
will be measured by the difference, if any, between the amount
realized on such disposition, except to the extent any amount
realized is attributable to accrued but unpaid interest not
previously included in income, which will be treated as such,
and such holders adjusted tax basis in the sold,
exchanged, redeemed or disposed exchange notes.
A U.S. holders adjusted tax basis in an exchange note
generally will equal such holders initial investment in
such note decreased by the amount of any principal payments.
Gain or loss recognized on the disposition of an exchange note
generally will be capital gain or loss and, if such holder has
held the disposed exchange note for more than one year at the
time of disposition, long-term capital gain or loss. The
deductibility of capital losses is subject to certain
limitations. To the extent that the amount realized is
attributable to accrued but unpaid interest not previously
included in income, such amount will be taxable as interest, as
described under the heading Interest
above.
Exchange
offer
In satisfaction of the registration rights provided for herein,
as described under the heading The exchange offer
above, we intend to offer exchange notes in exchange for the
surrender of notes. Because the exchange notes will not differ
materially in kind or extent from the notes, a
U.S. holders surrender of notes in exchange for
exchange notes will not constitute a taxable disposition of the
notes for U.S. federal income tax purposes. As a result, a
U.S. holder surrendering its notes in exchange for exchange
notes generally (i) will not recognize taxable income, gain
or loss on the exchange, (ii) will have a holding period in
respect of its exchange notes that includes the holding period
of such holders surrendered notes and (iii) will have
a tax basis in its exchange notes immediately following the
exchange equal to such holders adjusted tax basis in its
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surrendered notes immediately prior to the exchange. The
U.S. federal income tax consequences associated with owning
the notes generally will continue to apply in respect of the
exchange notes.
Non-U.S.
holders
The following is a summary of the material U.S. federal
income tax consequences generally applicable to
non-U.S. holders.
Non-U.S. holders
are encouraged to consult their own tax advisors concerning the
relevant U.S. federal, state and local and any
non-U.S. tax
consequences that may be relevant to their particular situations.
Interest
Payments made and accruals of interest on the exchange notes to
a
non-U.S. holder
generally will be exempt from U.S. federal income and
withholding tax, provided that:
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such payments are not effectively connected with the conduct by
such
non-U.S. holder
of a trade or business within the United States;
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the
non-U.S. holder
does not own, actually or constructively under applicable
attribution rules, 10% or more of the total combined voting
power of all classes of our stock entitled to vote;
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the
non-U.S. holder
is not a bank whose receipt of interest on the exchange notes is
described in section 881(c)(3)(A) of the Code;
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the
non-U.S. holder
is not a controlled foreign corporation that is
directly or indirectly related to us by stock ownership within
the meaning of the applicable sections of the Code; and
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the
non-U.S. holder
provides its name and address and certifies, under penalty of
perjury, on a properly executed and delivered IRS Form
W-8BEN
or
other form, if applicable, that such holder is not a United
States person for U.S. federal income tax purposes.
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The certification described in the last clause above may be
provided by a securities clearing organization, a bank or other
financial institution that holds customers securities in
the ordinary course of its trade or business. This certification
may also be provided by a qualified intermediary on behalf of
one or more beneficial owners or other intermediaries, provided
that such qualified intermediary has entered into a withholding
agreement with the Internal Revenue Service and other conditions
are satisfied.
A
non-U.S. holder
that is not exempt from tax under these rules generally will be
subject to U.S. federal withholding tax on payments of
interest at a gross rate of 30%, or such lower rate if provided
in an applicable income tax treaty, unless the interest is
effectively connected with the conduct by the
non-U.S. holder
of a trade or business within the United States and the
non-U.S. holder
so certifies under penalty of perjury on a properly executed and
delivered IRS
Form W-8ECI
or other applicable form. In such case, interest will be subject
to U.S. federal income tax based on such
non-U.S. holders
net effectively connected income generally in a similar manner
as if it were received by a U.S. holder. Corporate
non-U.S. holders
receiving interest income that is effectively connected with the
conduct of a trade or business within the United States may also
be subject to an additional branch profits tax at a
30% rate or a lower rate if specified by an applicable income
tax treaty.
Non-U.S. holders
should consult applicable income tax treaties, which may provide
reduced rates of or an exemption from U.S. federal income
or withholding tax and branch profits tax.
Non-U.S. holders
will be required to satisfy certification requirements in order
to claim a reduction of or exemption from withholding tax
pursuant to any applicable income tax treaties. A
non-U.S. holder
may meet these requirements by providing an IRS
Form W-8BEN
or appropriate substitute to us or our agent, whereby the
non-U.S. holder
certifies under penalty of perjury that it is entitled to treaty
benefits and provides such
non-U.S. holders
U.S. taxpayer identification number.
239
Sale,
exchange, redemption or other taxable disposition of exchange
notes
A
non-U.S. holder
generally will not be subject to U.S. federal income or
withholding tax on any gain recognized upon the sale, exchange,
redemption or other taxable disposition of an exchange note
unless:
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that gain is effectively connected with the conduct of a trade
or business within the United States by the
non-U.S. holder; or
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in the case of a
non-U.S. holder
who is a nonresident alien individual and holds the exchange
notes as a capital asset, such holder is present in the United
States for at least 183 days in the tax year of the sale or
other disposition and certain other conditions exist.
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A
non-U.S. holder
described in the first bullet point above will generally be
required to pay U.S. federal income tax on the net gain
derived from the sale or other disposition, except as otherwise
required by an applicable tax treaty. If such
non-U.S. holder
is a corporation, then it may also be subject to an additional
branch profits tax at a 30% rate or a lower rate if
so specified by an applicable income tax treaty. A
non-U.S. holder
described in the second bullet point above will generally be
subject to tax at a gross rate of 30% on the excess of all of
such holders U.S. source gains during the tax year
over any U.S. source losses during such tax year, except as
otherwise required by an applicable tax treaty. To the extent
that the amount realized on any sale, exchange, redemption or
other taxable disposition of exchange notes is attributable to
accrued but unpaid interest not previously included in income,
such amount will be treated as interest as described under the
heading Interest above, rather than as
amounts realized from any such sale, exchange, redemption or
other taxable disposition, but such amount will not be subject
to withholding.
Exchange
offer
The tax consequences to a
non-U.S. holder
of the surrender of notes in exchange for exchange notes will
not result in a taxable exchange for U.S. federal income
tax purposes. The consequences of the exchange will be the same
as those of a U.S. holder, which are described under the
heading U.S. Holders Exchange
offer above.
Information
reporting and backup withholding
U.S.
holders
Certain non-exempt U.S. holders will be subject to
information reporting in respect of any payments that we may
make or are made on our behalf on the exchange notes and the
proceeds of any sale or other disposition of the exchange notes.
In addition, backup withholding, currently at a rate of 28%, may
apply, unless the U.S. holder supplies a taxpayer
identification number and other information, certified under
penalty of perjury, or otherwise establishes, in the manner
prescribed by applicable law, an exemption from backup
withholding. Amounts withheld under the backup withholding rules
are allowable as a refund or a credit against the
U.S. holders federal income tax upon furnishing the
required information on a timely basis to the Internal Revenue
Service.
Non-U.S.
holders
We will, where required, report to
non-U.S. holders
and to the Internal Revenue Service the amount of any interest
paid on the exchange notes and the amount of tax, if any,
withheld with respect to those payments. Copies of these
information returns may be made available under the provisions
of a specific treaty or other agreement to the tax authorities
of the country in which the
non-U.S. holder
resides or is organized.
Backup withholding tax, currently at a rate of 28%, will not
apply to payments of interest with respect to which either the
requisite certification that the
non-U.S. holder
is not a United States person for U.S. federal income tax
purposes, has been received or an exemption has been otherwise
established, provided, in each case, however, that neither we
nor our paying agent, as the case may be, have actual knowledge
or reason to know that the
non-U.S. holder
is a United States person that is not an exempt recipient or
that the conditions of any other exemption are not, in fact,
satisfied.
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Payments on the sale, exchange or other disposition of exchange
notes effected through a foreign office of a broker to an
offshore account maintained by a
non-U.S. holder
are generally not subject to information reporting or backup
withholding. However, if the broker is a United States person, a
controlled foreign corporation, a
non-United
States person 50% or more of whose gross income is effectively
connected with a trade or business within the United States for
a specified three-year period, a foreign partnership engaged in
the conduct of a trade or business within the United States, a
foreign partnership with significant U.S. ownership or a
U.S. branch of a foreign bank or insurance company, then
information reporting will be required, unless the broker has
documentary evidence in its records that the beneficial owner of
the payment is not a United States person or is otherwise
entitled to an exemption and the broker has neither actual
knowledge nor a reason to know that the beneficial owner is not
entitled to an exemption. Backup withholding will apply if the
sale or other disposition is subject to information reporting
and the broker has actual knowledge that the beneficial owner is
a United States person that is not an exempt recipient.
Information reporting and backup withholding will apply to
payments effected at a U.S. office of any U.S. or
foreign broker, unless the broker has documentary evidence in
its records that the beneficial owner of the payment is not a
United States person or is otherwise entitled to an exemption
and the broker has no actual knowledge or reason to know that
the beneficial owner is a United States person or is not
otherwise entitled to an exemption.
Backup withholding does not represent an additional income tax.
Amounts withheld from payments to a
non-U.S. holder
under the backup withholding rules may be credited against the
non-U.S. holders
U.S. federal income tax liability and may entitle the
holder to a refund, provided that the required information is
timely furnished to the Internal Revenue Service.
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Certain
ERISA considerations
The following summary is general in nature and does not
address every issue pertaining to the Employee Retirement Income
Security Act of 1974, as amended (ERISA), that may
be applicable to RHD, the exchange notes or a particular
investor. Accordingly, each prospective investor should consult
with its own counsel in order to understand the ERISA-related
issues that affect or may affect the prospective investor with
respect to this investment. Furthermore, the issuance of the
exchange notes is not a representation by the issuer that an
investment in the exchange notes meets all legal requirements
applicable to investments by Benefit Plan Investors,
Governmental Plans, Church Plans (as defined below) or
non-U.S. plans
or that such an investment is appropriate for any particular
Benefit Plan Investor, Governmental Plan, Church Plan or
non-U.S. plan.
The following is a summary of certain considerations associated
with the exchange of the exchange notes by (1) an employee
benefit plan subject to Part 4 of Subtitle B of
Title I of ERISA, (2) a plan to which
Section 4975 of the Code applies, (3) an entity whose
underlying assets include plan assets by reason of a plans
investment in the entity (each of (1), (2) and (3), a
Benefit Plan Investor), (4) a governmental plan
as defined in Section 3(32) of ERISA (a Governmental
Plan), (5) a church plan as defined in
Section 3(33) of ERISA that has not made an election under
Section 410(d) of the Code (a Church Plan), or
(6) a
non-U.S. plan
(each, a Plan).
General
fiduciary matters
ERISA and the Code impose certain duties on persons who are
fiduciaries of a Plan subject to Title I of ERISA or
Section 4975 of the Code (each, an ERISA Plan)
and prohibit certain transactions involving the assets of an
ERISA Plan and its fiduciaries or other interested parties.
Under ERISA and the Code, any person who exercises any
discretionary authority or control over the administration of
such an ERISA Plan or any authority or control over the
management or disposition of the assets of such an ERISA Plan,
or who renders investment advice for a fee or other compensation
to such an ERISA Plan, is generally considered to be a fiduciary
of the ERISA Plan.
In considering an investment in the exchange notes of a portion
of the assets of any Plan, a fiduciary should determine whether
the investment is in accordance with the documents and
instruments governing the Plan and the applicable provisions of
ERISA, the Code or any other federal, state, local or
non-U.S. law
that regulates a Plans investments (each, a Similar
Law) relating to a fiduciarys duties with respect to
the Plan including, without limitation, the prudence,
diversification, delegation of control and prohibited
transaction provisions of ERISA, the Code or any applicable
Similar Law.
Prohibited
transaction issues
Sections 406 and 407 of ERISA and Section 4975 of the
Code prohibit ERISA Plans from engaging in specified
transactions, including, but not limited to, sales or exchanges
of property (such as the exchange notes) or extensions of credit
involving plan assets with persons or entities who are
parties in interest, within the meaning of ERISA, or
disqualified persons, within the meaning of
Section 4975 of the Code, unless an exemption is available.
A party in interest or disqualified person who engaged in a
non-exempt prohibited transaction may be subject to excise taxes
and other penalties and liabilities under ERISA and the Code. In
addition, the fiduciary of the ERISA Plan that engaged in such a
non-exempt prohibited transaction may be subject to penalties
and liabilities under ERISA and the Code. The acquisition and
holding of or the exchange notes by an ERISA Plan with respect
to which RHD or the initial purchasers are considered a party in
interest or a disqualified person may constitute or result in a
direct or indirect prohibited transaction under Section 406
of ERISA
and/or
Section 4975 of the Code, unless the investment is acquired
and is held in accordance with an applicable statutory, class or
individual prohibited transaction exemption. Statutory
exemptions include Section 408(b)(17) of ERISA and
Section 4975(d)(20) of the Code that pertain to certain
transactions with non-fiduciary service providers. Prohibited
transaction class exemptions, or PTCEs, issued by
the DOL that may apply to the acquisition and holding of the
exchange notes include, without limitation:
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PTCE 84-14
regarding transactions determined by independent qualified
professional asset managers;
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PTCE 90-1
regarding insurance company pooled separate accounts;
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PTCE 91-38
regarding bank collective investment funds;
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PTCE 95-60
regarding life insurance company general accounts; and
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PTCE 96-23
regarding transactions determined by in-house asset managers,
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although there can be no assurance that all of the conditions of
any such statutory or class exemptions will be satisfied.
As a general rule, Governmental Plans, Church Plans and
non-U.S. plans
are not subject to ERISAs requirements. Accordingly,
assets of such plans may be invested without regard to the
fiduciary and prohibited transaction considerations described
above. Although a Governmental Plan, a Church Plan or a
non-U.S. plan
is not subject to ERISA or Section 4975 of the Code, it may
be subject to Similar Law. A fiduciary of a Governmental Plan, a
Church Plan or a
non-U.S. plan
should make its own determination as to the requirements, if
any, under any Similar Law applicable to the purchase of the
exchange notes.
Because of the foregoing, the exchange notes may not be
purchased or held by any Plan, unless such purchase and holding
will not constitute a non-exempt prohibited transaction under
ERISA and the Code or a similar violation under any applicable
Similar Law.
Representation
Accordingly, by acceptance of an exchange note, each purchaser
and subsequent transferee of an exchange note will be deemed to
have represented and warranted that (i)(a) it is not a Benefit
Plan Investor, a Governmental Plan, a Church Plan or a
non-U.S. plan,
(b) it is a Benefit Plan Investor and its purchase and
holding of the exchange note will not result in a non-exempt
prohibited transaction under Section 406 of ERISA or
Section 4975 of the Code, or (c)(1) it is a Governmental
Plan, Church Plan, or a
non-U.S. plan
and (2) the purchase and holding of the exchange note is
not subject to (x) ERISA, (y) Section 4795 of the
Code or (z) any Similar Law that prohibits or imposes an
excise or penalty tax on the purchase or holding of any such
exchange note and (ii) it will promptly notify RHD and the
Trustee if, at any time, it is no longer able to make the
representations contained in clause (i) above.
243
Plan of
distribution
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. 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 notes, where such notes were acquired 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, as amended or
supplemented, available to any broker-dealer for use in
connection with any such resale.
We will not receive any proceeds from any sale of exchange notes
by broker-dealers. Exchange notes received by broker-dealers for
their own account pursuant to the exchange offer may be sold
from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the
writing of options on the exchange notes or a combination of
such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or
negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any
such broker-dealer
and/or
the
purchasers of any such exchange notes. Any broker-dealer that
resells exchange notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer
that participates in a distribution of such exchange notes may
be deemed to be an underwriter within the meaning of
the Securities Act and any profit of any such resale of exchange
notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the
Securities Act. The letter of transmittal states that by
acknowledging that it will deliver 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.
For a period of 180 days after the expiration date, we will
promptly send additional copies of this prospectus and any
amendment or supplement to this prospectus to any broker-dealer
that requests such documents in the letter of transmittal. We
have agreed to pay all expenses incident to the exchange offer
(including the expenses of one counsel for the holder of the
notes) other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the notes (including
any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
Legal
matters
The validity of the exchange notes offered hereby will be passed
upon for us by Robert J. Bush, Vice President and Assistant
Secretary of RHD, and Jones Day. As of May 7, 2008,
Mr. Bush held 4,668 shares of Common Stock and held
options to purchase another 94,362 shares of Common Stock
and stock appreciation rights with respect to another
124,636 shares of Common Stock.
Experts
The consolidated financial statements for the year ended
December 31, 2005 included in this Prospectus have been so
included in reliance on the report of PricewaterhouseCoopers
LLP, an independent registered public accounting firm, given on
the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of RHD as of
December 31, 2007 and 2006, and for the years then ended,
and the effectiveness of RHDs internal control over
financial reporting as of December 31, 2007, have been
included herein and in the registration statement in reliance
upon the reports of KPMG LLP, independent registered public
accounting firm, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
The audit report covering the December 31, 2007
consolidated financial statements refers to RHDs adoption
of the provisions of Statement of Financial Accounting Standards
No. 123(R),
Share-Based Payment
, as of
January 1, 2006, Statement of Financial Accounting
Standards No. 158,
Employers Accounting for
244
Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106, and
132(R)
, as of December 31, 2006, and FASB
Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes: an Interpretation of FASB Statement
No. 109
, as of January 1, 2007.
The consolidated statements of operations of Dex Media, Inc. and
subsidiaries for the one month ended January 31, 2006 and
for the year ended December 31, 2005, have been included
herein and in the registration statement in reliance upon the
report of KPMG LLP, independent registered public accounting
firm, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
Where you
can find more information
Available
information
RHD files annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and
copy materials that RHD has filed with the SEC at the following
SEC public reference room:
100 F Street,
N.E.
Washington, D.C. 20549
Please call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
room.
RHDs SEC filings are also available for free to the public
on the SECs Internet website at www.sec.gov, which
contains reports, proxy and information statements and other
information regarding companies that file electronically with
the SEC. In addition, RHDs SEC filings are also available
for free to the public on RHDs website, www.rhd.com.
Information contained on RHDs website is not incorporated
by reference into this prospectus, and you should not consider
information contained on that website as part of this
prospectus. In addition, our common stock is listed on the New
York Stock Exchange and our reports and other information can be
inspected at the offices of the NYSE, 20 Broad Street, New
York, New York 10005.
245
Managements
Report on Internal Control Over Financial Reporting
The management of R.H. Donnelley Corporation is responsible for
establishing and maintaining adequate internal control over the
Companys financial reporting within the meaning of
Rule 13a-15(f)
promulgated under the Securities Exchange Act of 1934. Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements in the
financial statements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions
or that the degree of compliance with policies and procedures
may deteriorate.
Management assessed the effectiveness of R.H. Donnelley
Corporations internal control over financial reporting as
of December 31, 2007. In undertaking this assessment,
management used the criteria established by the Committee of
Sponsoring Organizations (COSO) of the Treadway Commission
contained in the Internal Control Integrated
Framework.
Based on its assessment, management has concluded that as of
December 31, 2007, the Companys internal control over
financial reporting is effective based on the COSO criteria.
The Companys internal control over financial reporting as
of December 31, 2007 has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in
their report that appears on
page F-4.
KPMG LLP has also audited the Consolidated Financial Statements
of R.H. Donnelley Corporation and subsidiaries as of and for the
year ended December 31, 2007, included in this Prospectus,
as stated in their report that appears on
page F-3.
F-2
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
R.H. Donnelley Corporation:
We have audited the accompanying consolidated balance sheets of
R.H. Donnelley Corporation and subsidiaries as of
December 31, 2007 and 2006, and the related consolidated
statements of operations and comprehensive income (loss), cash
flows and changes in shareholders equity for the years
then ended. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of R.H. Donnelley Corporation and subsidiaries as of
December 31, 2007 and 2006, and the results of their
operations and their cash flows for the years then ended, in
conformity with U.S. generally accepted accounting
principles.
As discussed in Note 2 to the notes to consolidated
financial statements, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment
, as of January 1, 2006,
Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R)
, as of December 31,
2006, and FASB Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes: an Interpretation of FASB Statement
No. 109
, as of January 1, 2007.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), R.H.
Donnelley Corporations internal control over financial
reporting as of December 31, 2007, based on criteria
established in
Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO)
, and our report dated
March 13, 2008 expressed an unqualified opinion on the
effectiveness of the Companys internal control over
financial reporting.
/s/ KPMG LLP
Raleigh, North Carolina
March 13, 2008
F-3
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
R.H. Donnelley Corporation:
We have audited R.H. Donnelley Corporations internal
control over financial reporting as of December 31, 2007,
based on criteria established in
Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
R.H.
Donnelley Corporations management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, R.H. Donnelley Corporation maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2007, based on criteria
established in
Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of R.H. Donnelley Corporation and
subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of operations and comprehensive
income (loss), cash flows and changes in shareholders
equity for the years then ended, and our report dated
March 13, 2008 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
Raleigh, North Carolina
March 13, 2008
F-4
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
R.H. Donnelley Corporation:
In our opinion, the consolidated statements of operations and
comprehensive income (loss), cash flows and changes in
shareholders equity (deficit) for the year ended
December 31, 2005 present fairly, in all material respects,
the results of operations and cash flows of R.H. Donnelley
Corporation and its subsidiaries for the year ended
December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers
LLP
Raleigh, North Carolina
March 15, 2006
F-5
R.H.
DONNELLEY CORPORATION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except
|
|
|
|
share data)
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
46,076
|
|
|
$
|
156,249
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
Billed
|
|
|
258,839
|
|
|
|
248,334
|
|
Unbilled
|
|
|
847,446
|
|
|
|
842,869
|
|
Allowance for doubtful accounts and sales claims
|
|
|
(42,817
|
)
|
|
|
(42,952
|
)
|
|
|
|
|
|
|
|
|
|
Net accounts receivable
|
|
|
1,063,468
|
|
|
|
1,048,251
|
|
Deferred directory costs
|
|
|
183,687
|
|
|
|
211,822
|
|
Short-term deferred income taxes, net
|
|
|
47,759
|
|
|
|
|
|
Prepaid and other current assets
|
|
|
126,201
|
|
|
|
115,903
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,467,191
|
|
|
|
1,532,225
|
|
Fixed assets and computer software, net
|
|
|
187,680
|
|
|
|
159,362
|
|
Other non-current assets
|
|
|
139,406
|
|
|
|
141,619
|
|
Intangible assets, net
|
|
|
11,170,482
|
|
|
|
11,477,996
|
|
Goodwill
|
|
|
3,124,334
|
|
|
|
2,836,266
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
16,089,093
|
|
|
$
|
16,147,468
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
230,693
|
|
|
$
|
169,490
|
|
Accrued interest
|
|
|
198,828
|
|
|
|
179,419
|
|
Deferred directory revenue
|
|
|
1,172,035
|
|
|
|
1,197,796
|
|
Short-term deferred income taxes, net
|
|
|
|
|
|
|
79,882
|
|
Current portion of long-term debt
|
|
|
177,175
|
|
|
|
382,631
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,778,731
|
|
|
|
2,009,218
|
|
Long-term debt
|
|
|
9,998,474
|
|
|
|
10,020,521
|
|
Deferred income taxes, net
|
|
|
2,288,384
|
|
|
|
2,099,102
|
|
Other non-current liabilities
|
|
|
200,768
|
|
|
|
197,871
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
14,266,357
|
|
|
|
14,326,712
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Common stock, par value $1 per share, authorized
400,000,000 shares; issued
88,169,275 shares at December 31, 2007 and 2006;
outstanding 68,758,026 and 70,464,717 at
December 31, 2007 and 2006, respectively
|
|
|
88,169
|
|
|
|
88,169
|
|
Additional paid-in capital
|
|
|
2,402,181
|
|
|
|
2,341,009
|
|
Accumulated deficit
|
|
|
(385,540
|
)
|
|
|
(437,496
|
)
|
Treasury stock, at cost, 19,411,249 shares at
December 31, 2007 and 17,704,558 shares at
December 31, 2006
|
|
|
(256,334
|
)
|
|
|
(161,470
|
)
|
Accumulated other comprehensive loss
|
|
|
(25,740
|
)
|
|
|
(9,456
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
1,822,736
|
|
|
|
1,820,756
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
16,089,093
|
|
|
$
|
16,147,468
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
R.H.
DONNELLEY CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenues
|
|
$
|
2,680,299
|
|
|
$
|
1,899,297
|
|
|
$
|
956,631
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (exclusive of depreciation and amortization
shown separately below)
|
|
|
450,254
|
|
|
|
342,052
|
|
|
|
115,875
|
|
Selling and support expenses
|
|
|
716,333
|
|
|
|
656,014
|
|
|
|
327,355
|
|
General and administrative expenses
|
|
|
145,640
|
|
|
|
134,784
|
|
|
|
53,014
|
|
Depreciation and amortization
|
|
|
463,106
|
|
|
|
323,621
|
|
|
|
85,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,775,333
|
|
|
|
1,456,471
|
|
|
|
581,390
|
|
Operating income
|
|
|
904,966
|
|
|
|
442,826
|
|
|
|
375,241
|
|
Non-operating income
|
|
|
1,818
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(830,892
|
)
|
|
|
(765,055
|
)
|
|
|
(264,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
75,892
|
|
|
|
(322,229
|
)
|
|
|
110,709
|
|
Provision (benefit) for income taxes
|
|
|
29,033
|
|
|
|
(84,525
|
)
|
|
|
43,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
46,859
|
|
|
|
(237,704
|
)
|
|
|
67,533
|
|
Preferred dividend
|
|
|
|
|
|
|
1,974
|
|
|
|
11,708
|
|
(Gain) loss on repurchase of redeemable convertible preferred
stock
|
|
|
|
|
|
|
(31,195
|
)
|
|
|
133,681
|
|
Accretion of redeemable convertible preferred stock to
redemption value
|
|
|
|
|
|
|
|
|
|
|
211,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders
|
|
$
|
46,859
|
|
|
$
|
(208,483
|
)
|
|
$
|
(288,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.66
|
|
|
$
|
(3.14
|
)
|
|
$
|
(9.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.65
|
|
|
$
|
(3.14
|
)
|
|
$
|
(9.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
70,932
|
|
|
|
66,448
|
|
|
|
31,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
71,963
|
|
|
|
66,448
|
|
|
|
31,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
46,859
|
|
|
$
|
(237,704
|
)
|
|
$
|
67,533
|
|
Unrealized (loss) gain on interest rate swaps, net of tax
(benefit) provision of $(15,468), $(5,460) and $8,126 for the
years ended December 31, 2007, 2006 and 2005, respectively
|
|
|
(25,270
|
)
|
|
|
(9,449
|
)
|
|
|
12,710
|
|
Minimum pension liability adjustment, net of tax provision
(benefit) of $2,863 and $(9,049) for the years ended
December 31, 2006 and 2005, respectively
|
|
|
|
|
|
|
4,792
|
|
|
|
(14,148
|
)
|
Benefit plans adjustment, net of tax provision of $5,446
|
|
|
8,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
30,575
|
|
|
$
|
(242,361
|
)
|
|
$
|
66,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
R.H.
DONNELLEY CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
46,859
|
|
|
$
|
(237,704
|
)
|
|
$
|
67,533
|
|
Reconciliation of net income (loss) to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
463,106
|
|
|
|
323,621
|
|
|
|
85,146
|
|
Deferred income tax provision (benefit)
|
|
|
8,668
|
|
|
|
(85,152
|
)
|
|
|
43,176
|
|
Loss on disposal of assets
|
|
|
857
|
|
|
|
34
|
|
|
|
|
|
Provision for bad debts
|
|
|
80,850
|
|
|
|
71,066
|
|
|
|
30,004
|
|
Stock-based compensation expense
|
|
|
39,017
|
|
|
|
43,283
|
|
|
|
5,689
|
|
Loss on extinguishment of debt
|
|
|
26,321
|
|
|
|
|
|
|
|
32,725
|
|
Other non-cash charges
|
|
|
47,272
|
|
|
|
39,385
|
|
|
|
5,712
|
|
Changes in assets and liabilities, net of effects from
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) in accounts receivable
|
|
|
(95,787
|
)
|
|
|
(75,914
|
)
|
|
|
(31,881
|
)
|
(Increase) decrease in other assets
|
|
|
(5,966
|
)
|
|
|
(22,997
|
)
|
|
|
52,469
|
|
Increase in accounts payable and accrued liabilities
|
|
|
66,142
|
|
|
|
63,008
|
|
|
|
101,908
|
|
(Decrease) increase in deferred directory revenue
|
|
|
(26,455
|
)
|
|
|
635,690
|
|
|
|
82,016
|
|
Increase (decrease) in other non-current liabilities
|
|
|
40,925
|
|
|
|
13,989
|
|
|
|
(82,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
691,809
|
|
|
|
768,309
|
|
|
|
392,052
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to fixed assets and computer software
|
|
|
(77,470
|
)
|
|
|
(78,543
|
)
|
|
|
(31,605
|
)
|
Acquisitions, net of cash received
|
|
|
(329,102
|
)
|
|
|
(1,901,466
|
)
|
|
|
(6,450
|
)
|
Equity investment
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(409,072
|
)
|
|
|
(1,980,009
|
)
|
|
|
(38,055
|
)
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of debt, net of costs
|
|
|
1,468,648
|
|
|
|
2,079,005
|
|
|
|
293,439
|
|
Additional borrowings under the Credit Facilities, net of costs
|
|
|
1,416,822
|
|
|
|
435,376
|
|
|
|
341,417
|
|
Credit Facilities repayments
|
|
|
(1,674,095
|
)
|
|
|
(577,292
|
)
|
|
|
(345,227
|
)
|
Note repayments
|
|
|
(1,398,892
|
)
|
|
|
(291,716
|
)
|
|
|
(317,066
|
)
|
Revolver borrowings
|
|
|
722,550
|
|
|
|
934,900
|
|
|
|
268,000
|
|
Revolver repayments
|
|
|
(781,400
|
)
|
|
|
(869,000
|
)
|
|
|
(304,200
|
)
|
Tender, redemption and call premium payments
|
|
|
(71,656
|
)
|
|
|
|
|
|
|
(25,268
|
)
|
Repurchase of common stock
|
|
|
(89,578
|
)
|
|
|
|
|
|
|
|
|
Repurchase of redeemable convertible preferred stock and
redemption of preferred stock purchase rights
|
|
|
|
|
|
|
(336,819
|
)
|
|
|
(277,197
|
)
|
Repurchase of warrants
|
|
|
|
|
|
|
(53,128
|
)
|
|
|
|
|
Proceeds from employee stock option exercises
|
|
|
13,412
|
|
|
|
31,665
|
|
|
|
7,383
|
|
Proceeds from issuance of common stock
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in checks not yet presented for payment
|
|
|
(7,721
|
)
|
|
|
7,165
|
|
|
|
1,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(392,910
|
)
|
|
|
1,360,156
|
|
|
|
(356,959
|
)
|
(Decrease) increase in cash and cash equivalents
|
|
|
(110,173
|
)
|
|
|
148,456
|
|
|
|
(2,962
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
156,249
|
|
|
|
7,793
|
|
|
|
10,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
46,076
|
|
|
$
|
156,249
|
|
|
$
|
7,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash interest paid
|
|
$
|
721,505
|
|
|
$
|
663,683
|
|
|
$
|
231,930
|
|
Income tax payments (refunds) received, net
|
|
|
10,075
|
|
|
|
1,015
|
|
|
|
(851
|
)
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-8
R.H.
DONNELLEY CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Unamortized
|
|
|
Earnings
|
|
|
|
|
|
Other
|
|
|
Shareholders
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Warrants
|
|
|
Restricted
|
|
|
(Accumulated
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Equity
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Outstanding
|
|
|
Stock
|
|
|
Deficit)
|
|
|
Stock
|
|
|
Income (Loss)
|
|
|
(Deficit)
|
|
|
|
(In thousands)
|
|
|
Balance, December 31, 2004
|
|
$
|
51,622
|
|
|
$
|
107,238
|
|
|
$
|
13,758
|
|
|
$
|
(135
|
)
|
|
$
|
3,855
|
|
|
$
|
(163,603
|
)
|
|
$
|
5,250
|
|
|
$
|
17,985
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,533
|
|
|
|
|
|
|
|
|
|
|
|
67,533
|
|
Loss on repurchase of preferred stock
|
|
|
|
|
|
|
(72,147
|
)
|
|
|
|
|
|
|
|
|
|
|
(61,534
|
)
|
|
|
|
|
|
|
|
|
|
|
(133,681
|
)
|
Beneficial conversion feature from
|
|
|
|
|
|
|
(35,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,091
|
)
|
repurchase of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock to
|
|
|
|
|
|
|
(6,536
|
)
|
|
|
|
|
|
|
|
|
|
|
(204,484
|
)
|
|
|
|
|
|
|
|
|
|
|
(211,020
|
)
|
redemption value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion feature from
|
|
|
|
|
|
|
(5,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,385
|
)
|
accretion of preferred stock to redemption value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend
|
|
|
|
|
|
|
(8,159
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,549
|
)
|
|
|
|
|
|
|
|
|
|
|
(11,708
|
)
|
Employee stock option exercises
|
|
|
|
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
335
|
|
|
|
|
|
|
|
12,335
|
|
Restricted stock issued
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
Stock issued for employee bonus plans
|
|
|
|
|
|
|
1,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(265
|
)
|
|
|
|
|
|
|
1,714
|
|
Compensatory stock awards
|
|
|
|
|
|
|
5,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
5,190
|
|
Restricted stock amortization
|
|
|
|
|
|
|
364
|
|
|
|
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499
|
|
Beneficial conversion feature from
|
|
|
|
|
|
|
595
|
|
|
|
|
|
|
|
|
|
|
|
1,057
|
|
|
|
|
|
|
|
|
|
|
|
1,652
|
|
issuance of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on interest rate swaps, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,710
|
|
|
|
12,710
|
|
Minimum pension liability adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,148
|
)
|
|
|
(14,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
51,622
|
|
|
|
|
|
|
|
13,758
|
|
|
|
|
|
|
|
(197,122
|
)
|
|
|
(163,485
|
)
|
|
|
3,812
|
|
|
|
(291,415
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(237,704
|
)
|
|
|
|
|
|
|
|
|
|
|
(237,704
|
)
|
Gain on repurchase of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,195
|
|
|
|
|
|
|
|
|
|
|
|
31,195
|
|
Beneficial conversion feature from repurchase of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,195
|
)
|
|
|
|
|
|
|
|
|
|
|
(31,195
|
)
|
Redemption of preferred stock purchase rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(696
|
)
|
|
|
|
|
|
|
|
|
|
|
(696
|
)
|
Preferred stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,974
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,974
|
)
|
Employee stock option exercises
|
|
|
|
|
|
|
31,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,015
|
|
|
|
|
|
|
|
33,776
|
|
Issuance of common stock Dex Media Merger
|
|
|
36,547
|
|
|
|
2,222,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,259,359
|
|
Vested Dex Media equity awards
|
|
|
|
|
|
|
77,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,354
|
|
Compensatory stock awards
|
|
|
|
|
|
|
48,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,452
|
|
Unrealized loss on interest rate swaps, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,449
|
)
|
|
|
(9,449
|
)
|
Minimum pension liability adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,792
|
|
|
|
4,792
|
|
Adjustment to initially apply SFAS No. 158, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,611
|
)
|
|
|
(8,611
|
)
|
Repurchase of warrants
|
|
|
|
|
|
|
(39,370
|
)
|
|
|
(13,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
88,169
|
|
|
|
2,341,009
|
|
|
|
|
|
|
|
|
|
|
|
(437,496
|
)
|
|
|
(161,470
|
)
|
|
|
(9,456
|
)
|
|
|
1,820,756
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,859
|
|
|
|
|
|
|
|
|
|
|
|
46,859
|
|
Employee stock option exercises
|
|
|
|
|
|
|
12,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
678
|
|
|
|
|
|
|
|
13,412
|
|
Issuance of common stock Business.com Acquisition
|
|
|
|
|
|
|
8,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148
|
|
|
|
|
|
|
|
9,000
|
|
Cumulative effect of FIN No. 48 adoption
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,097
|
|
|
|
|
|
|
|
|
|
|
|
5,097
|
|
Other adjustments related to compensatory stock awards
|
|
|
|
|
|
|
569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
569
|
|
Unrealized loss on interest rate swaps, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,270
|
)
|
|
|
(25,270
|
)
|
Benefit plans adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,986
|
|
|
|
8,986
|
|
Compensatory stock awards
|
|
|
|
|
|
|
39,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,017
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95,690
|
)
|
|
|
|
|
|
|
(95,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
88,169
|
|
|
$
|
2,402,181
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(385,540
|
)
|
|
$
|
(256,334
|
)
|
|
$
|
(25,740
|
)
|
|
$
|
1,822,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-9
R.H.
DONNELLEY CORPORATION
(Tabular amounts in thousands, except per share data and
percentages)
|
|
1.
|
Business
and Presentation
|
The consolidated financial statements include the accounts of
R.H. Donnelley Corporation and its direct and indirect
wholly-owned subsidiaries (the Company,
RHD, Donnelley, we,
us and our). As of December 31,
2007, R.H. Donnelley Inc. (RHDI or RHD
Inc.), Dex Media, Inc. (Dex Media),
Business.com, Inc. (Business.com) and Local Launch,
Inc. (Local Launch) were our only direct
wholly-owned subsidiaries. Effective January 1, 2008, Local
Launch was merged with and into Business.com. All intercompany
transactions and balances have been eliminated.
We are one of the nations 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 and
three of the most highly recognizable brands in the industry,
Qwest, Embarq, and AT&T. 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. During 2007, we published and
distributed print directories in many of the countrys most
attractive markets including Albuquerque, Chicago, Denver, Las
Vegas, Orlando, and Phoenix.
Reclassifications
Certain prior period amounts included in the consolidated
statements of operations have been reclassified to conform to
the current periods 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 and bad debt expense in 2005
to conform to the current periods presentation.
Adjustments for customer claims prior to 2006 were not material.
These reclassifications had no impact on operating income or net
income for the years ended December 31, 2006 and 2005. The
table below summarizes these reclassifications.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
Year Ended December 31, 2005
|
|
|
|
As
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Reclass
|
|
|
Reclassified
|
|
|
Reported
|
|
|
Reclass
|
|
|
Reclassified
|
|
|
|
(In thousands)
|
|
|
Net revenue
|
|
$
|
1,895,921
|
|
|
$
|
3,376
|
|
|
$
|
1,899,297
|
|
|
$
|
956,631
|
|
|
$
|
|
|
|
$
|
956,631
|
|
Cost of revenue
|
|
|
987,056
|
|
|
|
(645,004
|
)
|
|
|
342,052
|
|
|
|
436,016
|
|
|
|
(320,141
|
)
|
|
|
115,875
|
|
Selling and support expenses
|
|
|
|
|
|
|
656,014
|
|
|
|
656,014
|
|
|
|
|
|
|
|
327,355
|
|
|
|
327,355
|
|
General and administrative expenses
|
|
|
142,418
|
|
|
|
(7,634
|
)
|
|
|
134,784
|
|
|
|
60,228
|
|
|
|
(7,214
|
)
|
|
|
53,014
|
|
In addition, certain prior period amounts included on the
consolidated statements of cash flows have been reclassified to
conform to the current periods presentation.
Significant
Business Developments
Acquisition
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 (the Business.com Acquisition).
The purchase price determined in accordance with generally
accepted accounting principles (GAAP) was
$334.4 million and excludes certain items such as the value
of unvested equity awards, which
F-10
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
RHDs position in the expanding local commercial search
market and to develop an online performance based advertising
network. 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. See Note 3, Acquisitions, and
Note 5, Long-Term Debt, Credit Facilities and
Notes, for a further description of the Business.com
Acquisition and related financing.
Debt
Refinancing
On October 2, 2007, we issued $1.0 billion aggregate
principal amount of 8.875%
Series A-4
Senior Notes due 2017
(Series A-4
Notes). Proceeds from this issuance were (a) used to
repay a $328 million RHD credit facility (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 RHDIs
$600 million aggregate principal amount 10.875% Senior
Subordinated Notes due 2012 (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 million of our
Series A-4
Notes. Proceeds from this issuance were (a) transferred to
Dex Media East (defined below) 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 RHDIs
$600 million Senior Subordinated Notes that RHDI commenced
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 (defined in Note 5, Long-Term Debt,
Credit Facilities and Notes). 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
Easts outstanding 9.875% senior notes due 2009 and
$341.3 million of Dex Media Easts outstanding
12.125% senior subordinated notes due 2012.
In December 2007, we redeemed RHDIs remaining
$7.9 million 8.875% Senior Notes due 2010 (RHDI
Senior Notes).
See Note 5, Long-Term Debt, Credit Facilities and
Notes, for additional information regarding these
refinancing transactions.
Share
Repurchases
In November 2007, the Companys Board of Directors
authorized a $100.0 million stock repurchase plan
(Repurchase Plan). This authorization permits the
Company to purchase its 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
F-11
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Revenue Recognition.
We earn revenue
principally from the sale of advertising into our yellow pages
directories. Revenue from the sale of such advertising is
deferred when a directory is published, net of estimated sales
claims, and recognized ratably over the life of a directory,
which is typically 12 months (the deferral and
amortization method). The Company also recognizes revenue
for those Internet-based advertising products that are sold with
print advertising using the deferral and amortization method.
Revenue with respect to Internet-based advertising that is not
sold with print advertising is recognized ratably over the
period the advertisement appears on the site. Revenue with
respect to our other products and services, such as search
engine marketing (SEM) and search engine
optimization (SEO) services (collectively referred
to as Internet Marketing), is recognized as
delivered or fulfilled. Revenue and deferred revenue from the
sale of advertising is recorded net of an allowance for sales
claims, estimated based primarily on historical experience. We
increase or decrease this estimate as information or
circumstances indicate that the estimate may no longer represent
the amount of claims we may incur in the future. The Company
recorded sales claims allowances of $54.8 million,
$41.9 million and $10.4 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
The Company enters into transactions, such as exclusivity
arrangements, sponsorships, and other media access transactions,
where the Companys products and services are promoted by a
third party and, in exchange, the Company carries the third
partys advertisement. The Company accounts for these
transactions in accordance with Emerging Issues Task Force
(EITF) Issue
No. 99-17,
Accounting for Advertising Barter Transactions.
Revenue
and expense related to such transactions are included in the
consolidated statements of operations consistent with, and only
to the extent of, reasonably similar and recent items sold or
purchased for cash.
In certain cases, the Company enters into agreements with
customers that involve the delivery of more than one product or
service. Revenue for such arrangements is allocated to the
separate units of accounting using the relative fair value
method in accordance with EITF Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables.
Deferred Directory Costs.
Costs directly
related to the selling and production of our directories are
initially deferred when incurred and recognized ratably over the
life of a directory, which is typically 12 months. These
costs are specifically identifiable to a particular directory
and include sales commissions and print, paper and initial
distribution costs. Such costs that are paid prior to directory
publication are classified as other current assets until
publication, when they are then reclassified as deferred
directory costs.
Cash and Cash Equivalents.
Cash equivalents
include liquid investments with a maturity of less than three
months at their time of purchase. The Company places its
investments with high quality financial institutions. At times,
such investments may be in excess of federally insured limits.
Accounts Receivable.
Accounts receivable
consist of balances owed to us by our advertising customers.
Advertisers typically enter into a twelve-month contract for
their advertising. Most local advertisers are billed a pro rata
amount of their contract value on a monthly basis. On behalf of
national advertisers, Certified Marketing Representatives
(CMRs) pay to the Company the total contract value
of their advertising, net of their commission, within
60 days after the publication month. Billed receivables
represent the amount that has been billed to advertisers. Billed
receivables are recorded net of an allowance for doubtful
accounts and sales claims, estimated based on historical
experience. We increase or decrease this estimate as information
or circumstances indicate that the estimate no longer
appropriately represents the amount of bad debts and sales
F-12
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
claims we may incur. Unbilled receivables represent
contractually owed amounts, net of an allowance for sales
claims, for published directories that have yet to be billed to
advertisers.
Fixed Assets and Computer Software.
Fixed
assets and computer software are recorded at cost. Fixed assets
and computer software acquired in conjunction with acquisitions
are recorded at fair value on the acquisition date. Depreciation
and amortization are provided over the estimated useful lives of
the assets using the straight-line method. Estimated useful
lives are thirty years for buildings, five years for machinery
and equipment, ten years for furniture and fixtures and three to
five years for computer equipment and computer software.
Leasehold improvements are amortized on a straight-line basis
over the shorter of the term of the lease or the estimated
useful life of the improvement. Fixed assets and computer
software at December 31, 2007 and 2006 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Computer software
|
|
$
|
215,410
|
|
|
$
|
140,100
|
|
Computer equipment
|
|
|
40,287
|
|
|
|
31,491
|
|
Machinery and equipment
|
|
|
8,220
|
|
|
|
6,182
|
|
Furniture and fixtures
|
|
|
16,532
|
|
|
|
12,386
|
|
Leasehold improvements
|
|
|
26,112
|
|
|
|
15,081
|
|
Buildings
|
|
|
1,863
|
|
|
|
1,735
|
|
Construction in Process Computer software and
equipment
|
|
|
14,014
|
|
|
|
33,396
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
322,438
|
|
|
|
240,371
|
|
Less accumulated depreciation and amortization
|
|
|
(134,758
|
)
|
|
|
(81,009
|
)
|
|
|
|
|
|
|
|
|
|
Net fixed assets and computer software
|
|
$
|
187,680
|
|
|
$
|
159,362
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense on fixed assets and
computer software for the years ended December 31, 2007,
2006 and 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Depreciation of fixed assets
|
|
$
|
16,649
|
|
|
$
|
15,928
|
|
|
$
|
4,887
|
|
Amortization of computer software
|
|
|
38,181
|
|
|
|
30,188
|
|
|
|
8,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization on fixed assets and computer
software
|
|
$
|
54,830
|
|
|
$
|
46,116
|
|
|
$
|
13,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Intangible Assets and
Goodwill.
As a result of the Dex Media Merger
(defined below), AT&T Directory Acquisition (defined
below), Embarq Acquisition (defined below), Business.com
Acquisition and Local Launch Acquisition (defined below),
certain long-term intangible assets were identified and recorded
at their estimated fair value. Amortization expense for the
years ended December 31, 2007, 2006 and 2005 was
$408.3 million, $277.5 million and $72.1 million,
respectively. Amortization expense for these intangible assets
for the five succeeding years is estimated to be approximately
$415.8 million, $403.4 million, $390.3 million,
$376.2 million and $353.7 million, respectively.
Amortization expense for the year ended December 31, 2007
includes an impairment charge of $20.0 million associated
with the tradenames acquired in the Embarq 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 Acquisition. This
impairment charge was determined using the relief from royalty
valuation method.
F-13
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The acquired long-term intangible assets and their respective
book values at December 31, 2007 are shown in the following
table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology,
|
|
|
|
|
|
|
Directory
|
|
|
Local
|
|
|
National
|
|
|
|
|
|
|
|
|
|
|
|
Network
|
|
|
|
|
|
|
Services
|
|
|
Customer
|
|
|
CMR
|
|
|
Third-Party
|
|
|
Trade
|
|
|
Advertising
|
|
|
Platforms &
|
|
|
|
|
|
|
Agreements
|
|
|
Relationships
|
|
|
Relationships
|
|
|
Contract
|
|
|
Names
|
|
|
Commitment
|
|
|
Other
|
|
|
Total
|
|
|
Initial fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qwest
|
|
$
|
7,320,000
|
|
|
$
|
875,000
|
|
|
$
|
205,000
|
|
|
$
|
|
|
|
$
|
490,000
|
|
|
$
|
25,000
|
|
|
$
|
|
|
|
$
|
8,915,000
|
|
AT&T
|
|
|
952,500
|
|
|
|
90,000
|
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,097,500
|
|
Embarq
|
|
|
1,625,000
|
|
|
|
200,000
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,885,000
|
|
Business.com
|
|
|
|
|
|
|
14,700
|
|
|
|
|
|
|
|
49,000
|
|
|
|
18,500
|
|
|
|
|
|
|
|
18,500
|
|
|
|
100,700
|
|
Local Launch
|
|
|
|
|
|
|
1,400
|
|
|
|
|
|
|
|
|
|
|
|
800
|
|
|
|
|
|
|
|
5,100
|
|
|
|
7,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,897,500
|
|
|
|
1,181,100
|
|
|
|
320,000
|
|
|
|
49,000
|
|
|
|
509,300
|
|
|
|
25,000
|
|
|
|
23,600
|
|
|
|
12,005,500
|
|
Accumulated amortization
|
|
|
(561,548
|
)
|
|
|
(163,661
|
)
|
|
|
(35,344
|
)
|
|
|
(3,841
|
)
|
|
|
(63,477
|
)
|
|
|
(3,993
|
)
|
|
|
(3,154
|
)
|
|
|
(835,018
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net intangible assets
|
|
$
|
9,335,952
|
|
|
$
|
1,017,439
|
|
|
$
|
284,656
|
|
|
$
|
45,159
|
|
|
$
|
445,823
|
|
|
$
|
21,007
|
|
|
$
|
20,446
|
|
|
$
|
11,170,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The acquired long-term intangible assets and their respective
book values at December 31, 2006 are shown in the following
table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directory
|
|
|
Local
|
|
|
National
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
Customer
|
|
|
CMR
|
|
|
Trade
|
|
|
Advertising
|
|
|
Technology
|
|
|
|
|
|
|
Agreements
|
|
|
Relationships
|
|
|
Relationships
|
|
|
Names
|
|
|
Commitment
|
|
|
& Other
|
|
|
Total
|
|
|
Initial fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qwest
|
|
$
|
7,320,000
|
|
|
$
|
875,000
|
|
|
$
|
205,000
|
|
|
$
|
490,000
|
|
|
$
|
25,000
|
|
|
$
|
|
|
|
$
|
8,915,000
|
|
AT&T
|
|
|
952,500
|
|
|
|
90,000
|
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,097,500
|
|
Embarq
|
|
|
1,625,000
|
|
|
|
200,000
|
|
|
|
60,000
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
1,915,000
|
|
Local Launch
|
|
|
|
|
|
|
1,400
|
|
|
|
|
|
|
|
800
|
|
|
|
|
|
|
|
5,100
|
|
|
|
7,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,897,500
|
|
|
|
1,166,400
|
|
|
|
320,000
|
|
|
|
520,800
|
|
|
|
25,000
|
|
|
|
5,100
|
|
|
|
11,934,800
|
|
Accumulated amortization
|
|
|
(335,261
|
)
|
|
|
(58,908
|
)
|
|
|
(22,264
|
)
|
|
|
(38,019
|
)
|
|
|
(1,910
|
)
|
|
|
(442
|
)
|
|
|
(456,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net intangible assets
|
|
$
|
9,562,239
|
|
|
$
|
1,107,492
|
|
|
$
|
297,736
|
|
|
$
|
482,781
|
|
|
$
|
23,090
|
|
|
$
|
4,658
|
|
|
$
|
11,477,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the Dex Media Merger, we acquired directory
services agreements (collectively, the Dex Directory
Services Agreements) which Dex Media had entered into with
Qwest (defined in Note 3, Acquisitions)
including, (1) a publishing agreement with a term of
50 years commencing November 8, 2002 (subject to
automatic renewal for additional one-year terms), which grants
us the right to be the exclusive official directory publisher of
listings and classified advertisements of Qwests telephone
customers in the geographic areas in the Qwest States (defined
in Note 3, Acquisitions) in which Qwest (and
its successors) provided local telephone services as of
November 8, 2002, as well as having the exclusive right to
use certain Qwest branding on directories in those markets and
(2) a non-competition agreement with a term of
40 years commencing November 8, 2002, pursuant to
which Qwest (on behalf of itself and its affiliates and
successors) has agreed not to sell directory products consisting
principally of listings and classified advertisements for
subscribers in the geographic areas in the Qwest States in which
Qwest provided local telephone service as of November 8,
2002 that are directed primarily at consumers in those
geographic areas. The fair value assigned to the Dex Media
Directory Services Agreements of $7.3 billion was based on
the multi-period excess earnings method and is being amortized
under the straight-line method over 42 years. Under the
multi-period excess earnings method, the projected cash flows of
the intangible asset are computed indirectly, which means
F-14
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
that future cash flows are projected with deductions made to
recognize returns on appropriate contributory assets, leaving
the excess, or residual net cash flow, as indicative of the
intangible asset fair value.
As a result of the Dex Media Merger, we also acquired
(1) an advertising commitment agreement whereby Qwest has
agreed to purchase an aggregate of $20 million of
advertising per year through 2017 from us at pricing on terms at
least as favorable as those offered to similar large customers
and (2) an intellectual property contribution agreement
pursuant to which Qwest assigned and or licensed to us the Qwest
intellectual property previously used in the Qwest directory
services business along with (3) a trademark license
agreement pursuant to which Qwest granted to us the right until
November 2007 to use the Qwest Dex and Qwest Dex Advantage marks
in connection with directory products and related marketing
material in the Qwest States and the right to use these marks in
connection with
DexKnows.com
®
(the intangible assets in (2) and (3) collectively,
Trade Names). The fair value assigned to the Dex
Media advertising commitment was based on the multi-period
excess earnings method and is being amortized under the
straight-line method over 12 years.
Directory services agreements between AT&T and the Company
include a directory services license agreement, a
non-competition agreement, an Internet Yellow Pages reseller
agreement and a directory publishing listing agreement
(collectively, AT&T Directory Services
Agreements) with certain affiliates of AT&T. The
directory services license agreement designates us as the
official and exclusive provider of yellow pages directory
services for AT&T (and its successors) in Illinois and
Northwest Indiana (the Territory), grants us the
exclusive license (and obligation as specified in the agreement)
to produce, publish and distribute white pages directories in
the Territory as AT&Ts agent and grants us the
exclusive license (and obligation as specified in the agreement)
to use the AT&T brand and logo on print directories in the
Territory. The non-competition agreement prohibits AT&T
(and its affiliates and successors), with certain limited
exceptions, from (1) producing, publishing and distributing
yellow and white pages print directories in the Territory,
(2) soliciting or selling local or national yellow or white
pages advertising for inclusion in such directories, and
(3) soliciting or selling local Internet yellow pages
advertising for certain Internet yellow pages directories in the
Territory or licensing AT&T marks to any third party for
that purpose. The Internet Yellow Pages reseller agreement
grants us the (a) exclusive right to sell to local
advertisers within the Territory Internet yellow pages
advertising focused upon products and services to be offered
within that territory, and (b) non-exclusive right to sell
to local (excluding National advertisers) advertisers within the
Territory Internet yellow pages advertising focused upon
products and services to be offered outside of the Territory, in
each case, onto the YellowPages.com platform. The directory
publishing listing agreement gives us the right to purchase and
use basic AT&T subscriber listing information and updates
for the purpose of publishing directories. The AT&T
Directory Services Agreements (other than the Internet Yellow
Pages reseller agreement) have initial terms of 50 years,
commencing in September 2004, subject to automatic renewal and
early termination under specified circumstances. The Internet
Yellow Pages reseller agreement has a term of 5 years,
commencing in September 2004. The fair value assigned to the
AT&T Directory Services Agreements and the Internet Yellow
Pages reseller agreement of $950.0 million and
$2.5 million, respectively, was based on the present value
of estimated future cash flows and is being amortized under the
straight-line method over 50 years and 5 years,
respectively.
Directory services agreements between Embarq and the Company,
which were executed in May 2006 in conjunction with
Sprints spin-off of its local telephone business, include
a directory services license agreement, a trademark license
agreement and a non-competition agreement with certain
affiliates of Embarq, as well as a non-competition agreement
with Sprint entered into in January 2003 (collectively
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
F-15
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 fair value of the Embarq Directory
Services Agreements of $1.6 billion was determined based on
the present value of estimated future cash flows at the time of
the Embarq Acquisition in January 2003, and is being amortized
under the straight-line method over 50 years.
The fair values of local and national customer relationships
obtained as a result of the Dex Media Merger, AT&T
Directory Acquisition and Embarq Acquisition were determined
based on the present value of estimated future cash flows. These
intangible assets are being amortized under the income
forecast method, which assumes the value derived from
customer relationships is greater in the earlier years and
steadily declines over time. The weighted average useful life of
these relationships is approximately 20 years. As a result
of cost uplift (defined below) from purchase accounting being
substantially amortized, during the first quarter of 2007, we
commenced amortization of local customer relationships obtained
as a result of the Dex Media Merger. As a result of purchase
accounting required by GAAP, we recorded the deferred directory
costs 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.
The fair value of acquired trade names obtained as a result of
the Dex Media Merger and Embarq Acquisition was determined based
on the relief from royalty method, which values the
trade names based on the estimated amount that a company would
have to pay in an arms length transaction to use these trade
names. As mentioned above, we recognized an impairment charge of
$20.0 million during the year ended December 31, 2007
associated with the trade names acquired in the Embarq
Acquisition. The Qwest tradenames are being amortized under the
straight-line method over 15 years. The Embarq tradenames
were being amortized under the straight-line method over
15 years.
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.
In connection with the Local Launch Acquisition, we identified
and recorded certain intangible assets at their estimated fair
value, including (1) local customer relationships,
(2) non-compete agreements, (3) technology and
(4) tradenames. These intangible assets are being amortized
under the straight-line method over remaining useful lives
ranging from 3 to 7 years.
Other than the Embarq tradenames mentioned above, no impairment
losses were recognized related to our other intangible assets
for the years ended December 31, 2007, 2006 and 2005,
respectively.
The excess purchase price for the Dex Media Merger, AT&T
Directory Acquisition, Embarq Acquisition, Business.com
Acquisition and Local Launch Acquisition over the net tangible
and identifiable intangible assets acquired of
$2.5 billion, $216.7 million, $97.0 million,
$258.8 million and $6.8 million, respectively, was
recorded as goodwill. Annual amortization of goodwill and the
acquired intangible assets for tax purposes is approximately
$672.5 million.
The change in goodwill during the year ended December 31,
2007 was primarily related to the Business.com Acquisition.
During the year ended December 31, 2007, we recorded
adjustments to goodwill totaling $30.8 million associated
with the Dex Media Merger that primarily related to deferred
income taxes. During 2007, we re-occupied the remaining portion
of our leased facilities in Chicago, Illinois, which we vacated
in conjunction with the 2005 Restructuring Actions (defined in
Note 4, Restructuring Charges). As a
F-16
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
result, we reversed the remaining amount of our reserve related
to these leased facilities during the year ended
December 31, 2007 by $1.8 million, with a
corresponding offset to goodwill. The total amount of goodwill
that is expected to be deductible for tax purposes related to
the Dex Media Merger is approximately $2.1 billion.
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 142,
Goodwill and Other
Intangible Assets
(SFAS No. 142),
goodwill is not amortized, but is subject to periodic impairment
testing. No impairment losses were recorded related to our
goodwill for the years ended December 31, 2007, 2006 and
2005, respectively.
The decline in the trading value of our debt and equity
securities will require us to continue to assess the
recoverability of our goodwill and negative industry and
economic trends may indicate that the carrying values of our
other intangible assets are not recoverable. The trading value
of our publicly traded debt and equity securities has continued
to decline subsequent to December 31, 2007. If the value of
our debt and equity securities does not recover, we will be
required to assess the fair values of the assets and liabilities
of the Company and could conclude that goodwill and other long
lived assets are impaired, which would result in impairment
charges in 2008. In addition, worsening economic conditions in
certain of our markets may require us to assess the
recoverability of other intangible assets during 2008 which
could result in additional impairment charges.
Interest Expense and Deferred Financing
Costs.
Interest expense for the years ended
December 31, 2007, 2006 and 2005 was $834.5 million,
$772.7 million and $265.0 million, respectively.
Certain costs associated with the issuance of debt instruments
are capitalized and included in other non-current assets on the
consolidated balance sheets. These costs are amortized to
interest expense over the terms of the related debt agreements.
The bond outstanding method is used to amortize deferred
financing costs relating to debt instruments with respect to
which we make accelerated principal payments. Other deferred
financing costs are amortized using the effective interest
method. Amortization of deferred financing costs included in
interest expense was $40.0 million, $21.9 million and
$23.6 million in 2007, 2006 and 2005, respectively. Apart
from business combinations, it is the Companys policy to
recognize losses incurred in conjunction with debt
extinguishments as a component of interest expense. Interest
expense in 2007 includes tender and redemption premium payments
of $71.7 million and write-off of unamortized deferred
financing costs of $16.8 million (which is included in the
amortization of deferred financing costs of $40.0 million
noted above) associated with the refinancing transactions
conducted during the fourth quarter of 2007. Interest expense in
2005 includes a $25.3 million tender premium payment and
write-off of unamortized deferred financing costs of
$7.4 million (which is included in the amortization of
deferred financing costs of $23.6 million noted above)
associated with the December 20, 2005 tender offer and exit
consent solicitation of our subsidiaries
8.875% Senior Notes due 2016. See Note 5,
Long-Term Debt, Credit Facilities and Notes for a
further description of these debt extinguishments. In
conjunction with the Dex Media Merger and as a result of
purchase accounting required under generally accepted accounting
principles (GAAP), we recorded Dex Medias debt
at its fair value on January 31, 2006. We recognize an
offset to interest expense in each period subsequent to the Dex
Media Merger for the amortization of the corresponding fair
value adjustment over the life of the respective debt. The
offset to interest expense for the years ended December 31,
2007 and 2006 was $92.1 million and $26.4 million,
respectively. The offset to interest expense for the year ended
December 31, 2007 includes $62.2 million related to
the redemption of Dex Media Easts outstanding
9.875% senior notes and 12.125% senior subordinated
notes on November 26, 2007.
Advertising Expense.
We recognize advertising
expenses as incurred. These expenses include media, public
relations, promotional and sponsorship costs and on-line
advertising. Total advertising expense was $55.2 million,
$32.7 million and $18.1 million in 2007, 2006 and
2005, respectively. Total advertising expense for 2007 includes
$7.8 million related to traffic acquisition costs
associated with the operations of Business.com.
F-17
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Concentration of Credit Risk.
Approximately
85% of our directory advertising revenue is derived from the
sale of advertising to local small- and medium-sized businesses.
These advertisers typically enter into
12-month
advertising sales contracts and make monthly payments over the
term of the contract. Some advertisers prepay the full amount or
a portion of the contract value. Most new advertisers and
advertisers desiring to expand their advertising programs are
subject to a credit review. If the advertisers qualify, we may
extend credit to them for their advertising purchase. Small- and
medium-sized businesses tend to have fewer financial resources
and higher failure rates than large businesses. In addition,
full collection of delinquent accounts can take an extended
period of time and involve significant costs. While we do not
believe that extending credit to our local advertisers will have
a material adverse effect on our results of operations or
financial condition, no assurances can be given. We do not
require collateral from our advertisers, although we do charge
interest to advertisers that do not pay by specified due dates.
The remaining approximately 15% of our directory advertising
revenue is derived from the sale of advertising to national or
large regional chains, such as rental car companies, automobile
repair shops and pizza delivery businesses. Substantially all of
the revenue derived through national accounts is serviced
through CMRs from which we accept orders. CMRs are independent
third parties that act as agents for national advertisers. The
CMRs are responsible for billing the national customers for
their advertising. We receive payment for the value of
advertising placed in our directory, net of the CMRs
commission, directly from the CMR. While we are still exposed to
credit risk, the amount of losses from these accounts has been
historically less than the local accounts as the advertisers,
and in some cases the CMRs, tend to be larger companies with
greater financial resources than local advertisers.
At December 31, 2007, we had interest rate swap agreements
with major financial institutions with a notional value of
$2.6 billion. We are exposed to credit risk in the event
that one or more of the counterparties to the agreements does
not, or cannot, meet their obligation. The notional amount is
used to measure interest to be paid or received and does not
represent the amount of exposure to credit loss. Any loss would
be limited to the amount that would have been received over the
remaining life of the swap agreement. The counterparties to the
swap agreements are major financial institutions with credit
ratings of AA- or higher. We do not currently foresee a material
credit risk associated with these swap agreements; however, no
assurances can be given.
Derivative Financial Instruments and Hedging
Activities.
The Company accounts for its
derivative financial instruments and hedging activities in
accordance with SFAS No. 133,
Accounting for
Derivative Instruments and Hedging Activities
(SFAS No. 133)
,
as amended by
SFAS No. 138,
Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of
FAS 133
and SFAS No. 149,
Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities.
We do not use derivative financial instruments
for trading or speculative purposes and our derivative financial
instruments are limited to interest rate swap agreements. The
Company utilizes a combination of fixed rate and variable rate
debt to finance its operations. The variable rate debt exposes
the Company to variability in interest payments due to changes
in interest rates. Management believes that it is prudent to
mitigate the interest rate risk on a portion of its variable
rate borrowings. Additionally, the credit facility of RHDI
requires that we maintain hedge agreements to provide either a
fixed interest rate or interest rate protection on at least 50%
of its total outstanding debt, while the Dex Media West (defined
below) and new Dex Media East credit facilities require that we
maintain hedge agreements to provide a fixed rate on at least
33% of their respective indebtedness. To satisfy our objectives
and requirements, the Company has entered into fixed interest
rate swap agreements to manage fluctuations in cash flows
resulting from changes in interest rates on variable rate debt.
The Companys interest rate swap agreements effectively
convert $2.6 billion, or approximately 69%, of our variable
rate debt to fixed rate debt, mitigating our exposure to
increases in interest rates. At December 31, 2007,
approximately 37% of our total debt outstanding consists of
variable rate debt, excluding the effect of our interest rate
swaps. Including the effect of our interest rate swaps, total
fixed rate debt comprised approximately 89% of our total debt
portfolio as of December 31, 2007.
F-18
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On the day a derivative contract is executed, the Company may
designate the derivative instrument as a hedge of the
variability of cash flows to be received or paid (cash flow
hedge). For all hedging relationships, the Company formally
documents the hedging relationship and its risk-management
objective and strategy for undertaking the hedge, the hedging
instrument, the item, the nature of the risk being hedged, how
the hedging instruments effectiveness in offsetting the
hedged risk will be assessed, and a description of the method of
measuring ineffectiveness. The Company also formally assesses,
both at the hedges inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions
are highly effective in offsetting changes in cash flows of
hedged items.
All derivative financial instruments are recognized as either
assets or liabilities on the consolidated balance sheets with
measurement at fair value. On a quarterly basis, the fair values
of the interest rate swaps are determined based on quoted market
prices and, to the extent the swaps provide an effective hedge,
the differences between the fair value and the book value of the
swaps are recognized in accumulated other comprehensive loss, a
component of shareholders equity. For derivative financial
instruments that are not designated or do not qualify as hedged
transactions, the initial fair value, if any, and any subsequent
gains or losses on the change in the fair value are reported in
earnings as a component of interest expense. Any gains or losses
related to the quarterly fair value adjustments are presented as
a non-cash operating activity on the consolidated statements of
cash flows.
The Company discontinues hedge accounting prospectively when it
is determined that the derivative is no longer effective in
offsetting changes in the cash flows of the hedged item, the
derivative or hedged item is expired, sold, terminated,
exercised, or management determines that designation of the
derivative as a hedging instrument is no longer appropriate. In
situations in which hedge accounting is discontinued, the
Company continues to carry the derivative at its fair value on
the consolidated balance sheet and recognizes any subsequent
changes in its fair value in earnings as a component of interest
expense. Any amounts previously recorded to accumulated other
comprehensive loss will be amortized to interest expense in the
same period(s) in which the interest expense of the underlying
debt impacts earnings.
Please refer to Note 6, Derivative Financial
Instruments for additional information regarding our
derivative financial instruments and hedging activities.
Pension and Postretirement Benefits.
Pension
and other postretirement benefits represent estimated amounts to
be paid to employees in the future. The accounting for benefits
reflects the recognition of these benefit costs over the
employees approximate service period based on the terms of
the plan and the investment and funding decisions made. The
determination of the benefit obligation and the net periodic
pension and other postretirement benefit costs requires
management to make assumptions regarding the discount rate,
return on retirement plan assets, increase in future
compensation and healthcare cost trends. Changes in these
assumptions can have a significant impact on the projected
benefit obligation, funding requirement and net periodic benefit
cost. The assumed discount rate is the rate at which the pension
benefits could be settled. During 2007 and 2006, we utilized the
Citigroup Pension Liability Index as the appropriate discount
rate for our defined benefit pension plans. 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 cash flows using this single rate equaled the
present value computed using the Citigroup Pension Discount
Curve. The expected long-term rate of return on plan assets is
based on the mix of assets held by the plan and the expected
long-term rates of return within each asset class. The
anticipated trend of future healthcare costs is based on
historical experience and external factors.
In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R)
(SFAS No. 158). This statement
requires recognition of the overfunded or underfunded status of
defined benefit postretirement plans as an asset or liability in
the
F-19
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
statement of financial position and to recognize changes in that
funded status in accumulated other comprehensive income (loss)
in the year in which the changes occur. SFAS No. 158
also requires measurement of the funded status of a plan as of
the date of the statement of financial position.
SFAS No. 158 became effective for recognition of the
funded status of the benefit plans for fiscal years ending after
December 15, 2006 and is effective for the measurement date
provisions for fiscal years ending after December 15, 2008.
We adopted the funded status recognition provisions of
SFAS No. 158 related to our defined benefit pension
and postretirement plans as of December 31, 2006, as
required. We complied with the measurement date provisions of
SFAS No. 158 as of December 31, 2006.
Please refer to Note 10, Benefit Plans, which
addresses the financial impact of our adoption of
SFAS No. 158, and for further information regarding
our benefit plans.
Income Taxes.
We account for income taxes
under the asset and liability method in accordance with
SFAS No. 109,
Accounting for Income Taxes
(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.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes: An Interpretation
of FASB Statement No. 109
(FIN No. 48). This interpretation
clarifies the accounting for uncertainty in income taxes
recognized in an entitys 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. This
interpretation is effective for fiscal years beginning after
December 15, 2006 and as such, we adopted
FIN No. 48 on January 1, 2007.
The Companys policy is to recognize interest and penalties
related to unrecognized tax benefits in income tax expense. See
Note 9, Income Taxes, for more information
regarding our provision (benefit) for income taxes as well as
the impact of adopting FIN No. 48.
Earnings (Loss) Per Share.
Subsequent to the
GS Repurchase (defined in Note 7, Redeemable
Preferred Stock, Warrants and Other) and for the year
ended December 31, 2007, we accounted for earnings (loss)
per share (EPS) in accordance with
SFAS No. 128,
Earnings Per Share
(SFAS No. 128). For the year ended
December 31, 2006 (through January 27, 2006, the
closing date of the GS Repurchase), we accounted for EPS in
accordance with
EITF No. 03-6,
Participating Securities and the Two-Class Method under
FASB Statement 128
(EITF 03-6),
which established standards regarding the computation of EPS by
companies that have issued securities other than common stock
that contractually entitle the holder to participate in
dividends and earnings of the company.
EITF 03-6
requires earnings available to common shareholders for the
period, after deduction of preferred stock dividends, to be
allocated between the common and preferred stockholders based on
their respective rights to receive dividends. Basic EPS is then
calculated by dividing loss allocable to common shareholders by
the weighted average number of shares outstanding.
EITF 03-6
does not require the presentation of basic and diluted EPS for
securities other than common stock. Therefore, the following EPS
amounts only pertain to our common stock.
Under the guidance of SFAS No. 128, diluted EPS is
calculated by dividing loss allocable to common shareholders by
the weighted average common shares outstanding plus dilutive
potential common stock. Potential common stock includes stock
options, stock appreciation rights (SARs),
restricted stock and
F-20
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
warrants, the dilutive effect of which is calculated using the
treasury stock method, and prior to the GS Repurchase, our
Preferred Stock (defined in Note 7, Redeemable
Preferred Stock, Warrants and Other), the dilutive effect
of which was calculated using the if-converted
method.
The calculation of basic and diluted EPS for the years ended
December 31, 2007, 2006 and 2005, respectively, is
presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders
|
|
$
|
46,859
|
|
|
$
|
(208,483
|
)
|
|
$
|
(288,876
|
)
|
Amount allocable to common shareholders(1)
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocable to common shareholders
|
|
|
46,859
|
|
|
|
(208,483
|
)
|
|
|
(288,876
|
)
|
Weighted average common shares outstanding
|
|
|
70,932
|
|
|
|
66,448
|
|
|
|
31,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.66
|
|
|
$
|
(3.14
|
)
|
|
$
|
(9.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders
|
|
$
|
46,859
|
|
|
$
|
(208,483
|
)
|
|
$
|
(288,876
|
)
|
Amount allocable to common shareholders(1)
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocable to common shareholders
|
|
|
46,859
|
|
|
|
(208,483
|
)
|
|
|
(288,876
|
)
|
Weighted average common shares outstanding
|
|
|
70,932
|
|
|
|
66,448
|
|
|
|
31,731
|
|
Dilutive effect of stock awards and warrants(2)
|
|
|
1,031
|
|
|
|
|
|
|
|
|
|
Dilutive effect of Preferred Stock assuming conversion(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
71,963
|
|
|
|
66,448
|
|
|
|
31,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.65
|
|
|
$
|
(3.14
|
)
|
|
$
|
(9.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In computing EPS using the two-class method, we have not
allocated the net loss reported for the years ended
December 31, 2006 and 2005, respectively, between common
and preferred shareholders since preferred shareholders had no
contractual obligation to share in the net loss.
|
|
(2)
|
|
Due to the loss allocable to common shareholders reported for
the years ended December 31, 2006 and 2005, respectively,
the effect of all stock-based awards, warrants and the assumed
conversion of the Preferred Stock were anti-dilutive and
therefore are not included in the calculation of diluted EPS.
For the years ended December 31, 2007, 2006 and 2005,
2,593 shares, 2,263 shares and 60 shares,
respectively, of stock-based awards had exercise prices that
exceeded the average market price of the Companys common
stock for the respective periods. For the years ended
December 31, 2006 and 2005, the assumed conversion of the
Preferred Stock into 391 shares and 5,132 shares,
respectively, of common stock was anti-dilutive and therefore
not included in the calculation of diluted EPS.
|
Stock-Based
Awards
We maintain a shareholder approved stock incentive plan, the
2005 Stock Award and Incentive Plan (2005 Plan),
whereby certain employees and non-employee directors are
eligible to receive stock options, SARs, limited stock
appreciation rights in tandem with stock options and restricted
stock. Prior to adoption of the 2005 Plan, we maintained a
shareholder approved stock incentive plan, the 2001 Stock Award
and Incentive Plan (2001 Plan). Under the 2005 Plan
and 2001 Plan, 5 million and 4 million shares,
respectively,
F-21
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
were originally authorized for grant. Stock awards are typically
granted at the market value of our common stock at the date of
the grant, become exercisable in ratable installments or
otherwise, over a period of one to five years from the date of
grant, and may be exercised up to a maximum of ten years from
the date of grant. The Compensation Committee determines
termination, vesting and other relevant provisions at the date
of the grant. We have implemented a policy of issuing treasury
shares held by the Company to satisfy stock issuances associated
with stock-based award exercises.
Non-employee directors receive options to purchase
1,500 shares and an award of 1,500 shares of
restricted stock upon election to the Board. Non-employee
directors also receive, on an annual basis, options to purchase
1,500 shares and an award of 1,500 shares of
restricted stock. Non-employee directors may also elect to
receive additional equity awards in lieu of all or a portion of
their cash fees.
On January 1, 2006, the Company adopted the provisions of
SFAS No. 123 (R),
Share-Based Payment
(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. The Company estimates
forfeitures over the requisite service period when recognizing
compensation expense. Estimated forfeitures are adjusted to the
extent actual forfeitures differ, or are expected to materially
differ, from such estimates. For the years ended
December 31, 2007 and 2006, the Company utilized a
forfeiture rate of 5% in determining compensation expense.
Prior to adopting SFAS No. 123 (R), the Company
accounted for stock-based awards granted to employees and
non-employee directors in accordance with the intrinsic
value-based method prescribed by Accounting Principles Board
Opinion No. 25,
Accounting for Stock Issued to Employees
(APB No. 25) and related
interpretations. Compensation expense related to the issuance of
stock options to employees or non-employee directors was only
recognized if the exercise price of the stock option was less
than the market value of the underlying common stock on the date
of grant. Compensation expense related to SARs was determined at
the end of each period in the amount by which the quoted market
value of the underlying shares covered by the grant exceeded the
grant price and was recognized over the vesting term. In
accordance with the Modified Prospective Method, financial
statement amounts for the year ended December 31, 2005 have
not been restated to reflect the fair value method of expensing
stock-based compensation.
The following table depicts the effect of adopting
SFAS No. 123 (R) on net loss, loss available to common
shareholders and loss per share for the year ended
December 31, 2006. The Companys reported net loss,
loss available to common shareholders and basic and diluted loss
per share for the year ended December 31, 2006, which
reflect compensation expense related to the Companys
stock-based awards recorded in accordance with
SFAS No. 123 (R), is compared to net loss, loss
available to common shareholders and basic and diluted loss per
share for the same period that would have been reported had such
compensation expense been determined under APB No. 25.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
As Reported
|
|
|
Per APB No. 25
|
|
|
Total stock-based compensation expense
|
|
$
|
43,283
|
|
|
$
|
11,682
|
|
Net loss
|
|
|
(237,704
|
)
|
|
|
(214,392
|
)
|
Loss available to common shareholders
|
|
|
(208,483
|
)
|
|
|
(185,171
|
)
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.14
|
)
|
|
$
|
(2.79
|
)
|
Diluted
|
|
$
|
(3.14
|
)
|
|
$
|
(2.79
|
)
|
F-22
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Upon adoption of SFAS No. 123 (R), pro forma
disclosure permitted by SFAS No. 123,
Accounting
for Stock Based Compensation
(SFAS No. 123) is no longer a
permitted alternative. As the Company adopted
SFAS No. 123 (R), as of January 1, 2006,
using the Modified Prospective Method, the Company has provided
the following pro forma disclosure of the effect on net income
and loss per share for the year ended December 31, 2005, as
if the Company had accounted for its employee stock awards
granted under the fair value method of SFAS No. 123.
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2005
|
|
|
Net income, as reported
|
|
$
|
67,533
|
|
Add: Stock-based compensation expense included in
reported net income, net of related tax effects
|
|
|
3,162
|
|
Less: Stock-based compensation expense that would have been
included in the determination of net income if the fair value
method had been applied to all awards, net of related tax effects
|
|
|
(7,791
|
)
|
|
|
|
|
|
Pro forma net income
|
|
|
62,904
|
|
Loss on repurchase of preferred stock
|
|
|
(133,681
|
)
|
Accretion of preferred stock to redemption value
|
|
|
(211,020
|
)
|
Preferred dividend
|
|
|
(11,708
|
)
|
|
|
|
|
|
Pro forma loss available to common shareholders
|
|
$
|
(293,505
|
)
|
|
|
|
|
|
Basic loss per share
|
|
|
|
|
As reported
|
|
$
|
(9.10
|
)
|
Pro forma
|
|
$
|
(9.25
|
)
|
Diluted loss per share
|
|
|
|
|
As reported
|
|
$
|
(9.10
|
)
|
Pro forma
|
|
$
|
(9.25
|
)
|
The weighted average fair value of stock-based awards granted
during 2005 was $19.76 per share. The pro forma information
noted above was determined based on the fair value of
stock-based awards calculated using the Black-Scholes
option-pricing model with the following assumptions:
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
December 31, 2005
|
|
|
|
Dividend yield
|
|
0%
|
|
|
Expected volatility
|
|
29%
|
|
|
Risk-free interest rate
|
|
3.9%
|
|
|
Expected holding period
|
|
5 years
|
|
|
F-23
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In accordance with APB No. 25, the following table
presents changes in awards outstanding under all of our stock
incentive plans for the year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Exercise/Grant
|
|
|
|
Shares
|
|
|
Price Per Share
|
|
|
Awards outstanding, December 31, 2004
|
|
|
4,034,885
|
|
|
$
|
29.57
|
|
Granted
|
|
|
384,093
|
|
|
|
59.54
|
|
Exercised
|
|
|
(334,718
|
)
|
|
|
22.06
|
|
Canceled or expired
|
|
|
(82,016
|
)
|
|
|
46.99
|
|
|
|
|
|
|
|
|
|
|
Awards outstanding, December 31, 2005
|
|
|
4,002,244
|
|
|
$
|
32.69
|
|
|
|
|
|
|
|
|
|
|
Available for future grants at December 31, 2005
|
|
|
5,301,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with APB No. 25, the following table
summarizes information about stock awards outstanding and
exercisable at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards Outstanding
|
|
|
Stock Awards Exercisable
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Range of
|
|
|
|
|
Remaining
|
|
|
Weighted Average
|
|
|
|
|
|
Exercise/
|
|
Exercise/Grant
|
|
|
|
|
Contractual Life
|
|
|
Exercise/Grant
|
|
|
|
|
|
Grant Price Per
|
|
Prices
|
|
Shares
|
|
|
(In Years)
|
|
|
Price Per Share
|
|
|
Shares
|
|
|
Share
|
|
|
$11.10 - $14.75
|
|
|
34,109
|
|
|
|
1.76
|
|
|
$
|
14.02
|
|
|
|
34,109
|
|
|
$
|
14.02
|
|
$15.22 - $19.41
|
|
|
401,804
|
|
|
|
3.09
|
|
|
|
15.74
|
|
|
|
401,804
|
|
|
|
15.74
|
|
$24.75 - $29.59
|
|
|
1,795,290
|
|
|
|
4.47
|
|
|
|
25.97
|
|
|
|
1,398,971
|
|
|
|
25.96
|
|
$30.11 - $39.21
|
|
|
236,075
|
|
|
|
4.14
|
|
|
|
30.80
|
|
|
|
79,719
|
|
|
|
31.01
|
|
$41.10 - $43.85
|
|
|
1,142,486
|
|
|
|
5.40
|
|
|
|
41.32
|
|
|
|
210,772
|
|
|
|
41.12
|
|
$46.06 - $53.74
|
|
|
36,600
|
|
|
|
5.28
|
|
|
|
47.90
|
|
|
|
7,066
|
|
|
|
47.24
|
|
$56.72 - $64.95
|
|
|
355,880
|
|
|
|
6.20
|
|
|
|
59.54
|
|
|
|
225
|
|
|
|
59.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,002,244
|
|
|
|
4.72
|
|
|
$
|
32.69
|
|
|
|
2,132,666
|
|
|
$
|
25.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Please refer to Note 8, Stock Incentive Plans,
for additional information regarding our stock incentive plans
and the adoption of SFAS No. 123 (R).
Treasury Stock.
In November 2007, the
Companys Board of Directors authorized a
$100.0 million Repurchase Plan. This authorization permits
the Company to purchase its 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. Purchases of common stock are accounted
for using the cost method whereby the total cost of the shares
reacquired is charged to treasury stock, a contra equity
account. When treasury stock is reissued, the cost of the shares
reissued (determined based on the
first-in,
first-out cost flow assumption) is charged against treasury
stock and the excess of the reissuance price over cost is
credited to additional paid-in capital. In accordance with the
Repurchase Plan, the Company repurchased a total of
2.5 million shares at a cost of $95.7 million during
December 2007.
Fair Value of Financial Instruments.
SFAS No.
107,
Disclosures About Fair Value of Financial Instruments
(SFAS No. 107), requires disclosure of the
fair value of financial instruments for which it is practicable
to estimate that value. At December 31, 2007 and 2006, the
fair value of cash and cash equivalents, accounts receivable,
and accounts payable and accrued liabilities approximated their
carrying value based on the short-term nature of these
instruments. The Company has utilized quoted market prices,
where available, to compute the fair value of our long-term debt
as disclosed in Note 5, Long-Term Debt, Credit
Facilities and
F-24
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Notes. These estimates of fair value may be affected by
assumptions made and, accordingly, are not necessarily
indicative of the amounts the Company could realize in a current
market exchange.
Estimates.
The preparation of financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and certain expenses and the
disclosure of contingent assets and liabilities. Actual results
could differ materially from those estimates and assumptions.
Estimates and assumptions are used in the determination of
recoverability of long-lived assets, sales allowances,
allowances for doubtful accounts, depreciation and amortization,
employee benefit plans expense, restructuring reserves, and
certain assumptions pertaining to our stock-based awards, among
others.
New Accounting Pronouncements.
In December
2007, the FASB issued SFAS No. 141(R),
Business
Combinations
(SFAS No. 141(R)).
SFAS No. 141(R) replaces SFAS No. 141,
Business Combinations
(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 Securities and Exchange Commission
(SEC) issued Staff Accounting
Bulletin No. 110, Use of a Simplified Method in
Developing Expected Term of Share Options
(SAB No. 110). SAB No. 110
amends and replaces Staff Accounting Bulletin No. 107
(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 the Company does not expect
the adoption of SAB No. 110 to have a material impact
on its 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
(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
(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.
F-25
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Business.com
Acquisition
On August 23, 2007, we completed the Business.com
Acquisition for a disclosed amount of $345.0 million. 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 RHDs 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. Proceeds from the RHD
Credit Facility were used to fund the Business.com Acquisition.
In conjunction with the Business.com Acquisition and under the
terms of a related Stock Purchase Agreement, dated as of
July 27, 2007, on August 23, 2007, Jacob Winebaum
purchased from RHD 148,372 shares of RHD common stock for
approximately $9.0 million. Mr. Winebaum was the
founder and Chief Executive Officer of Business.com.
Local
Launch Acquisition
On September 6, 2006, we acquired (the Local Launch
Acquisition) Local Launch, a local search products,
platform and fulfillment provider. Local Launch specializes in
search through publishing, distribution, directory and organic
marketing solutions. The purpose of the Local Launch Acquisition
was to support the expansion of our current local Internet
Marketing offerings and provide new, innovative solutions to
enhance our local Internet Marketing capabilities. The results
of the Local Launch business are included in our consolidated
results commencing September 6, 2006. 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.
Dex Media
Merger
On January 31, 2006, we acquired Dex Media for an equity
purchase price of $4.1 billion (the Dex Media
Merger). Pursuant to the Agreement and Plan of Merger,
dated October 3, 2005 (Merger Agreement), each
issued and outstanding share of Dex Media common stock was
converted into $12.30 in cash and 0.24154 of a share of RHD
common stock, resulting in an aggregate cash value of
$1.9 billion and aggregate stock value of
$2.2 billion, based on 36,547,381 newly issued shares of
RHD common stock. Additionally, we assumed Dex Medias
outstanding indebtedness on January 31, 2006 with a fair
value of $5.5 billion. The total allocable purchase price
also included transaction costs of $26.7 million that were
directly related to the Dex Media Merger, severance and related
costs for certain Dex Media employees of $17.7 million and
Dex Media vested equity awards outstanding as of
January 31, 2006 with an estimated fair value of
$77.4 million, for a total aggregate purchase price of
$9.8 billion.
Dex Media is the exclusive publisher of the official
yellow pages and white pages directories for Qwest
Communications International Inc. (Qwest) where
Qwest was the primary incumbent local exchange carrier
(ILEC) in November 2002. The purpose of the Dex
Media Merger was to take a further step in the transformation of
RHD into a leading publisher of yellow pages directories, as
well as to combine the complementary strengths of both companies.
F-26
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Dex Media is the indirect parent of Dex Media East LLC
(Dex Media East) and Dex Media West LLC (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
(collectively, the Dex East States). Dex Media West
operates our directory business in the following states:
Arizona, Idaho, Montana, Oregon, Utah, Washington and Wyoming
(collectively, the Dex West States and together with
the Dex East States, collectively, the Qwest
States). The acquired business of Dex Media and its
subsidiaries (Dex Media Business) now operates
through Dex Media, Inc., one of RHDs direct, wholly-owned
subsidiaries. The results of the Dex Media Business have been
included in the Companys operating results commencing
February 1, 2006. To finance the Dex Media Merger, we
issued $660 million 6.875% Senior Discount Notes due
January 15, 2013 for gross proceeds of $600.5 million
and $1.21 billion 8.875% Senior Notes due
January 15, 2016 to pay the cash portion of the purchase
price to the Dex Media stockholders.
AT&T
Directory Acquisition
On September 1, 2004, we completed the acquisition of the
directory publishing business (AT&T Directory
Business) of AT&T Inc. (AT&T)
(formerly known as SBC Communications, Inc., SBC) in
Illinois and Northwest Indiana, including AT&Ts
interests in The DonTech II Partnership
(DonTech), a
50
/
50
general partnership between us and AT&T (collectively, the
AT&T Directory Acquisition) for
$1.41 billion in cash, after working capital adjustments
and the settlement of a $30 million liquidation preference
owed to us related to DonTech. As a result of the AT&T
Directory Acquisition, we became the publisher of AT&T
branded yellow pages directories in Illinois and Northwest
Indiana. This transaction was consummated pursuant to a purchase
agreement dated as of July 28, 2004, as amended, by and
among RHD, Ameritech Corporation (Ameritech), a
direct wholly-owned subsidiary of AT&T, and Ameritech
Publishing, Inc. (API), a direct wholly-owned
subsidiary of Ameritech. The results of the AT&T Directory
Business have been included in our consolidated results
commencing September 1, 2004. The acquired AT&T
Directory Business now operates as R.H. Donnelley
Publishing & Advertising of Illinois Partnership, one
of our indirect, wholly-owned subsidiaries.
Embarq
Acquisition
On January 3, 2003, we completed the acquisition of the
directory business (the Embarq Directory Business)
of Sprint Nextel Corporation (Sprint) (formerly
known as Sprint Corporation) by acquiring all the outstanding
capital stock of the various entities comprising Sprint
Publishing & Advertising (collectively, the
Embarq Acquisition) for $2.23 billion in cash.
As a result, we are the publisher of Embarq (formerly Sprint)
branded yellow pages directories in 18 states. In May 2006,
Sprint spun-off its local telephone business as Embarq
Corporation (Embarq) and in connection with the
spin-off, we entered into new agreements with Embarq that
replaced the related agreements with Sprint, except that Sprint
remains bound by certain non-competition obligations. The
results of the Embarq Directory Business are included in our
consolidated results commencing January 3, 2003. The Embarq
Directory Business now operates as R.H. Donnelley
Publishing & Advertising, Inc., one of our indirect
wholly-owned subsidiaries.
The purposes of our acquisitions included the following:
|
|
|
|
|
Building RHD into a leading publisher of yellow pages
directories and provider of online commercial search services;
|
|
|
|
Adding leading Internet advertising talent and technology, to
strengthen RHDs position in the expanding local commercial
search market and to develop an online performance based
advertising network;
|
|
|
|
Enhancing our local Internet Marketing capabilities and
offerings.
|
F-27
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
These acquisitions were accounted for as purchase business
combinations in accordance with SFAS No. 141. Each
purchase price was allocated to the related tangible and
identifiable intangible assets acquired and liabilities assumed
based on their respective estimated fair values on the
acquisition dates with the remaining consideration recorded as
goodwill. Certain long-term intangible assets were identified
and recorded at their estimated fair values. Identifiable
intangible assets acquired primarily include directory services
agreements between the Company and each of Qwest, AT&T and
Embarq, respectively, a
non-competition
agreement between the Company and Sprint, established customer
relationships, third party contracts, trademarks and trade
names, an advertising commitment and technology and network
platforms, all resulting from the Dex Media Merger, AT&T
Directory Acquisition, Embarq Acquisition, Business.com
Acquisition or Local Launch Acquisition. In accordance with
SFAS No. 142, the fair values of the identifiable
intangible assets are being amortized over their estimated
useful lives in a manner that best reflects the economic
benefits derived from such assets. Goodwill is not amortized but
is subject to impairment testing on an annual basis. See
Note 2, Summary of Significant Accounting
Policies Identifiable Intangible Assets and
Goodwill, for a further description of our intangible
assets and goodwill.
Under purchase accounting rules, we did not assume or record the
deferred revenue balance associated with directories published
by Dex Media of $114.0 million at January 31, 2006 or
the AT&T Directory Business of $204.1 million at
September 1, 2004. These amounts represented revenue that
would have been recognized subsequent to each acquisition under
the deferral and amortization method in the absence of purchase
accounting. Accordingly, we did not and will not record revenue
associated with directories that were published prior to each
acquisition, as well as directories that were published in the
month each acquisition was completed. Although the deferred
revenue balances associated with directories that were published
prior to each acquisition were eliminated, we retained all the
rights associated with the collection of amounts due under and
contractual obligations under the advertising contracts executed
prior to the acquisitions. As a result, the billed and unbilled
accounts receivable balances acquired in each acquisition became
assets of the Company. Also under purchase accounting rules, we
did not assume or record the deferred directory costs related to
those directories that were published prior to each acquisition
as well as directories that published in the month each
acquisition was completed, totaling $205.1 million for
Qwest-branded directories and $175.8 million for
AT&T-branded directories. These costs represented cost of
revenue that would have been recognized subsequent to the
acquisitions under the deferral and amortization method in the
absence of purchase accounting.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed in the Dex Media Merger
on January 31, 2006:
|
|
|
|
|
Current assets
|
|
$
|
792,645
|
|
Non-current assets
|
|
|
80,320
|
|
Intangible assets
|
|
|
8,915,000
|
|
Goodwill
|
|
|
2,544,980
|
|
|
|
|
|
|
Total assets acquired
|
|
|
12,332,945
|
|
Current liabilities
|
|
|
(304,542
|
)
|
Non-current liabilities
|
|
|
(7,786,229
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(8,090,771
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
4,242,174
|
|
|
|
|
|
|
The following unaudited condensed pro forma information has been
prepared in accordance with SFAS No. 141 for the years
ended December 31, 2006 and 2005, respectively, and assumes
the Dex Media Merger (and related GS Repurchase) and related
financing occurred on January 1, 2005. The following
unaudited condensed pro forma information does not purport to
represent what the Companys results of
F-28
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
operations would actually have been if the Dex Media Merger (and
related GS Repurchase) had in fact occurred on January 1,
2005 and is not necessarily representative of results of
operations for any future period. The unaudited condensed pro
forma financial information for the year ended December 31,
2006 does not eliminate the adverse impact of purchase
accounting relating to the Dex Media Merger. The unaudited
condensed pro forma financial information for the year ended
December 31, 2005 reflects the combination of GAAP results
for both RHD and Dex Media.
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Net revenue
|
|
$
|
2,039,192
|
|
|
$
|
2,615,047
|
|
Operating income
|
|
|
470,353
|
|
|
|
1,029,102
|
|
Net (loss) income
|
|
|
(275,943
|
)
|
|
|
99,816
|
|
(Loss) income available to common shareholders
|
|
|
(275,943
|
)
|
|
|
99,816
|
|
Diluted (loss) earnings per share
|
|
$
|
(3.97
|
)
|
|
$
|
1.46
|
|
The table below shows the activity in our restructuring reserves
during 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
|
|
|
|
Actions
|
|
|
Actions
|
|
|
Actions
|
|
|
Actions
|
|
|
Total
|
|
|
Balance at December 31, 2004
|
|
$
|
3,461
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,461
|
|
Additions to reserve charged to goodwill
|
|
|
|
|
|
|
8,828
|
|
|
|
|
|
|
|
|
|
|
|
8,828
|
|
Payments
|
|
|
(1,884
|
)
|
|
|
(2,356
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
1,577
|
|
|
|
6,472
|
|
|
|
|
|
|
|
|
|
|
|
8,049
|
|
Additions to reserve charged to goodwill
|
|
|
|
|
|
|
|
|
|
|
18,914
|
|
|
|
|
|
|
|
18,914
|
|
Payments
|
|
|
(606
|
)
|
|
|
(1,074
|
)
|
|
|
(11,299
|
)
|
|
|
|
|
|
|
(12,979
|
)
|
Reserve reversal credited to goodwill
|
|
|
|
|
|
|
(3,455
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
971
|
|
|
|
1,943
|
|
|
|
7,615
|
|
|
|
|
|
|
|
10,529
|
|
Additions to reserve charged to goodwill
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
|
|
|
|
96
|
|
Additions to reserve charged to earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,542
|
|
|
|
5,542
|
|
Payments
|
|
|
(208
|
)
|
|
|
(135
|
)
|
|
|
(3,825
|
)
|
|
|
|
|
|
|
(4,168
|
)
|
Reserve reversal credited to goodwill
|
|
|
|
|
|
|
(1,808
|
)
|
|
|
(559
|
)
|
|
|
|
|
|
|
(2,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
763
|
|
|
$
|
|
|
|
$
|
3,327
|
|
|
$
|
5,542
|
|
|
$
|
9,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2007, we recognized a
restructuring charge to earnings of $5.5 million associated
with planned headcount reductions and consolidation of
responsibilities to be effectuated during 2008.
F-29
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As a result of the Dex Media Merger and integration of the Dex
Media Business, approximately 120 employees were affected
by a restructuring plan, of which 110 were terminated and 10
were relocated to our corporate headquarters in Cary, North
Carolina. Additionally, we have vacated certain of our leased
Dex Media facilities in Colorado, Minnesota, Nebraska and
Oregon. The costs associated with these actions are shown in the
table above under the caption 2006 Restructuring
Actions. We estimated the costs associated with terminated
employees, including Dex Media executive officers, and
abandonment of certain of our leased facilities, net of
estimated sublease income, to be approximately
$18.9 million and such costs were charged to goodwill
during 2006. During January 2007, we finalized our estimate of
costs associated with terminated employees and recognized a
charge to goodwill of $0.1 million. Payments made with
respect to severance and relocation during 2007 and 2006 totaled
$1.6 million and $10.8 million, respectively. During
2007, we finalized our assessment of the relocation reserve
established as a result of the Dex Media Merger and as a result,
we reversed the remaining amount in the reserve of
$0.6 million, with a corresponding offset to goodwill.
Payments of $2.2 million and $0.5 million were made
during 2007 and 2006, respectively, with respect to the vacated
leased Dex Media facilities. The remaining lease payments for
these facilities will be made through 2016.
During the first quarter of 2005, we completed a restructuring
relating to the integration of the AT&T Directory Business.
There were 63 employees affected by the restructuring, 57
were terminated during the first quarter of 2005, and 6 were
relocated to our corporate headquarters in Cary, North Carolina.
Additionally, we vacated certain of our leased facilities in
Chicago, Illinois. The costs associated with these actions are
shown in the table above under the caption 2005
Restructuring Actions. We estimated the costs associated
with the terminated employees and the abandonment of certain of
our leased facilities to be approximately $8.8 million and
such costs were charged to goodwill during the first quarter of
2005. There were no payments made with respect to severance and
relocation during 2007. Payments made with respect to severance
and relocation during 2006 and 2005 were $0.1 million and
$1.4 million, respectively. Payments of $0.1 million,
$1.0 million and $1.0 million, net of sublease income,
were charged against the reserve during 2007, 2006 and 2005,
respectively, with respect to the leased facilities in Chicago,
Illinois. During 2006, we formalized a plan to re-occupy in
early 2007 a portion of the leased facilities in Chicago,
Illinois, which we vacated in conjunction with the AT&T
Directory Acquisition. As a result, we reduced our reserve
related to these leased facilities during the year ended
December 31, 2006 by $3.5 million, with a
corresponding offset to goodwill. During 2007, we re-occupied
the remaining portion of our leased facilities in Chicago,
Illinois. As a result, we reversed the remaining amount of our
reserve related to these leased facilities during the year ended
December 31, 2007 by $1.8 million, with a
corresponding offset to goodwill.
Following the Embarq Acquisition on January 3, 2003, we
consolidated publishing and technology operations, sales offices
and administrative personnel and relocated the headquarters
functions from Overland Park, Kansas and Purchase, New York to
Cary, North Carolina. Approximately 140 people were
affected by the relocation of the headquarters functions in
Overland Park, Kansas and Purchase, New York, of which 75 were
included in the restructuring reserve. The remaining
65 people relocated with the Company. The costs associated
with these actions are shown in the table above under the
caption 2003 Restructuring Actions. Payments of
$0.2 million, $0.2 million and $0.4 million, net
of sublease income, were charged against the reserve with
respect to the former pre-press publishing facility during 2007,
2006 and 2005, respectively. Remaining payments will be made
through 2012. Payments of $0.6 million were made during
2005 related to severance and related costs. Payments of
$0.4 million and $0.8 million, net of sublease income,
were charged against the reserve with respect to the former
headquarters office lease during 2006 and 2005, respectively.
The former headquarters office lease expired during 2006.
F-30
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Long-Term
Debt, Credit Facilities and Notes
|
Long-term debt of the Company at December 31, 2007 and
2006, including fair value adjustments required by GAAP as a
result of the Dex Media Merger, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
RHD
|
|
|
|
|
|
|
|
|
6.875% Senior Notes due 2013
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
6.875%
Series A-1
Senior Discount Notes due 2013
|
|
|
339,222
|
|
|
|
335,401
|
|
6.875%
Series A-2
Senior Discount Notes due 2013
|
|
|
613,649
|
|
|
|
606,472
|
|
8.875%
Series A-3
Senior Notes due 2016
|
|
|
1,210,000
|
|
|
|
1,210,000
|
|
8.875%
Series A-4
Senior Notes due 2017
|
|
|
1,500,000
|
|
|
|
|
|
RHDI
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,571,536
|
|
|
|
1,946,535
|
|
8.875% Senior Notes due 2010
|
|
|
|
|
|
|
7,934
|
|
10.875% Senior Subordinated Notes due 2012
|
|
|
|
|
|
|
600,000
|
|
Dex Media, Inc.
|
|
|
|
|
|
|
|
|
8% Senior Notes due 2013
|
|
|
512,097
|
|
|
|
513,663
|
|
9% Senior Discount Notes due 2013
|
|
|
719,112
|
|
|
|
663,153
|
|
Dex Media East
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,106,050
|
|
|
|
656,571
|
|
9.875% Senior Notes due 2009
|
|
|
|
|
|
|
476,677
|
|
12.125% Senior Subordinated Notes due 2012
|
|
|
|
|
|
|
390,314
|
|
Dex Media West
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,071,491
|
|
|
|
1,450,917
|
|
8.5% Senior Notes due 2010
|
|
|
398,736
|
|
|
|
403,260
|
|
5.875% Senior Notes due 2011
|
|
|
8,774
|
|
|
|
8,786
|
|
9.875% Senior Subordinated Notes due 2013
|
|
|
824,982
|
|
|
|
833,469
|
|
|
|
|
|
|
|
|
|
|
Total RHD Consolidated
|
|
|
10,175,649
|
|
|
|
10,403,152
|
|
Less current portion
|
|
|
177,175
|
|
|
|
382,631
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
9,998,474
|
|
|
$
|
10,020,521
|
|
|
|
|
|
|
|
|
|
|
Credit
Facilities
At December 31, 2007, total outstanding debt under our
credit facilities was $3,749.1 million, comprised of
$1,571.5 million under the RHDI credit facility,
$1,106.1 million under the new Dex Media East credit
facility and $1,071.5 million under the Dex Media West
credit facility.
RHD
To finance the Business.com Acquisition and related fees and
expenses, on August 23, 2007, RHD entered into a
$328.0 million credit facility, with a scheduled maturity
date of December 31, 2011. On October 2, 2007, the RHD
Credit Facility was paid in full from the proceeds of our
Series A-4
Notes. The repayment of the RHD Credit Facility was accounted
for as an extinguishment of debt resulting in a loss charged to
interest expense during the year ended December 31, 2007 of
$0.8 million related to the write-off of unamortized
deferred financing costs.
F-31
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
RHDI
As of December 31, 2007, outstanding balances under
RHDIs senior secured credit facility, as amended and
restated (RHDI Credit Facility), totaled
$1,571.5 million, comprised of $314.0 million under
Term Loan D-1, $1,257.5 million under Term Loan D-2 and no
amount was outstanding under the $175.0 million Revolving
Credit Facility (the RHDI Revolver) (with an
additional $0.3 million utilized under a standby letter of
credit). Prior to the refinancing transactions on
October 17, 2007 (discussed below), RHDIs Credit
Facility also consisted of a Term Loan
A-4,
which
has been paid in full. All Term Loans require quarterly
principal and interest payments. The RHDI Credit Facility
provides for a new Term Loan C for potential borrowings up to
$400.0 million, such proceeds, if borrowed, to be used to
fund acquisitions, refinance certain indebtedness or to make
certain restricted payments. On October 17, 2007,
$91.8 million, $16.2 million and $83.0 million of
Term Loans
A-4,
D-1,
and D-2, respectively, were repaid from the proceeds of the
Series A-4
Notes issued on October 17, 2007. The repayment of these
term loans was accounted for as an extinguishment of debt
resulting in a loss charged to interest expense during the year
ended December 31, 2007 of $4.2 million related to the
write-off of unamortized deferred financing costs. The RHDI
Revolver matures in December 2009 and Term Loans D-1 and D-2
require accelerated amortization beginning in 2010 through final
maturity in June 2011. The weighted average interest rate of
outstanding debt under the RHDI Credit Facility was 6.50% and
6.86% at December 31, 2007 and 2006, respectively.
As of December 31, 2007, RHDIs Credit Facility bears
interest, at our option, at either:
|
|
|
|
|
The higher of (i) a base rate as determined by the
Administrative Agent, Deutsche Bank Trust Company Americas
and (ii) the Federal Funds Effective Rate (as defined) plus
0.50%, and in each case, plus a 0.25% margin on the RHDI
Revolver and a 0.50% margin on Term Loan D-1 and Term Loan
D-2; or
|
|
|
|
The LIBOR rate plus a 1.25% margin on the RHDI Revolver and a
1.50% margin on Term Loan D-1 and Term Loan D-2. We may elect
interest periods of 1, 2, 3 or 6 months (or 9 or
12 months if, at the time of the borrowing, all lenders
agree to make such term available), for LIBOR borrowings.
|
Dex Media
East
On October 24, 2007, we replaced the former Dex Media East
credit facility with a new Dex Media East credit facility. The
new Dex Media East credit facility consists 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 (new Dex Media East
Revolver) 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. The new Dex Media East credit facility is secured by
pledges of similar assets and has similar covenants and events
of default as the former Dex Media East credit facility.
As of December 31, 2007, the principal amounts owing under
the Term Loan A and Term Loan B totaled $1,100.0 million,
comprised of $700.0 million and $400.0 million,
respectively, and $6.1 million was outstanding under the
new Dex Media East Revolver (with an additional
$3.0 million utilized under three standby letters of
credit). The new Dex Media East Revolver and Term Loan A will
mature in October 2013, and the Term Loan B will mature in
October 2014. The weighted average interest rate of outstanding
debt under the new Dex Media East credit facility was 6.87% at
December 31, 2007. The weighted average interest rate of
outstanding debt under the former Dex Media East credit facility
was 6.85% at December 31, 2006.
The former Dex Media East credit facility, as amended and
restated in connection with the Dex Media Merger, consisted of
revolving loan commitments (former Dex Media East
Revolver) and a Term Loan A and Term Loan B. On
October 17, 2007, $86.4 million and
$213.6 million of the Term Loan A and Term
F-32
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Loan B under the former Dex Media East credit facility,
respectively, were repaid from the proceeds of the
Series A-4
Notes issued on October 17, 2007.
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. The repayment of the term loans and revolving
loan commitments outstanding under the former Dex Media East
credit facility was accounted for as an extinguishment of debt
resulting in a loss charged to interest expense during the year
ended December 31, 2007 of $0.2 million related to the
write-off of unamortized deferred financing costs.
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 Easts outstanding
9.875% senior notes due 2009 and $341.3 million of Dex
Media Easts outstanding 12.125% senior subordinated
notes due 2012. See below for further details.
As of December 31, 2007, the new Dex Media East credit
facility bears interest, at our option, at either:
|
|
|
|
|
The higher of (i) the base rate determined by the
Administrative Agent, JP Morgan Chase Bank, N.A. and
(ii) the Federal Funds Effective Rate (as defined) plus
0.50%, and in each case, plus a 0.75% (or 0.50% if leverage
ratio is less than 2 to 1) margin on the new Dex Media East
Revolver and Term Loan A and a 1.00% margin on Term Loan
B; or
|
|
|
|
The LIBOR rate plus a 1.75% (or 1.50% if leverage ratio is less
than 2 to 1) margin on the new Dex Media East Revolver and
Term Loan A and a 2.00% margin on Term Loan B. We may elect
interest periods of 1, 2, 3, or 6 months (or 9 or
12 months if, at the time of the borrowing, all lenders
agree to make such term available), for LIBOR borrowings.
|
Dex Media
West
As of December 31, 2007, the Dex Media West credit
facility, as amended and restated in connection with the Dex
Media Merger, consists of revolving loan commitments (Dex
Media West Revolver) and a Term Loan A, Term Loan B-1 and
Term Loan B-2. The Dex Media West Revolver consists of a total
principal amount of $100.0 million, which is available for
general corporate purposes, subject to certain conditions. As of
December 31, 2007, the principal amounts owed under the
Term Loan A, Term Loan B-1, and Term Loan B-2 totaled
$1,053.5 million, comprised of $152.9 million,
$310.7 million, and $589.9 million, respectively, and
$18.0 million was outstanding under the Dex Media West
Revolver. The Term Loan B-1 in the amount of $444.2 million
was utilized to redeem Dex Media Wests senior notes that
were put to Dex Media West in connection with the change of
control offer associated with the Dex Media Merger and to fund a
portion of the cash consideration paid to Dex Media, Inc.s
stockholders in connection with the Dex Media Merger. The
remaining $58.8 million is no longer available. The Term
Loan A and Dex Media West Revolver will mature in September 2009
and the Term Loan B-1 and Term Loan B-2 will mature in March
2010. The weighted average interest rate of outstanding debt
under the Dex Media West credit facility was 6.51% and 6.83% at
December 31, 2007 and 2006, respectively.
As of December 31, 2007, the Dex Media West credit facility
bears interest, at our option, at either:
|
|
|
|
|
The higher of (i) the base rate determined by the
Administrative Agent, JP Morgan Chase Bank, N.A. and
(ii) the Federal Funds Effective Rate (as defined) plus
0.50%, and in each case, plus a 0.25% margin on the Dex Media
West Revolver and Term Loan A and a 0.50% margin on Term Loan
B-1 and Term Loan B-2; or
|
|
|
|
The LIBOR rate plus a 1.25% margin on the Dex Media West
Revolver and Term Loan A and a 1.50% margin on Term Loan B-1 and
Term Loan B-2. We may elect interest periods of 1, 2, 3, or
6 months
|
F-33
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
(or 9 or 12 months if, at the time of the borrowing, all
lenders agree to make such term available), for LIBOR borrowings.
|
Notes
At December 31, 2007, RHD had total outstanding notes of
$6,426.6 million, comprised of $3,962.9 million
outstanding RHD notes, $1,231.2 million outstanding Dex
Media, Inc. notes and $1,232.5 million outstanding Dex
Media West notes.
RHD
At December 31, 2007, RHD had total outstanding notes of
$3,962.9 million, comprised of $300.0 million
6.875% Senior Notes, $339.2 million 6.875%
Series A-1
Senior Discount Notes, $613.7 million 6.875%
Series A-2
Senior Discount Notes, $1,210.0 million 8.875%
Series A-3
Senior Notes and $1,500.0 million 8.875%
Series A-4
Senior Notes.
On October 2, 2007, we issued $1.0 billion of
Series A-4
Notes. Proceeds from the
Series A-4
Notes were (a) used to repay the $328 million 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 RHDIs
$600 million 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 million of
Series A-4
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.
Interest on the
Series A-4
Notes is payable semi-annually on April 15th and October 15th of
each year, commencing on April 15, 2008. The
Series A-4
Notes are senior unsecured obligations of RHD, senior in right
of payment to all of RHDs existing and future senior
subordinated debt and future subordinated obligations and rank
equally with any of RHDs existing and future senior
unsecured debt. The
Series A-4
Notes are effectively subordinated to RHDs secured debt,
including RHDs guarantee of borrowings under the RHDI
Credit Facility and are structurally subordinated to any
existing or future liabilities (including trade payables) of our
direct and indirect subsidiaries. At December 31, 2007, the
Series A-4
Notes had a fair market value of $1.37 billion.
The 8.875%
Series A-4
Notes with a face value of $1.5 billion are redeemable at
our option beginning in 2012 at the following prices (as a
percentage of face value):
|
|
|
|
|
Redemption Year
|
|
Price
|
|
|
2012
|
|
|
104.438
|
%
|
2013
|
|
|
102.958
|
%
|
2014
|
|
|
101.479
|
%
|
2015 and thereafter
|
|
|
100.000
|
%
|
The
Series A-4
Notes were issued to certain institutional investors in an
offering exempt from registration requirements under the
Securities Act of 1933. Under the terms of a registration rights
agreement, the Company has agreed to file a registration
statement for the
Series A-4
Notes within 210 days subsequent to the initial closing.
We issued $300 million of 6.875% Senior Notes due
January 15, 2013 (Holdco Notes), the proceeds
of which were used to redeem 100,303 shares of the then
outstanding Preferred Stock from the GS Funds, pay transaction
costs and repay debt associated with RHDIs Credit
Facility. Interest is payable on the Holdco
F-34
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Notes semi-annually in arrears on January 15th and July 15th of
each year, commencing July 15, 2005. At December 31,
2007, the 6.875% Holdco Notes had a fair market value of
$265.5 million.
The 6.875% Holdco Notes with a face value of $300 million
are redeemable at our option beginning in 2009 at the following
prices (as a percentage of face value):
|
|
|
|
|
Redemption Year
|
|
Price
|
|
|
2009
|
|
|
103.438
|
%
|
2010
|
|
|
101.719
|
%
|
2011 and thereafter
|
|
|
100.000
|
%
|
In order to fund the cash portion of the Dex Media Merger
purchase price, we issued $660 million aggregate principal
amount at maturity ($600.5 million gross proceeds) of
6.875%
Series A-2
Senior Discount Notes due January 15, 2013 and
$1.21 billion principal amount of 8.875%
Series A-3
Senior Notes due January 15, 2016. Interest is payable
semi-annually on January 15th and July 15th of each year for the
Series A-2
Senior Discount Notes and the
Series A-3
Senior Notes, commencing July 15, 2006. We also issued
$365 million aggregate principal amount at maturity
($332.1 million gross proceeds) of 6.875%
Series A-1
Senior Discount Notes due January 15, 2013 to fund the GS
Repurchase. Interest is payable semi-annually on January 15th
and July 15th of each year, commencing July 15, 2006. All
of these notes are unsecured obligations of RHD, senior in right
of payment to all future senior subordinated and subordinated
indebtedness of RHD and structurally subordinated to all
indebtedness of our subsidiaries. At December 31, 2007, the
6.875%
Series A-1
and
Series A-2
Senior Discount Notes and 8.875%
Series A-3
Senior Notes had a fair market value of $300.2 million,
$543.1 million and $1.12 billion, respectively.
The 6.875%
Series A-1
Senior Discount Notes with a face value of $365 million and
Series A-2
Senior Discount Notes with a face value of $660 million are
redeemable at our option beginning in 2009 at the following
prices (as a percentage of face value):
|
|
|
|
|
Redemption Year
|
|
Price
|
|
|
2009
|
|
|
103.438
|
%
|
2010
|
|
|
101.719
|
%
|
2011 and thereafter
|
|
|
100.000
|
%
|
The 8.875%
Series A-3
Senior Notes with a face value of $1.21 billion are
redeemable at our option beginning in 2011 at the following
prices (as a percentage of face value):
|
|
|
|
|
Redemption Year
|
|
Price
|
|
|
2011
|
|
|
104.438
|
%
|
2012
|
|
|
102.958
|
%
|
2013
|
|
|
101.479
|
%
|
2014 and thereafter
|
|
|
100.000
|
%
|
RHDI
In connection with the Embarq Acquisition, RHDI issued
$325 million of RHDI Senior Notes and $600 million of
RHDI Senior Subordinated Notes. On December 20, 2005, we
repurchased through a tender offer and exit consent solicitation
$317.1 million of the RHDI Senior Notes. Proceeds from the
RHDI Credit Facilitys $350 million Term Loan D-1 were
used to fund the partial repurchase of the RHDI Senior Notes, a
tender premium of $25.3 million and pay transaction costs
of the tender offer. The partial repurchase of the RHDI Senior
Notes was accounted for as an extinguishment of debt resulting
in a loss of $32.7 million charged to interest expense
during the year ended December 31, 2005, consisting of the
tender premium and the write-off of unamortized deferred
financing costs of $7.4 million. In December 2007, we
redeemed the
F-35
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
remaining $7.9 million of RHDI Senior Notes. Proceeds from
the RHDI Revolver were used to fund the redemption, a redemption
premium of $0.2 million and pay transaction costs. The
redemption of the RHDI Senior Notes was accounted for as an
extinguishment of debt resulting in a loss of $0.2 million
charged to interest expense during the year ended
December 31, 2007, consisting of the redemption premium and
the write-off of unamortized deferred financing costs of less
than $0.1 million.
In October 2007, under the terms and conditions of a tender
offer and consent solicitation to purchase the RHDI Senior
Subordinated Notes that RHDI commenced on September 18,
2007, $599.9 million, or 99.9%, of the outstanding RHDI
Senior Subordinated Notes were repurchased. Proceeds from the
Series A-4
Notes were contributed by RHD to RHDI in order to fund the
repurchase of the RHDI Senior Subordinated Notes, a tender
premium of $39.7 million and pay transaction costs of the
tender offer. In December 2007, the remaining $0.1 million
of RHDI Senior Subordinated Notes were redeemed. The tender and
redemption of the RHDI Senior Subordinated Notes was accounted
for as an extinguishment of debt resulting in a loss of
$51.3 million charged to interest expense during the year
ended December 31, 2007, consisting of the tender premium
and the write-off of unamortized deferred financing costs of
$11.6 million.
Dex
Media, Inc.
At December 31, 2007, Dex Media, Inc. had total outstanding
notes of $1,231.2 million, comprised of $512.1 million
8% Senior Notes and $719.1 million 9% Senior
Discount Notes.
Dex Media, Inc. has issued $500 million aggregate principal
amount of 8% Senior Notes due 2013. These Senior Notes are
unsecured obligations of Dex Media, Inc. and interest is payable
on May 15th and November 15th of each year. As of
December 31, 2007, $500 million aggregate principal
amount was outstanding excluding fair value adjustments. At
December 31, 2007, the 8% Senior Notes had a fair
market value of $466.3 million.
The 8% Senior Notes with a face value of $500 million
are redeemable at our option beginning in 2008 at the following
prices (as a percentage of face value):
|
|
|
|
|
Redemption Year
|
|
Price
|
|
|
2008
|
|
|
104.000
|
%
|
2009
|
|
|
102.667
|
%
|
2010
|
|
|
101.333
|
%
|
2011 and thereafter
|
|
|
100.000
|
%
|
Dex Media, Inc. has issued $750 million aggregate principal
amount of 9% Senior Discount Notes due 2013, under two
indentures. Under the first indenture totaling $389 million
aggregate principal amount, the 9% Senior Discount Notes
were issued at an original issue discount with interest accruing
at 9%, per annum, compounded semi-annually. These Senior
Discount Notes are unsecured obligations of Dex Media, Inc. and
interest accrues in the form of increased accreted value until
November 15, 2008 (Full Accretion Date), at
which time the accreted value will be equal to the full
principal amount at maturity. Under the second indenture
totaling $361 million aggregate principal amount, interest
accrues at 8.37% per annum, compounded semi-annually, which
creates a premium at the Full Accretion Date that will be
amortized over the remainder of the term. After
November 15, 2008, the 9% Senior Discount Notes bear
cash interest at 9% per annum, payable semi-annually on May 15th
and November 15th of each year. These Senior Discount Notes are
unsecured obligations of Dex Media, Inc. and no cash interest
will accrue on the discount notes prior to the Full Accretion
Date. As of December 31, 2007, $749.9 million
aggregate principal amount was outstanding excluding fair value
adjustments. At December 31, 2007, the 9% Senior
Discount Notes had a fair market value of $673.1 million.
F-36
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The remaining $749.9 million face value of 9% Senior
Discount Notes are redeemable at our option beginning in 2008 at
the following prices (as a percentage of face value):
|
|
|
|
|
Redemption Year
|
|
Price
|
|
|
2008
|
|
|
104.500
|
%
|
2009
|
|
|
103.000
|
%
|
2010
|
|
|
101.500
|
%
|
2011 and thereafter
|
|
|
100.000
|
%
|
Dex Media
East
On November 26, 2007, proceeds from the new Dex Media East
credit facility were used to fund the redemption of
$449.7 million of Dex Media Easts outstanding
9.875% Senior Notes due 2009, $341.3 million of Dex
Media Easts outstanding 12.125% Senior Subordinated
Notes due 2012, redemption premiums associated with these Senior
Notes and Senior Subordinated Notes of $11.1 million and
$20.7 million, respectively, and pay transaction costs. The
redemption of these Senior Notes and Senior Subordinated Notes
was accounted for as an extinguishment of debt resulting in a
loss of $31.8 million charged to interest expense during
the year ended December 31, 2007 related to the redemption
premiums. In addition, as a result of redeeming these Senior
Notes and Senior Subordinated Notes, interest expense was offset
by $62.2 million during the year ended December 31,
2007, resulting from accelerated amortization of the remaining
fair value adjustment recorded as a result of the Dex Media
Merger.
Dex Media
West
At December 31, 2007, Dex Media West had total outstanding
notes of $1,232.5 million, comprised of $398.7 million
8.5% Senior Notes, $8.8 million 5.875% Senior
Notes and $825.0 million Senior Subordinated Notes.
Dex Media West issued $385 million aggregate principal
amount of 8.5% Senior Notes due 2010. These Senior Notes
are unsecured obligations of Dex Media West and interest is
payable on February 15th and August 15th of each year. As of
December 31, 2007, $385 million aggregate principal
amount was outstanding excluding fair value adjustments. At
December 31, 2007, the 8.5% Senior Notes had a fair
market value of $389.8 million.
The 8.5% Senior Notes with a face value of
$385 million are redeemable at our option beginning in 2007
at the following prices (as a percentage of face value):
|
|
|
|
|
Redemption Year
|
|
Price
|
|
|
2008
|
|
|
102.125
|
%
|
2009 and thereafter
|
|
|
100.000
|
%
|
Dex Media West issued $300 million aggregate principal
amount of 5.875% Senior Notes due 2011. These Senior Notes
are unsecured obligations of Dex Media West and interest is
payable on May 15th and November 15th of each year. As of
December 31, 2007, $8.7 million aggregate principal
amount was outstanding excluding fair value adjustments. At
December 31, 2007, the 5.875% Senior Notes had a fair
market value of $8.7 million.
F-37
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The remaining $8.7 million face value of 5.875% Senior
Notes are redeemable at our option beginning in 2008 at the
following prices (as a percentage of face value):
|
|
|
|
|
Redemption Year
|
|
Price
|
|
|
2008
|
|
|
102.938
|
%
|
2009
|
|
|
101.469
|
%
|
2010 and thereafter
|
|
|
100.000
|
%
|
Dex Media West issued $780 million aggregate principal
amount of 9.875% Senior Subordinated Notes due 2013. These
Senior Subordinated Notes are unsecured obligations of Dex Media
West and interest is payable on February 15th and August 15th of
each year. As of December 31, 2007, $761.7 million
aggregate principal amount was outstanding excluding fair value
adjustments. At December 31, 2007, the 9.875% Senior
Subordinated Notes had a fair market value of
$788.4 million.
The remaining $761.7 million face value of
9.875% Senior Subordinated Notes are redeemable at our
option beginning in 2008 at the following prices (as a
percentage of face value):
|
|
|
|
|
Redemption Year
|
|
Price
|
|
|
2008
|
|
|
104.938
|
%
|
2009
|
|
|
103.292
|
%
|
2010
|
|
|
101.646
|
%
|
2011 and thereafter
|
|
|
100.000
|
%
|
Aggregate maturities of long-term debt (including current
portion and excluding fair value adjustments under purchase
accounting) at December 31, 2007 were:
|
|
|
|
|
2008
|
|
$
|
177,175
|
|
2009
|
|
|
808,800
|
|
2010
|
|
|
1,689,238
|
|
2011
|
|
|
695,584
|
|
2012
|
|
|
179,000
|
|
Thereafter
|
|
|
6,522,036
|
|
|
|
|
|
|
Total
|
|
$
|
10,071,833
|
|
|
|
|
|
|
The Companys credit facilities and the indentures
governing the notes contain usual and customary affirmative and
negative covenants that, among other things, place limitations
on our ability to (i) incur additional indebtedness;
(ii) pay dividends and repurchase our capital stock;
(iii) enter into mergers, consolidations, acquisitions,
asset dispositions and sale-leaseback transactions;
(iv) make capital expenditures; (v) issue capital
stock of our subsidiaries; (vi) engage in transactions with
our affiliates; and (vii) make investments, loans and
advances. The Companys credit facilities also contain
financial covenants relating to maximum consolidated leverage,
minimum interest coverage and maximum senior secured leverage as
defined therein. Substantially all of RHDIs and its
subsidiaries assets, including the capital stock of RHDI
and its subsidiaries, are pledged to secure the obligations
under the RHDI Credit Facility. Substantially all of the assets
of Dex Media East and Dex Media West and their subsidiaries,
including their equity interests, are pledged to secure the
obligations under their respective credit facilities.
Impact of
Dex Media Merger
The completion of the Dex Media Merger triggered change of
control offers on all of the Dex Media outstanding notes,
requiring us to make offers to repurchase the notes.
$291.3 million of the 5.875% Dex Media West Senior Notes
due 2011, $0.3 million of the 9.875% Dex Media East Senior
Notes due 2009,
F-38
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$0.2 million of the 9.875% Dex Media West Senior
Subordinated Notes due 2013 and $0.1 million of the 9% Dex
Media, Inc. Senior Discount Notes due 2013 were tendered in the
applicable change of control offer and repurchased by us.
As a result of the Dex Media Merger, an adjustment was
established to record the acquired debt at fair value on
January 31, 2006. This fair value adjustment is amortized
as a reduction of interest expense over the remaining term of
the respective debt agreements using the effective interest
method and does not impact future scheduled interest or
principal payments. Amortization of the fair value adjustment
included as a reduction of interest expense was
$92.1 million (including $62.2 million related to the
redemption of Dex Media Easts Senior Notes and Senior
Subordinated Notes) and $26.4 million during the years
ended December 31, 2007 and 2006, respectively. A total
premium of $222.3 million was recorded upon consummation of
the Dex Media Merger, of which $103.8 million remains
unamortized at December 31, 2007, as shown in the following
table. In connection with the redemption of Dex Media
Easts Senior Notes and Senior Subordinated Notes, the
remaining fair value adjustment related to these debt
obligations was fully amortized as of December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
Initial Fair Value
|
|
|
Unamortized Fair
|
|
|
|
Adjustment at
|
|
|
Value Adjustment at
|
|
|
|
January 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Dex Media, Inc.
|
|
|
|
|
|
|
|
|
8% Senior Notes due 2013
|
|
$
|
15,000
|
|
|
$
|
12,097
|
|
9% Senior Discount Notes due 2013
|
|
|
17,177
|
|
|
|
14,596
|
|
Dex Media East
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
|
|
|
|
|
|
9.875% Senior Notes due 2009
|
|
|
34,290
|
|
|
|
|
|
12.125% Senior Subordinated Notes due 2012
|
|
|
54,600
|
|
|
|
|
|
Dex Media West
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
|
|
|
|
|
|
8.5% Senior Notes due 2010
|
|
|
22,138
|
|
|
|
13,736
|
|
5.875% Senior Notes due 2011
|
|
|
76
|
|
|
|
54
|
|
9.875% Senior Subordinated Notes due 2013
|
|
|
79,022
|
|
|
|
63,333
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
222,303
|
|
|
$
|
103,816
|
|
|
|
|
|
|
|
|
|
|
F-39
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Derivative
Financial Instruments
|
The RHDI Credit Facility, the Dex Media West, and the new Dex
Media East credit facilities bear interest at variable rates
and, accordingly, our earnings and cash flow are affected by
changes in interest rates. The Company has entered into the
following interest rate swaps that effectively convert
approximately $2.6 billion of the Companys variable
rate debt to fixed rate debt as of December 31, 2007.
|
|
|
|
|
|
|
|
|
Effective Dates
|
|
Notional Amount
|
|
|
Pay Rates
|
|
Maturity Dates
|
|
|
(Amounts in millions)
|
|
|
|
|
|
|
September 7, 2004
|
|
|
200
|
(3)
|
|
3.490% 3.750%
|
|
September 8, 2008 September 7, 2009
|
September 15, 2004
|
|
|
200
|
(3)
|
|
3.500% 3.910%
|
|
September 15, 2008 September 15, 2009
|
September 17, 2004
|
|
|
100
|
(2)
|
|
3.510% 3.740%
|
|
September 17, 2008 September 17, 2009
|
September 23, 2004
|
|
|
100
|
(2)
|
|
3.4335% 3.438%
|
|
September 23, 2008
|
December 20, 2005
|
|
|
150
|
(3)
|
|
4.74% 4.752%
|
|
June 20, 2008 December 22, 2008
|
February 14, 2006
|
|
|
300
|
(3)
|
|
4.925% 4.9435%
|
|
February 14, 2008 February 14, 2009
|
February 28, 2006
|
|
|
50
|
(1)
|
|
4.93275%
|
|
August 28, 2008
|
March 10, 2006
|
|
|
150
|
(2)
|
|
5.010%
|
|
March 10, 2008
|
May 25, 2006
|
|
|
300
|
(3)
|
|
5.326%
|
|
May 25, 2009 May 26, 2009
|
May 26, 2006
|
|
|
200
|
(2)
|
|
5.2725% -5.275%
|
|
May 26, 2009
|
May 31, 2006
|
|
|
100
|
(2)
|
|
5.295% 5.312%
|
|
May 31, 2008 May 31, 2009
|
June 12, 2006
|
|
|
150
|
(2)
|
|
5.27% 5.279%
|
|
June 12, 2009
|
November 26, 2007
|
|
|
600
|
(4)
|
|
4.1852% 4.604%
|
|
November 26, 2010 November 26, 2012
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Consists of one swap.
|
|
(2)
|
|
Consists of two swaps.
|
|
(3)
|
|
Consists of three swaps.
|
|
(4)
|
|
Consists of four swaps.
|
By using derivative financial instruments to hedge exposures to
changes in interest rates, the Company exposes itself to credit
risk and market risk. Credit risk is the possible failure of the
counterparty to perform under the terms of the derivative
contract. When the fair value of a derivative contract is
positive, the counterparty owes the Company, which creates
credit risk for the Company. When the fair value of a derivative
contract is negative, the Company owes the counterparty and,
therefore, it is not subject to credit risk. The Company
minimizes the credit risk in derivative financial instruments by
entering into transactions with major financial institutions
with credit ratings of AA- or higher.
Market risk is the adverse effect on the value of a financial
instrument that results from a change in interest rates. The
market risk associated with interest-rate contracts is managed
by establishing and monitoring parameters that limit the types
and degree of market risk that may be undertaken.
The Companys interest rate swap agreements effectively
convert $2.6 billion of variable rate debt to fixed rate
debt, mitigating the Companys exposure to increases in
interest rates. Under the terms of the interest rate swap
agreements, we receive variable interest based on the
three-month LIBOR and pay a
F-40
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
weighted average fixed rate of 4.61%. The interest rate swaps
mature at varying dates from February 14, 2008 through
November 26, 2012. The weighted average rate received on
our interest rate swaps was 5.02% during the year ended
December 31, 2007. These periodic payments and receipts are
recorded as interest expense.
Interest rate swaps with a notional value of $2.6 billion
have been designated as cash flow hedges to hedge three-month
LIBOR-based interest payments on $2.6 billion of bank debt.
As of December 31, 2007, these respective interest rate
swaps provided an effective hedge of the three-month LIBOR-based
interest payments on $2.6 billion of bank debt.
During May 2006, the Company entered into $1.0 billion
notional value of interest rate swaps, which were not designated
as cash flow hedges until July 2006. The Company recorded
changes in the fair value of these interest rate swaps as a
reduction to interest expense of $4.4 million for the year
ended December 31, 2006. In addition, certain interest rate
swaps acquired as a result of the Dex Media Merger with a
notional amount of $425 million were not designated as cash
flow hedges. During the years ended December 31, 2007 and
2006, $125 million and $300 million, respectively, of
these interest rate swaps were settled, leaving no undesignated
swaps at December 31, 2007. For the year ended
December 31, 2007 and 2006, the Company recorded additional
interest expense of $3.4 million and $3.7 million,
respectively, as a result of the change in fair value of the
acquired undesignated interest rate swaps.
During the years ended December 31, 2007, 2006 and 2005,
the Company reclassified $15.2 million, $22.6 million
and $0.6 million of hedging gains into earnings,
respectively. As of December 31, 2007, $2.8 million of
deferred losses, net of tax, on derivative instruments recorded
in accumulated other comprehensive loss are expected to be
reclassified into earnings during the next 12 months.
Transactions and events are expected to occur over the next
12 months that will necessitate reclassifying these
derivative losses to earnings.
|
|
7.
|
Redeemable
Preferred Stock, Warrants and Other
|
We have 10 million shares of Preferred Stock authorized for
issuance. In a series of transactions related to the Embarq
Acquisition in November 2002 and January 2003, we issued through
a private placement 200,604 shares of 8% convertible
cumulative preferred stock (Preferred Stock) and
warrants to purchase 1.65 million shares of our common
stock to investment partnerships affiliated with The Goldman
Sachs Group, Inc. (the GS Funds) for gross proceeds
of $200 million. On January 27, 2006, we completed the
GS Repurchase (defined below) and as a result, there are no
outstanding shares of our Preferred Stock. The aforementioned
warrants remained outstanding following the GS Repurchase until
November 2, 2006, at which time we repurchased all of the
outstanding warrants from the GS Funds.
Prior to the GS Repurchase, the Preferred Stock, and any accrued
and unpaid dividends, were convertible by the GS Funds into
common stock at any time after issuance at a price of $24.05 per
share and earned a cumulative dividend of 8% compounded
quarterly. We could not pay cash dividends on the Preferred
Stock through September 30, 2005, during which time the
dividend accreted. Accrued cash dividends on the Preferred Stock
of approximately $2.5 million through January 3, 2006
were included in the purchase price of the GS Repurchase.
The net proceeds received from the issuance of Preferred Stock
in January 2003 and November 2002 were allocated to the
Preferred Stock, warrants and the beneficial conversion feature
(BCF) of the Preferred Stock based on their relative
fair values. The fair value of the Preferred Stock was estimated
using the Dividend Discount Method, which determines the fair
value based on the discounted cash flows of the security. The
BCF is a function of the conversion price of the Preferred
Stock, the fair value of the warrants and the fair market value
of the underlying common stock on the date of issuance. The fair
value of the warrants
F-41
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
($12.18 for January 2003 warrants and $10.43 for November 2002
warrants) was determined based on the Black-Scholes model, with
the following assumptions:
|
|
|
|
|
Dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
35
|
%
|
Risk-free interest rate
|
|
|
3.0
|
%
|
Expected holding period
|
|
|
5 years
|
|
In connection with each issuance of our Preferred Stock and each
subsequent quarterly dividend date through September 30,
2005, a BCF was recorded because the fair value of the
underlying common stock at the time of issuance was greater than
the conversion price of the Preferred Stock. The BCF has been
treated as a deemed dividend because the Preferred Stock was
convertible into common stock immediately after issuance.
Commencing October 3, 2005, the date of the stock purchase
agreement relating to the GS Repurchase, the Preferred Stock was
no longer convertible into common stock, and consequently, we no
longer recognized any BCF. The Preferred Stock dividend for the
year ended December 31, 2005 of $11.7 million
consisted of the stated 8% dividend of $10.1 million
(including $2.5 million of accrued cash dividends) and a
BCF of $1.6 million.
On January 14, 2005, we repurchased 100,303 shares of
our outstanding Preferred Stock from the GS Funds for
$277.2 million in cash. In order to fund this repurchase,
on January 14, 2005, we issued $300 million of Holdco
Notes. See Note 5, Long-Term Debt, Credit Facilities
and Notes for a further discussion of the financing
associated with this transaction. In connection with this
Preferred Stock repurchase, we recorded an increase to loss
available to common shareholders on the consolidated statement
of operations of $133.7 million to reflect the loss on the
repurchase of these shares for the year ended December 31,
2005. The excess of the cash paid to the GS Funds over the
carrying amount of the repurchased Preferred Stock, plus the
amount previously recognized for the BCF associated with these
shares was recognized as a loss on repurchase. Such amount
represents a return to the GS Funds and, therefore was treated
in a manner similar to the treatment of the Preferred Stock
dividend.
On January 27, 2006, in conjunction with the Dex Media
Merger, we repurchased the remaining 100,301 shares of
Preferred Stock from the GS Funds for $336.1 million in
cash, including accrued cash dividends and interest (the
GS Repurchase), pursuant to the terms of a Stock
Purchase and Support Agreement (the Stock Purchase
Agreement) dated October 3, 2005. In order to fund
the GS Repurchase, we issued $365 million aggregate
principal amount at maturity ($332.1 million gross
proceeds) of 6.875%
Series A-1
Senior Discount Notes due January 15, 2013. See
Note 5, Long-Term Debt, Credit Facilities and
Notes for a further discussion of the financing associated
with this transaction.
Based on the terms of the Stock Purchase Agreement, the recorded
value of the Preferred Stock was accreted to its redemption
value of $334.1 million at December 31, 2005 and
$336.1 million at January 27, 2006. The accretion to
redemption value of $211.0 million and $2.0 million
(which represented accrued dividends and interest) for the years
ended December 31, 2005 and 2006, respectively, was
recorded as an increase to loss available to common shareholders
on the consolidated statements of operations. In conjunction
with the GS Repurchase, we also reversed the previously recorded
BCF related to these shares and recorded a decrease to loss
available to common shareholders on the consolidated statement
of operations of approximately $31.2 million for the year
ended December 31, 2006.
On November 2, 2006, we repurchased all outstanding
warrants to purchase 1.65 million shares of our common
stock for an aggregate purchase price of approximately
$53.1 million. Exercise prices related to the warrants
ranged between $26.28 and $28.62 per share. As a result, the
value of these warrants were removed from shareholders
equity on our consolidated balance sheet at December 31,
2006.
F-42
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On May 30, 2006, RHD redeemed the outstanding preferred
stock purchase rights issued pursuant to the Companys
stockholder rights plan at a redemption price of one cent per
right for a total redemption payment of $0.7 million. This
payment was recorded as a charge to retained earnings for the
year ended December 31, 2006.
On November 9, 2006, certain affiliates of The Carlyle
Group and Welsh, Carson, Anderson & Stowe (the
Selling Shareholders) sold 9,424,360 shares and
9,424,359 shares, respectively, of RHD common stock. The
Selling Shareholders were former shareholders of Dex Media that
became shareholders of RHD in conjunction with the Dex Media
Merger. After this sale, the Selling Shareholders no longer hold
any shares of RHD common stock that they acquired in connection
with the Dex Media Merger. We did not receive any proceeds from
this transaction.
For the years ended December 31, 2007 and 2006, the Company
recognized $39.0 million and $43.3 million,
respectively, of stock-based compensation expense related to
stock-based awards granted under our various employee and
non-employee stock incentive plans.
Prior to the adoption of SFAS No. 123 (R), the Company
presented all tax benefits of deductions resulting from the
exercise of stock-based awards as operating cash flows in the
consolidated statements of cash flows. SFAS No. 123
(R) requires that these cash flows be classified as financing
cash flows. During the years ended December 31, 2007 and
2006, the Company was not able to utilize the tax benefit
resulting from stock-based award exercises due to net operating
loss carryforwards. As such, neither operating nor financing
cash flows were affected by the tax impact of stock-based award
exercises for the years ended December 31, 2007 and 2006.
Under SFAS No. 123 (R), the fair value for our stock
options and SARs is calculated using the Black-Scholes model at
the time these stock-based awards are granted. The amount, net
of estimated forfeitures, is then amortized over the vesting
period of the stock-based award. The weighted average fair value
per share of stock options and SARs granted during the years
ended December 31, 2007 and 2006 was $22.47 and $20.08,
respectively. The following assumptions were used in valuing
these stock-based awards for the years ended December 31,
2007 and 2006, respectively:
|
|
|
|
|
|
|
December 31, 2007
|
|
December 31, 2006
|
|
Dividend yield
|
|
0%
|
|
0%
|
Expected volatility
|
|
23.5%
|
|
28.2%
|
Risk-free interest rate
|
|
4.5%
|
|
4.4%
|
Expected life
|
|
5 Years
|
|
5 Years
|
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 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.
The Company grants restricted stock to certain of its employees,
including executive officers, and non-employee directors in
accordance with the 2005 Plan. Under SFAS No. 123 (R),
compensation expense related to these awards is measured at fair
value on the date of grant based on the number of shares granted
and the quoted market price of the Companys common stock
at such time.
F-43
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the year ended December 31, 2007, we granted
1.3 million stock options and SARs. The following table
presents a summary of the Companys stock options and SARs
activity and related information for the year ended
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise/Grant
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price Per Share
|
|
|
Value
|
|
|
Awards outstanding, January 1, 2007
|
|
|
5,281,773
|
|
|
$
|
41.98
|
|
|
$
|
29,690
|
|
Granted
|
|
|
1,266,795
|
|
|
|
73.29
|
|
|
|
|
|
Business.com stock-based awards converted
|
|
|
196,826
|
|
|
|
10.01
|
|
|
|
5,391
|
|
Exercises
|
|
|
(718,483
|
)
|
|
|
30.50
|
|
|
|
(7,991
|
)
|
Forfeitures
|
|
|
(163,109
|
)
|
|
|
61.93
|
|
|
|
(369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards outstanding, December 31, 2007
|
|
|
5,863,802
|
|
|
$
|
48.51
|
|
|
$
|
26,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for future grants at December 31, 2007
|
|
|
3,071,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of stock-based awards vested during
the years ended December 31, 2007 and 2006 was
$1.7 million and $34.4 million, respectively. The
total fair value of stock-based awards vested during the years
ended December 31, 2007 and 2006 was $19.0 million and
$26.4 million, respectively.
The following table summarizes information about stock-based
awards outstanding and exercisable at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards Outstanding
|
|
|
|
Stock Awards Exercisable
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
Range of
|
|
|
|
|
Remaining
|
|
|
Weighted Average
|
|
|
|
|
|
|
Remaining
|
|
|
Exercise/
|
|
Exercise/Grant
|
|
|
|
|
Contractual Life
|
|
|
Exercise/Grant
|
|
|
|
|
|
|
Contractual Life
|
|
|
Grant Price Per
|
|
Prices
|
|
Shares
|
|
|
(In Years)
|
|
|
Price Per Share
|
|
|
|
Shares
|
|
|
(In Years)
|
|
|
Share
|
|
$0.22 $5.36
|
|
|
113,929
|
|
|
|
8.35
|
|
|
$
|
2.33
|
|
|
|
|
26,523
|
|
|
|
8.08
|
|
|
$
|
2.30
|
|
$10.78 $14.75
|
|
|
139,009
|
|
|
|
5.60
|
|
|
|
10.78
|
|
|
|
|
117,692
|
|
|
|
5.50
|
|
|
|
10.78
|
|
$15.22 $19.41
|
|
|
186,960
|
|
|
|
4.07
|
|
|
|
16.77
|
|
|
|
|
133,640
|
|
|
|
1.99
|
|
|
|
16.19
|
|
$24.75 $29.59
|
|
|
1,448,776
|
|
|
|
2.45
|
|
|
|
26.02
|
|
|
|
|
1,448,776
|
|
|
|
2.45
|
|
|
|
26.02
|
|
$30.11 $39.21
|
|
|
82,614
|
|
|
|
2.19
|
|
|
|
31.46
|
|
|
|
|
82,614
|
|
|
|
2.19
|
|
|
|
31.46
|
|
$41.10 $43.85
|
|
|
892,815
|
|
|
|
3.35
|
|
|
|
41.26
|
|
|
|
|
892,815
|
|
|
|
3.35
|
|
|
|
41.26
|
|
$46.06 $55.25
|
|
|
79,397
|
|
|
|
5.22
|
|
|
|
51.91
|
|
|
|
|
36,304
|
|
|
|
4.62
|
|
|
|
51.14
|
|
$56.55 $66.23
|
|
|
1,800,368
|
|
|
|
4.91
|
|
|
|
63.81
|
|
|
|
|
1,035,123
|
|
|
|
4.74
|
|
|
|
63.82
|
|
$70.44 $80.68
|
|
|
1,119,934
|
|
|
|
6.18
|
|
|
|
74.36
|
|
|
|
|
1,675
|
|
|
|
6.16
|
|
|
|
74.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,863,802
|
|
|
|
4.33
|
|
|
$
|
48.51
|
|
|
|
|
3,775,162
|
|
|
|
3.42
|
|
|
$
|
39.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of exercisable stock-based awards
as of December 31, 2007 was $22.2 million.
F-44
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the status of our non-vested
stock awards as of December 31, 2007 and changes during the
year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Non-vested
|
|
|
Grant Date
|
|
|
Non-Vested
|
|
|
Weighted Average
|
|
|
|
Stock Options
|
|
|
Exercise Price Per
|
|
|
Restricted
|
|
|
Grant Date Fair
|
|
|
|
and SARs
|
|
|
Award
|
|
|
Stock
|
|
|
Value Per Award
|
|
|
Non-vested at January 1, 2007
|
|
|
1,797,668
|
|
|
$
|
45.18
|
|
|
|
193,083
|
|
|
$
|
61.31
|
|
Granted
|
|
|
1,266,795
|
|
|
|
73.29
|
|
|
|
18,701
|
|
|
|
73.39
|
|
Non-vested Business.com
|
|
|
196,826
|
|
|
|
10.01
|
|
|
|
|
|
|
|
|
|
Options Converted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(1,009,540
|
)
|
|
|
52.35
|
|
|
|
(48,461
|
)
|
|
|
73.11
|
|
Forfeitures
|
|
|
(163,109
|
)
|
|
|
61.93
|
|
|
|
(11,759
|
)
|
|
|
60.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2007
|
|
|
2,088,640
|
|
|
$
|
63.96
|
|
|
|
151,564
|
|
|
$
|
62.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, there was $38.2 million of
total unrecognized compensation cost related to non-vested
stock-based awards. The cost is expected to be recognized over a
weighted average period of approximately two years. After
applying the Companys estimated forfeiture rate, we expect
2.0 million non-vested stock-based awards to vest over a
weighted average period of approximately two years. The
intrinsic value at December 31, 2007 of the non-vested
stock-based awards expected to vest is $5.0 million and the
corresponding weighted average grant date exercise price is
$64.95 per share.
On February 27, 2007, the Company granted 1.1 million
SARs to certain employees, including executive officers, in
conjunction with its annual grant of stock incentive awards.
These SARs, which are settled in our common stock, were granted
at a grant price of $74.31 per share, which was equal to the
market value of the Companys common stock on the grant
date, and vest ratably over three years. In accordance with
SFAS No. 123 (R), we recognized non-cash compensation
expense related to these SARs of $11.2 million for the year
ended December 31, 2007.
As a result of the Business.com Acquisition, 4.2 million
outstanding Business.com equity awards were converted into
0.2 million RHD equity awards on August 23, 2007. For
the year ended December 31, 2007, we recognized non-cash
compensation expense related to these converted equity awards of
$4.0 million.
On December 13, 2006, the Company granted 0.1 million
shares of restricted stock to certain executive officers. These
restricted shares, which are settled in our common stock, were
granted at a grant price of $60.64 per share, which was equal to
the market value of the Companys common stock on the date
of grant. The vesting of these restricted shares is contingent
upon our common stock equaling or exceeding $65.00 per share for
20 consecutive trading days and continued employment with the
Company through the third anniversary of the date of grant. In
accordance with SFAS No. 123 (R), we recognized
non-cash compensation expense related to these restricted shares
of $2.4 million and $0.1 million for the years ended
December 31, 2007 and 2006, respectively.
On February 21, 2006, the Company granted 0.1 million
shares of restricted stock to certain employees, including
executive officers. These restricted shares, which are settled
in our common stock, were granted at a grant price of $64.26 per
share, which was equal to the market value of the Companys
common stock on the date of grant, and vest ratably over three
years. In accordance with SFAS No. 123 (R), we
recognized non-cash compensation expense related to these
restricted shares of $1.7 million and $2.8 million for
the years ended December 31, 2007 and 2006, respectively.
On February 21, 2006, the Company granted 0.6 million
SARs to certain employees, not including executive officers, in
conjunction with its annual grant of stock incentive awards.
These SARs, which are
F-45
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
settled in our common stock, were granted at a grant price of
$64.26 per share, which was equal to the market value of the
Companys common stock on the grant date, and vest ratably
over three years. On February 24, 2005, the Company granted
0.5 million SARs to certain employees, not including
executive officers, in conjunction with its annual grant of
stock incentive awards. These SARs, which are settled in our
common stock, were granted at a grant price of $59.00 per share,
which was equal to the market value of the Companys common
stock on the grant date, and vest ratably over three years. On
July 28, 2004, the Company granted 0.9 million SARs to
certain employees, including executive officers, in connection
with the AT&T Directory Acquisition. These SARs, which are
settled in our common stock, were granted at a grant price of
$41.58 per share, which was equal to the market value of the
Companys common stock on the grant date, and initially
were scheduled to vest entirely only after five years. The
maximum appreciation of the July 28, 2004 and
February 24, 2005 SAR grants is 100% of the initial grant
price. We recognized non-cash compensation expense related to
these and other smaller SAR grants of $7.2 million,
$13.9 million and $4.1 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
In connection with the Embarq Acquisition, the Company granted
1.5 million options (Founders Grant) to certain
employees, including executive officers, during 2002. These
options were granted in October 2002 at an exercise price of
$25.54, which was equal to the market value of the
Companys common stock on the date of grant. However, the
award of these options was contingent upon the successful
closing of the Embarq Acquisition. Therefore, these options were
subject to forfeiture until January 3, 2003, by which time
the market value of the Companys common stock exceeded the
exercise price. Accordingly, these options were accounted for as
compensatory options under APB No. 25 and resulted in a
charge of $1.0 million for the year ended December 31,
2005.
In connection with the Dex Media Merger, the Company granted on
October 3, 2005, 1.1 million SARs to certain
employees, including executive officers. These SARs were granted
at an exercise price of $65.00 (above the then prevailing market
price of our common stock) and vest ratably over three years.
The award of these SARs was contingent upon the successful
completion of the Dex Media Merger and therefore were not
identified as awards outstanding as of December 31, 2005.
We recognized non-cash compensation expense related to these
SARs of $7.0 million and $9.1 million for the years
ended December 31, 2007 and 2006, respectively.
At January 31, 2006, stock-based awards outstanding under
the existing Dex Media equity compensation plans totaled
4.0 million Dex Media option shares and had a weighted
average exercise price of $5.48 per option share. As a result of
the Dex Media Merger, all outstanding Dex Media equity awards
were converted to RHD equity awards on February 1, 2006.
Upon conversion to RHD equity awards, the number of securities
to be issued upon exercise of outstanding awards totaled
1.7 million shares of RHD and had a weighted average
exercise price of $12.73 per share. At December 31, 2007,
the number of RHD shares remaining available for future issuance
totaled less than 0.1 million under the Dex Media, Inc.
2004 Incentive Award Plan. For the years ended December 31,
2007 and 2006, non-cash compensation expense related to these
converted awards totaled $2.6 million and
$4.1 million, respectively.
The Dex Media Merger triggered a change in control under the
Companys stock incentive plans. Accordingly, all awards
granted to employees through January 31, 2006, with the
exception of stock-based awards held by executive officers and
members of the Board of Directors (who waived the change of
control provisions of such awards), became fully vested. In
addition, the vesting conditions related to the July 28,
2004 SARs grant, noted above, were modified as a result of the
Dex Media Merger, and the SARs now vest ratably over three years
from the date of grant. For the years ended December 31,
2007 and 2006, $2.3 million and $13.4 million,
respectively, of non-cash compensation expense, which is
included in the total non-cash compensation expense amounts
noted above, was recognized as a result of these modifications.
Non-cash stock-based compensation expense relating to existing
stock options held by executive officers and members of the
Board of Directors as of January 1, 2006, which were not
modified as a result of the Dex Media
F-46
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Merger, as well as non-cash stock-based compensation expense
from smaller grants issued subsequent to the Dex Media Merger
not mentioned above, totaled $2.9 million and
$13.3 million for the years ended December 31, 2007
and 2006, respectively.
Deferred tax assets and liabilities are determined based on the
estimated future tax effects of temporary differences between
the financial statement and tax basis of assets and liabilities,
as measured by tax rates at which temporary differences are
expected to reverse. Deferred tax expense (benefit) is the
result of changes in the deferred tax assets and liabilities.
Provision (benefit) for income taxes consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current provision
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
11,839
|
|
|
$
|
|
|
|
$
|
|
|
State and local
|
|
|
8,526
|
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
20,365
|
|
|
|
627
|
|
|
|
|
|
Deferred provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
15,712
|
|
|
|
(112,897
|
)
|
|
|
37,087
|
|
State and local
|
|
|
(7,044
|
)
|
|
|
27,745
|
|
|
|
6,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision (benefit)
|
|
|
8,668
|
|
|
|
(85,152
|
)
|
|
|
43,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
29,033
|
|
|
$
|
(84,525
|
)
|
|
$
|
43,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the significant differences
between the U.S. Federal statutory tax rate and our
effective tax rate, which has been applied to the Companys
income (loss) before income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Statutory U.S. Federal tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local taxes, net of U.S. Federal tax benefit
|
|
|
(9.1
|
)
|
|
|
(8.8
|
)
|
|
|
3.6
|
|
Non-deductible expense
|
|
|
0.9
|
|
|
|
0.4
|
|
|
|
0.4
|
|
Change in valuation allowance
|
|
|
10.2
|
|
|
|
(0.1
|
)
|
|
|
|
|
Other
|
|
|
1.3
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
38.3
|
%
|
|
|
26.2
|
%
|
|
|
39.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-47
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Certain prior period amounts included in the following table
have been reclassified to conform to the current periods
presentation. Deferred tax assets and liabilities consisted of
the following at December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
15,103
|
|
|
$
|
23,467
|
|
Deferred and other compensation
|
|
|
37,120
|
|
|
|
14,079
|
|
Deferred directory revenue and costs
|
|
|
22,270
|
|
|
|
|
|
Deferred financing costs
|
|
|
25,836
|
|
|
|
45,585
|
|
Capital investments
|
|
|
6,208
|
|
|
|
5,978
|
|
Debt and other interest
|
|
|
49,503
|
|
|
|
67,992
|
|
Pension and other retirement benefits
|
|
|
27,782
|
|
|
|
40,977
|
|
Restructuring reserves
|
|
|
1,586
|
|
|
|
896
|
|
Net operating loss and credit carryforwards
|
|
|
250,276
|
|
|
|
280,106
|
|
Other
|
|
|
10,980
|
|
|
|
1,320
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
446,664
|
|
|
|
480,400
|
|
Valuation allowance
|
|
|
(13,726
|
)
|
|
|
(5,978
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
432,938
|
|
|
|
474,422
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Deferred directory revenue and costs
|
|
|
|
|
|
|
101,465
|
|
Fixed assets and capitalized software
|
|
|
34,751
|
|
|
|
12,798
|
|
Purchased goodwill and intangible assets
|
|
|
2,638,668
|
|
|
|
2,535,702
|
|
Other
|
|
|
144
|
|
|
|
3,441
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
2,673,563
|
|
|
|
2,653,406
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
2,240,625
|
|
|
$
|
2,178,984
|
|
|
|
|
|
|
|
|
|
|
The 2007 provision for income taxes of $29.0 million is
comprised of a federal tax provision of $27.5 million,
resulting from a current tax provision of $11.8 million
relating to an Internal Revenue Service (IRS)
settlement and a deferred tax provision of $15.7 million
resulting from a current year taxable loss. The 2007 state tax
provision of $1.5 million results from a current tax
provision of $8.5 million relating to taxes due in states
where subsidiaries of the Company file separate company returns,
offset by a deferred state tax benefit of $7.0 million
relating to the apportioned taxable income or loss among various
states. A federal net operating loss for income tax purposes of
approximately $303.3 million was generated in 2007
primarily as a result of tax amortization expense recorded with
respect to the intangible assets acquired in the Dex Media
Merger, AT&T Directory Acquisition, Embarq Acquisition and
Business.com Acquisition. The acquired intangible assets
resulted in a deferred tax liability of $2.6 billion at
December 31, 2007.
At December 31, 2007, the Company had federal and state net
operating loss carryforwards of approximately
$618.3 million (net of carryback) and $801.3 million,
respectively, which will begin to expire in 2026 and 2008,
respectively. These amounts include consideration of net
operating losses expected to expire unused due to the Internal
Revenue Code Section 382 limitation for ownership changes
related to Business.com that occurred prior to the Business.com
Acquisition. A portion of the benefits from the net operating
loss carryforwards will be reflected in additional paid-in
capital as a portion of these net operating loss carryforwards
are generated by deductions related to the exercise of stock
awards. The 2007 and 2006 deduction for stock awards was
$30.8 million and $83.4 million, respectively.
Included in the $30.8 million deduction for stock awards in
2007 is a suspended $8.6 million windfall tax benefit as
required by
F-48
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS No. 123 (R). This benefit will be recognized for
financial reporting purposes when the net operating loss is
utilized.
In assessing the realizability of our deferred tax assets, we
have considered whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during periods in
which those temporary differences become deductible. In making
this determination, under the applicable financial reporting
standards, we are allowed to consider the scheduled reversal of
deferred tax liabilities, projected future taxable income, and
tax planning strategies. The Company believes that it is more
likely than not that some of the deferred tax assets associated
with capital investments will not be realized, contributing to a
valuation allowance of $6.2 million at December 31,
2007. Additionally, we believe it is more likely than not that
state net operating losses in various states will not be used
before expiration, resulting in a valuation allowance of
$7.5 million, for a total valuation allowance of
$13.7 million at December 31, 2007.
The 2006 income tax benefit of $84.5 million is comprised
of a federal deferred tax benefit of $112.9 million
resulting from the periods taxable loss, offset by a state
tax provision of $28.4 million. The 2006 state tax
provision of $28.4 million primarily resulted from the
modification of apportioned taxable income or loss among various
states. A net operating loss for tax purposes of approximately
$216.3 million was generated in 2006 primarily as a result
of tax amortization expense recorded with respect to the
intangible assets acquired in the Dex Media Merger, AT&T
Directory Acquisition and Embarq Acquisition. The acquired
intangible assets resulted in a deferred tax liability of
$2.2 billion.
The 2005 provision for income taxes of $43.2 million is
comprised of a deferred tax provision due to the taxable loss
generated during that period. The 2005 deferred tax provision
resulted in an effective tax rate of 39.0% and net operating
losses of approximately $168.6 million related to tax
deductions and amortization expense recorded for tax purposes
compared to book purposes with respect to the intangible assets
acquired in the Embarq Acquisition and the AT&T Directory
Acquisition. The 2005 effective tax rate reflects a decrease in
the state and local tax rate due to integration of the Embarq
Acquisition and the AT&T Directory Acquisition.
As noted in further detail below, in July 2007, we effectively
settled all issues under consideration with the IRS related to
its audit for taxable years 2003 and 2004. Therefore, tax years
2005 and 2006 are still subject to examination by the IRS.
Certain state tax returns are under examination by various
regulatory authorities. We continuously review issues raised in
connection with ongoing examinations and open tax years to
evaluate the adequacy of our reserves. We believe that our
accrued tax liabilities under FIN No. 48 are adequate
to cover uncertain tax positions related to U.S. federal
and state income taxes.
Adoption
of FIN No. 48
As a result of implementing FIN No. 48, we recognized
an increase of $160.1 million in the liability for
unrecognized tax benefits as of January 1, 2007. The
increase in the liability included a reduction in deferred tax
liabilities of $165.2 million and a decrease in accumulated
deficit of $5.1 million.
F-49
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the beginning and ending amount of gross
unrecognized tax benefits is as follows:
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
171,476
|
|
Gross additions based on tax positions related to the current
year
|
|
|
1,695
|
|
Gross additions for tax positions of prior years
|
|
|
6,673
|
|
Gross reductions based on tax positions related to the current
year
|
|
|
(581
|
)
|
Gross reductions for tax positions of prior years
|
|
|
(1,125
|
)
|
Settlements
|
|
|
(168,150
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
9,988
|
|
|
|
|
|
|
Included in the balance of unrecognized benefits at
December 31, 2007 and January 1, 2007 are
$9.4 million and $5.6 million, respectively, of tax
benefits that, if recognized, would favorably affect the
effective tax rate.
Our policy is to recognize interest and penalties related to
unrecognized tax benefits in income tax expense. During the year
ended December 31, 2007, the Company recognized
approximately $1.5 million in interest and penalties. As of
December 31, 2007 and January 1, 2007, we have
accrued $5.9 million and $3.8 million, respectively,
related to interest and have accrued $0.8 million for tax
penalties as of December 31, 2007. No amounts were accrued
for tax penalties as of January 1, 2007.
In July 2007, we effectively settled all issues under
consideration with the IRS related to its audit for taxable
years 2003 and 2004. As a result of the settlement, the
unrecognized tax benefits associated with our uncertain Federal
tax positions decreased by $167.0 million during the year
ended December 31, 2007. As a result of the IRS settlement,
we recognized additional interest expense of $1.6 million
and $1.2 million related to the taxable years 2004 and
2005, respectively. The recognition of this interest expense
within our tax provision (net of tax benefit) has increased our
effective tax rate for the year ended December 31, 2007.
The unrecognized tax benefits impacted by the IRS audit
primarily related to items for which the ultimate deductibility
was highly certain but for which there was uncertainty regarding
the timing of such deductibility.
It is reasonably possible that the amount of unrecognized tax
benefits could decrease within the next twelve months. We are
currently under audit in New York State and New York City for
taxable years 2000 through 2003 and North Carolina for taxable
years 2003 through 2006. During the year ended December 31,
2007, we recorded an increase in the liability for unrecognized
tax benefits of $14.0 million. If the New York State, New
York City or North Carolina audits are resolved within the next
twelve months, the total amount of unrecognized tax benefits
could decrease by approximately $14.0 million. The
unrecognized tax benefits related to the New York State, New
York City and North Carolina audits relate to apportionment and
allocation of income among our various legal entities.
As noted above, in July 2007, we effectively settled the
IRSs federal tax audit for the taxable years 2003 and
2004. Therefore, tax years 2005 and 2006 are still subject to
examination by the IRS. In addition, certain state tax returns
are under examination by various regulatory authorities,
including New York and North Carolina. Our state tax return
years are open to examination for an average of three years.
However, certain jurisdictions remain open to examination longer
than three years due to the existence of net operating loss
carryforwards and statutory waivers.
As a result of the Dex Media Merger, we acquired Dex
Medias pension plan, defined contribution plan and
postretirement plan. As a result of the Business.com
Acquisition, we acquired Business.coms defined
contribution plan. Effective January 1, 2007, the DonTech
Retirement Plan was merged with and into the RHD Retirement Plan
(defined below). We now have two defined benefit pension plans
(the RHD Retirement Plan and the Dex Media Pension Plan), three
defined contribution plans (the RHD 401(k) Savings Plan, the Dex
F-50
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Media Employee Savings Plan and the Business.com, Inc. 401(k)
Plan) and a postretirement plan (the RHD Group Benefit Plan),
which became effective on January 1, 2007.
RHD Pension Plan.
The RHD cash balance defined
benefit pension plan (RHD Retirement Plan) covers
substantially all legacy RHD employees with at least one year of
service. The benefits to be paid to employees are based on age,
years of service and a percentage of total annual compensation.
The percentage of compensation allocated to a retirement account
ranges from 3.0% to 12.5% depending on age and years of service
(cash balance benefit). Benefits for certain
employees who were participants in the predecessor The
Dun & Bradstreet Corporation (D&B)
defined benefit pension plan are also determined based on the
participants average compensation and years of service
(final average pay benefit) and benefits to be paid
will equal the greater of the final average pay benefit or the
cash balance benefit. Annual pension costs are determined using
the projected unit credit actuarial cost method. Our funding
policy is to contribute an amount at least equal to the minimum
legal funding requirement. We were required to make
contributions of $3.6 million to the RHD Retirement Plan
during 2007. We were not required to make any contributions to
our pension plans during 2006 or 2005. The underlying pension
plan assets are invested in diversified portfolios consisting
primarily of equity and debt securities. A measurement date of
December 31 is used for all of our plan assets.
We also have an unfunded non-qualified defined benefit pension
plan, the Pension Benefit Equalization Plan (PBEP),
which covers senior executives and certain key employees.
Benefits are based on years of service and compensation
(including compensation not permitted to be taken into account
under the previously mentioned defined benefit pension plan).
Dex Media Pension Plan.
We have a
noncontributory defined benefit pension plan covering
substantially all management and occupational (union) employees
within Dex Media. Annual pension costs are determined using the
projected unit credit actuarial cost method. Our funding policy
is to contribute an amount at least equal to the minimum legal
funding requirement. We were required to make contributions of
$12.8 million to the Dex Media Pension Plan during 2007. No
contributions were required or made to the plan during 2006. The
underlying pension plan assets are invested in diversified
portfolios consisting primarily of equity and debt securities. A
measurement date of December 31 is used for all of our plan
assets.
RHD, Dex Media and Business.com Savings
Plans.
Under the RHD plan, we contribute 50% for
each dollar contributed by a participating employee, up to a
maximum of 6% of each participating employees salary
(including bonus and commissions). Contributions under this plan
were $2.5 million, $3.0 million and $2.5 million
for the years ended December 31, 2007, 2006 and 2005,
respectively. For management employees under the Dex Media plan,
we contribute 100% of the first 4% of each participating
employees salary and 50% of the next 2%. For management
employees, the match is limited to 5% of each participating
employees eligible earnings. For occupational employees
under the Dex Media plan, we contribute 81% of the first 6% of
each participating employees salary not to exceed 4.86% of
eligible earnings for any one pay period. Matching contributions
are limited to $4,860 per occupational employee annually.
Contributions under the Dex Media plan were $5.7 million
and $5.3 million for the year ended December 31, 2007
and eleven months ended December 31, 2006, respectively.
Under the Business.com plan, the Company may make matching
contributions at the discretion of the Board of Directors. The
Company did not make any contributions to the plan subsequent to
the Business.com Acquisition.
Postretirement Benefits.
Our unfunded
postretirement benefit plan provides certain healthcare and life
insurance benefits to certain full-time employees who reach
retirement eligibility while working for their respective
companies.
F-51
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Benefit
Obligation and Funded Status
Information presented below for 2006 includes combined amounts
for the legacy RHD benefit plans for the twelve months ended
December 31, 2006 and the acquired Dex Media plans for the
eleven months ended December 31, 2006. A summary of the
funded status of the benefit plans at December 31, 2007 and
2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Plans
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year
|
|
$
|
315,104
|
|
|
$
|
125,759
|
|
|
$
|
91,721
|
|
|
$
|
23,227
|
|
Dex Media benefit obligation, as of February 1, 2006
|
|
|
|
|
|
|
208,408
|
|
|
|
|
|
|
|
69,309
|
|
Service cost
|
|
|
14,209
|
|
|
|
13,281
|
|
|
|
2,005
|
|
|
|
2,668
|
|
Interest cost
|
|
|
17,741
|
|
|
|
16,717
|
|
|
|
5,325
|
|
|
|
4,642
|
|
Plan participant contributions
|
|
|
|
|
|
|
|
|
|
|
420
|
|
|
|
337
|
|
Amendments
|
|
|
555
|
|
|
|
387
|
|
|
|
|
|
|
|
(66
|
)
|
Actuarial (gain)/loss
|
|
|
(21,284
|
)
|
|
|
(12,814
|
)
|
|
|
1,107
|
|
|
|
(4,512
|
)
|
Benefits paid
|
|
|
(6,813
|
)
|
|
|
(6,654
|
)
|
|
|
(4,679
|
)
|
|
|
(3,884
|
)
|
Plan settlement
|
|
|
(18,820
|
)
|
|
|
(29,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of year
|
|
$
|
300,692
|
|
|
$
|
315,104
|
|
|
$
|
95,899
|
|
|
$
|
91,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year
|
|
$
|
239,064
|
|
|
$
|
100,783
|
|
|
$
|
|
|
|
$
|
|
|
Dex Media fair value of plan assets, as of February 1, 2006
|
|
|
|
|
|
|
158,555
|
|
|
|
|
|
|
|
|
|
Return on plan assets
|
|
|
13,011
|
|
|
|
16,220
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
16,455
|
|
|
|
140
|
|
|
|
4,259
|
|
|
|
3,547
|
|
Plan participant contributions
|
|
|
|
|
|
|
|
|
|
|
420
|
|
|
|
337
|
|
Benefits paid
|
|
|
(6,813
|
)
|
|
|
(6,654
|
)
|
|
|
(4,679
|
)
|
|
|
(3,884
|
)
|
Plan settlement
|
|
|
(18,820
|
)
|
|
|
(29,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of year
|
|
$
|
242,897
|
|
|
$
|
239,064
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(57,795
|
)
|
|
$
|
(76,040
|
)
|
|
$
|
(95,899
|
)
|
|
$
|
(91,721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the Dex Media Merger, we recorded a liability
associated with Dex Medias pension and postretirement
plans at fair value as of January 31, 2006 of
$119.4 million. Net amounts recognized in the consolidated
balance sheets at December 31, 2007 and 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Plans
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Current liabilities
|
|
$
|
(417
|
)
|
|
$
|
(200
|
)
|
|
$
|
(6,835
|
)
|
|
$
|
(5,525
|
)
|
Non-current liabilities
|
|
|
(57,378
|
)
|
|
|
(75,840
|
)
|
|
|
(89,064
|
)
|
|
|
(86,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(57,795
|
)
|
|
$
|
(76,040
|
)
|
|
$
|
(95,899
|
)
|
|
$
|
(91,721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for all defined benefit
pension plans was $271.0 million and $289.2 million at
December 31, 2007 and 2006, respectively.
F-52
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The projected benefit obligation and accumulated benefit
obligation for the unfunded PBEP at December 31, 2007 and
2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Projected benefit obligation
|
|
$
|
6,233
|
|
|
$
|
5,287
|
|
Accumulated benefit obligation
|
|
$
|
4,063
|
|
|
$
|
3,323
|
|
Components
of Net Periodic Benefit Expense
The net periodic benefit expense of the pension plans for the
years ended December 31, 2007, 2006 and 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Service cost
|
|
$
|
14,209
|
|
|
$
|
13,281
|
|
|
$
|
5,050
|
|
Interest cost
|
|
|
17,741
|
|
|
|
16,717
|
|
|
|
6,406
|
|
Expected return on plan assets
|
|
|
(19,314
|
)
|
|
|
(19,203
|
)
|
|
|
(8,363
|
)
|
Amortization of unrecognized prior service cost
|
|
|
152
|
|
|
|
130
|
|
|
|
133
|
|
Settlement gain
|
|
|
(1,543
|
)
|
|
|
(982
|
)
|
|
|
|
|
Other adjustment
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
Amortization of unrecognized net loss
|
|
|
1,586
|
|
|
|
2,062
|
|
|
|
1,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense
|
|
$
|
12,825
|
|
|
$
|
12,005
|
|
|
$
|
4,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net periodic benefit expense of the postretirement plans for
the years ended December 31, 2007, 2006 and 2005 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Service cost
|
|
$
|
2,005
|
|
|
$
|
2,668
|
|
|
$
|
685
|
|
Interest cost
|
|
|
5,325
|
|
|
|
4,642
|
|
|
|
1,195
|
|
Other adjustment
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service cost
|
|
|
856
|
|
|
|
219
|
|
|
|
814
|
|
Amortization of unrecognized net loss
|
|
|
63
|
|
|
|
813
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense
|
|
$
|
8,243
|
|
|
$
|
8,342
|
|
|
$
|
2,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption
of SFAS No. 158
Upon the initial implementation of SFAS No. 158 at
December 31, 2006, we recorded all previously unrecognized
prior service costs and actuarial gains and losses as a
component of accumulated other comprehensive loss. The following
table presents the incremental effect of applying
SFAS No. 158 on individual line items in the
consolidated balance sheet as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
|
|
|
|
After
|
|
|
Application
|
|
SFAS No. 158
|
|
Application
|
|
|
of SFAS No. 158
|
|
Adjustment
|
|
of SFAS No. 158
|
|
Liability for pension and postretirement benefits
|
|
$
|
(155,380
|
)
|
|
$
|
(12,381
|
)
|
|
$
|
(167,761
|
)
|
Deferred income taxes
|
|
|
|
|
|
|
(5,145
|
)
|
|
|
|
|
Accumulated other comprehensive loss, net of tax
|
|
$
|
(9,871
|
)
|
|
$
|
(8,611
|
)
|
|
$
|
(18,482
|
)
|
F-53
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the amount of previously
unrecognized actuarial gains and losses and prior service cost,
both currently in accumulated other comprehensive loss, expected
to be recognized as net periodic benefit expense in 2008:
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
|
|
Plans
|
|
Plans
|
|
Previously unrecognized actuarial loss expected to be recognized
in 2008
|
|
$
|
828
|
|
|
$
|
36
|
|
Previously unrecognized prior service cost expected to be
recognized in 2008
|
|
$
|
196
|
|
|
$
|
666
|
|
Amounts recognized in accumulated other comprehensive loss at
December 31, 2007 and 2006 consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Plans
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Net actuarial loss (gain)
|
|
$
|
10,907
|
|
|
$
|
25,924
|
|
|
$
|
694
|
|
|
$
|
(355
|
)
|
Prior service cost
|
|
$
|
1,753
|
|
|
$
|
1,350
|
|
|
$
|
2,039
|
|
|
$
|
2,894
|
|
Assumptions
The following assumptions were used in determining the benefit
obligations for the pension plans and postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average discount rate
|
|
|
6.48
|
%
|
|
|
5.90
|
%
|
Rate of increase in future compensation
|
|
|
3.66
|
%
|
|
|
3.66
|
%
|
The discount rate reflects the current rate at which the pension
and postretirement obligations could effectively be settled at
the end of the year. During 2007 and 2006, we utilized the
Citigroup Pension Liability Index (the 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 cash
flows using this single rate equaled the present value computed
using the Citigroup Pension Discount Curve.
The following assumptions were used in determining the net
periodic benefit expense for the RHD pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Weighted average discount rate
|
|
|
5.90
|
%
|
|
|
5.50
|
%
|
|
|
5.75
|
%
|
Rate of increase in future compensation
|
|
|
3.66
|
%
|
|
|
3.66
|
%
|
|
|
3.66
|
%
|
Expected return on plan assets
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
The following assumptions were used in determining the net
periodic benefit expense for the Dex Media pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006
|
|
|
February 1, 2006
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
|
2007
|
|
|
December 31, 2006
|
|
|
June 30, 2006
|
|
|
Weighted average discount rate
|
|
|
5.90
|
%
|
|
|
6.25
|
%
|
|
|
5.50
|
%
|
Rate of increase in future compensation
|
|
|
3.66
|
%
|
|
|
3.66
|
%
|
|
|
3.66
|
%
|
Expected return on plan assets
|
|
|
8.50
|
%
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
F-54
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On December 1, 2007 and July 1, 2006 and thereafter,
settlements of Dex Medias pension plan occurred as defined
by SFAS No. 88,
Employers Accounting
for Settlements and Curtailments of Defined Benefit Plans and
for Termination Benefits
. At that time, lump sum
payments to participants exceeded the sum of the service cost
plus interest cost component of the net periodic benefit costs
for the year. These settlements resulted in the recognition of
actuarial gains of $1.5 million and $1.0 million for
the years ended December 31, 2007 and 2006, respectively.
Pension expense in 2006 was recomputed based on assumptions as
of the July 1, 2006 settlement date, resulting in an
increase in the discount rate from 5.50% to 6.25% based on the
Index.
The weighted average discount rate used to determine the net
periodic expense for the RHD postretirement plan was 5.90%,
5.50% and 5.75% for 2007, 2006 and 2005, respectively. The
weighted average discount rate used to determine net periodic
expense for the Dex Media postretirement plan was 5.90% and
5.50% for 2007 and 2006, respectively.
The following table reflects assumed healthcare cost trend rates
used in determining the net periodic benefit expense for our
postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Healthcare cost trend rate assumed for next year
|
|
|
|
|
|
|
|
|
Under 65
|
|
|
9.0
|
%
|
|
|
10.0
|
%
|
65 and older
|
|
|
11.0
|
%
|
|
|
12.0
|
%
|
Rate to which the cost trend rate is assumed to decline
|
|
|
|
|
|
|
|
|
Under 65
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
65 and older
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Year ultimate trend rate is reached
|
|
|
2013
|
|
|
|
2013
|
|
The following table reflects assumed healthcare cost trend rates
used in determining the benefit obligations for our
postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Healthcare cost trend rates assumed for next year
|
|
|
|
|
|
|
|
|
Under 65
|
|
|
10.4%-11.0
|
%
|
|
|
10.0
|
%
|
65 and older
|
|
|
11.4%-13.0
|
%
|
|
|
12.0
|
%
|
Rate to which the cost trend rate is assumed to decline
|
|
|
|
|
|
|
|
|
Under 65
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
65 and older
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Years ultimate trend rates are reached
|
|
|
2014-2016
|
|
|
|
2013
|
|
Assumed healthcare cost trend rates have a significant effect on
the amounts reported for postretirement benefit plans. A
one-percent change in the assumed healthcare cost trend rate
would have had the following effects at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
One Percent Change
|
|
|
|
Increase
|
|
|
Decrease
|
|
|
Effect on the aggregate of the service and interest cost
components of net periodic postretirement benefit cost
(Consolidated Statement of Operations)
|
|
$
|
446
|
|
|
$
|
(373
|
)
|
Effect on accumulated postretirement benefit obligation
(Consolidated Balance Sheet)
|
|
$
|
4,769
|
|
|
$
|
(4,078
|
)
|
F-55
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Plan
Assets
The pension plan weighted-average asset allocation at
December 31, 2007, by asset category, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RHD Plan
|
|
|
Dex Media Plan
|
|
|
|
Plan Assets at
|
|
|
Asset
|
|
|
Plan Assets at
|
|
|
Asset
|
|
|
|
December 31,
|
|
|
Allocation
|
|
|
December 31,
|
|
|
Allocation
|
|
|
|
2007
|
|
|
Target
|
|
|
2007
|
|
|
Target
|
|
|
Equity securities
|
|
|
64
|
%
|
|
|
65
|
%
|
|
|
64
|
%
|
|
|
65
|
%
|
Debt securities
|
|
|
36
|
%
|
|
|
35
|
%
|
|
|
36
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pension plan weighted-average asset allocation at
December 31, 2006, by asset category, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RHD Plans
|
|
|
Dex Media Plan
|
|
|
|
Plan Assets at
|
|
|
Asset
|
|
|
Plan Assets at
|
|
|
Asset
|
|
|
|
December 31,
|
|
|
Allocation
|
|
|
December 31,
|
|
|
Allocation
|
|
|
|
2006
|
|
|
Target
|
|
|
2006
|
|
|
Target
|
|
|
Equity securities
|
|
|
67
|
%
|
|
|
65
|
%
|
|
|
66
|
%
|
|
|
65
|
%
|
Debt securities
|
|
|
33
|
%
|
|
|
35
|
%
|
|
|
34
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The plans assets are invested in accordance with
investment practices that emphasize long-term investment
fundamentals. The plans investment objective is to achieve
a positive rate of return over the long-term from capital
appreciation and a growing stream of current income that would
significantly contribute to meeting the plans current and
future obligations. These objectives can be obtained through a
well-diversified portfolio structure in a manner consistent with
each plans investment policy statement.
The plans assets are invested in marketable equity and
fixed income securities managed by professional investment
managers. Plan assets are invested using a combination of active
and passive (indexed) investment strategies. The plans
assets are to be broadly diversified by asset class, investment
style, number of issues, issue type and other factors consistent
with the investment objectives outlined in each plans
investment policy statement. The plans assets are to be
invested with prudent levels of risk and with the expectation
that long-term returns will maintain and contribute to
increasing purchasing power of the plans assets, net of
all disbursements, over the long-term.
The plans assets in separately managed accounts may not be
used for the following purposes: short sales, purchases of
letter stock, private placements, leveraged transactions,
commodities transactions, option strategies, purchases of Real
Estate Investment Trusts, investments in some limited
partnerships, investments by the managers in their own
securities, their affiliates or subsidiaries, investment in
futures, use of margin or investments in any derivative not
explicitly permitted in each plans investment policy
statement.
For 2007, 2006 and 2005, we used a rate of 8.25% as the expected
long-term rate of return assumption on the plan assets for the
RHD pension plans. The basis used for determining this rate was
the long-term capital market return forecasts for an asset mix
similar to the plans asset allocation target of 65% equity
securities and 35% debt securities. For 2007 and 2006, we used a
rate of 8.50% and 9.00%, respectively, as the expected long-term
rate of return assumption on the plan assets for the Dex Media
pension plan. The basis used for determining these rates also
included an opportunity for active management of the assets to
add value over the long term. The active management expectation
was supported by calculating historical returns for the seven
investment managers who actively manage the Dex Media
plans assets. The decrease in the rate for
F-56
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2007 was a result of increasing the debt securities portion of
the asset mix held by the Dex Media pension plan.
Although we review our expected long-term rate of return
assumption annually, our performance in any one particular year
does not, by itself, significantly influence our evaluation. Our
assumption is generally not revised unless there is a
fundamental change in one of the factors upon which it is based,
such as the target asset allocation or long-term capital market
return forecasts.
Estimated
Future Benefit Payments
The pension plans benefits and postretirement plans benefits
expected to be paid in each of the next five fiscal years and in
the aggregate for the five fiscal years thereafter are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
Part D
|
|
|
|
Plans
|
|
|
Plans
|
|
|
Subsidy
|
|
|
2008
|
|
$
|
25,208
|
|
|
$
|
6,835
|
|
|
$
|
68
|
|
2009
|
|
|
25,288
|
|
|
|
7,407
|
|
|
|
90
|
|
2010
|
|
|
26,006
|
|
|
|
8,068
|
|
|
|
111
|
|
2011
|
|
|
25,839
|
|
|
|
8,598
|
|
|
|
136
|
|
2012
|
|
|
25,914
|
|
|
|
8,930
|
|
|
|
164
|
|
Years
2013-2017
|
|
|
141,564
|
|
|
|
46,186
|
|
|
|
1,173
|
|
We expect to make contributions of approximately
$15.8 million and $6.8 million to our pension plans
and postretirement plan, respectively, in 2008.
Additional
Information and Subsequent Events
On August 17, 2006, the Pension Protection Act of 2006 (the
Act) was signed into law. In general, the Act
requires that all single-employer defined benefit plans be fully
funded within a seven year period, beginning in 2008. Some
provisions of the Act were effective January 1, 2006,
however, most of the new provisions are effective
January 1, 2008. The Act replaces the prior rules for
funding with a new standard that is based on the plans
funded status. Funding must be determined using specified
interest rates and a specified mortality assumption. At this
time, we do not expect the adoption of the new requirements to
have a material impact on the plans liabilities. However,
the funding requirements under the Act will be greater than
under the previous rules.
Effective January 1, 2008, the DonTech PBEP was merged with
and into the RHD PBEP and was amended. The merger of these plans
streamlines RHDs administrative processes.
We lease office facilities and equipment under operating leases
with non-cancelable lease terms expiring at various dates
through 2017. Rent and lease expense for 2007, 2006 and 2005 was
$26.4 million,
F-57
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$25.3 million and $10.0 million, respectively. The
future non-cancelable minimum rental payments applicable to
operating leases at December 31, 2007 are:
|
|
|
|
|
2008
|
|
$
|
25,977
|
|
2009
|
|
|
26,833
|
|
2010
|
|
|
23,617
|
|
2011
|
|
|
21,017
|
|
2012
|
|
|
17,160
|
|
Thereafter
|
|
|
74,546
|
|
|
|
|
|
|
Total
|
|
$
|
189,150
|
|
|
|
|
|
|
In connection with the AT&T Directory Acquisition, we
entered into an Internet Yellow Pages reseller agreement whereby
we are obligated to pay AT&T $7.2 million over the
years 2008 and 2009. In connection with our software system
modernization and on-going support services related to the
Amdocs software system, we are obligated to pay Amdocs
$128.2 million over the years 2008 through 2012. In
conjunction with the Dex Media Merger, we are obligated to pay
Qwest approximately $8.3 million over the years 2008 and
2009 for certain information technology, communications and
billing and collection services. We have entered into agreements
with Yahoo!, whereby Yahoo! will serve and maintain our local
search listings for placement on its web-based electronic local
information directory and electronic mapping products. We are
obligated to pay Yahoo! up to $18.8 million over the years
2008 through 2010.
We are involved in various legal proceedings arising in the
ordinary course of our business, as well as certain litigation
and tax matters. In many of these matters, plaintiffs allege
that they have suffered damages from errors or omissions in
their advertising or improper listings, in each case, contained
in directories published by us.
We are also exposed to potential defamation and breach of
privacy claims arising from our publication of directories and
our methods of collecting, processing and using advertiser and
telephone subscriber data. If such data were determined to be
inaccurate or if data stored by us were improperly accessed and
disseminated by us or by unauthorized persons, the subjects of
our data and users of the data we collect and publish could
submit claims against the Company. Although to date we have not
experienced any material claims relating to defamation or breach
of privacy, we may be party to such proceedings in the future
that could have a material adverse effect on our business.
We periodically assess our liabilities and contingencies in
connection with these matters based upon the latest information
available to us. For those matters where it is probable that we
have incurred a loss and the loss or range of loss can be
reasonably estimated, we record a liability in our consolidated
financial statements. In other instances, we are unable to make
a reasonable estimate of any liability because of the
uncertainties related to both the probable outcome and amount or
range of loss. As additional information becomes available, we
adjust our assessment and estimates of such liabilities
accordingly.
Based on our review of the latest information available, we
believe our ultimate liability in connection with pending or
threatened legal proceedings will not have a material adverse
effect on our results of operations, cash flows or financial
position. No material amounts have been accrued in our
consolidated financial statements with respect to any of such
matters.
F-58
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Management reviews and analyzes its business of providing local
commercial search products and solutions, including publishing
yellow pages directories, as one operating segment.
|
|
14.
|
R.H.
Donnelley Corporation (Parent Company) Financial
Statements
|
The following condensed Parent Company financial statements
should be read in conjunction with the consolidated financial
statements of RHD.
In general, substantially all of the net assets of the Company
and its subsidiaries are restricted from being paid as dividends
to any third party, and our subsidiaries are restricted from
paying dividends, loans or advances to us with very limited
exceptions, under the terms of our credit facilities. See
Note 5, Long-Term Debt, Credit Facilities and
Notes, for a further description of our debt instruments.
F-59
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
R.H.
Donnelley Corporation
Condensed
Parent Company Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,900
|
|
|
$
|
122,565
|
|
Intercompany, net
|
|
|
279,244
|
|
|
|
|
|
Prepaid and other current assets
|
|
|
8,948
|
|
|
|
9,485
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
307,092
|
|
|
|
132,050
|
|
Investment in subsidiaries
|
|
|
5,231,597
|
|
|
|
4,507,776
|
|
Fixed assets and computer software, net
|
|
|
10,462
|
|
|
|
7,258
|
|
Other non-current assets
|
|
|
91,506
|
|
|
|
148,066
|
|
Intercompany note receivable
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,940,657
|
|
|
$
|
4,795,150
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
14,032
|
|
|
$
|
8,483
|
|
Accrued interest
|
|
|
123,882
|
|
|
|
90,971
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
137,914
|
|
|
|
99,454
|
|
Intercompany, net
|
|
|
|
|
|
|
413,098
|
|
Long-term debt
|
|
|
3,962,871
|
|
|
|
2,451,873
|
|
Deferred income taxes, net
|
|
|
5,161
|
|
|
|
|
|
Other long-term liabilities
|
|
|
11,975
|
|
|
|
9,969
|
|
Shareholders equity
|
|
|
1,822,736
|
|
|
|
1,820,756
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
5,940,657
|
|
|
$
|
4,795,150
|
|
|
|
|
|
|
|
|
|
|
F-60
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
R.H.
Donnelley Corporation
Condensed
Parent Company Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expenses
|
|
$
|
19,678
|
|
|
$
|
1,641
|
|
|
$
|
38
|
|
Partnership and equity income (loss)
|
|
|
338,606
|
|
|
|
(125,677
|
)
|
|
|
131,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
318,928
|
|
|
|
(127,318
|
)
|
|
|
131,343
|
|
Interest expense, net
|
|
|
(244,854
|
)
|
|
|
(194,911
|
)
|
|
|
(20,634
|
)
|
Other income
|
|
|
1,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
75,892
|
|
|
|
(322,229
|
)
|
|
|
110,709
|
|
Provision (benefit) for income taxes
|
|
|
29,033
|
|
|
|
(84,525
|
)
|
|
|
43,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
46,859
|
|
|
|
(237,704
|
)
|
|
|
67,533
|
|
Preferred dividend
|
|
|
|
|
|
|
1,974
|
|
|
|
11,708
|
|
(Gain) loss on repurchase of redeemable convertible preferred
stock
|
|
|
|
|
|
|
(31,195
|
)
|
|
|
133,681
|
|
Accretion of redeemable convertible preferred stock to
redemption value
|
|
|
|
|
|
|
|
|
|
|
211,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders
|
|
$
|
46,859
|
|
|
$
|
(208,483
|
)
|
|
$
|
(288,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-61
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
R.H.
Donnelley Corporation
Condensed
Parent Company Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flow from operating activities
|
|
$
|
(220,262
|
)
|
|
$
|
37,777
|
|
|
$
|
(11,219
|
)
|
Cash flow from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to fixed assets and computer software
|
|
|
(4,095
|
)
|
|
|
(6,389
|
)
|
|
|
|
|
Acquisitions, net of cash received
|
|
|
(336,925
|
)
|
|
|
(1,768,626
|
)
|
|
|
(6,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(341,020
|
)
|
|
|
(1,775,015
|
)
|
|
|
(6,450
|
)
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt, net of costs
|
|
|
1,468,648
|
|
|
|
2,079,005
|
|
|
|
293,439
|
|
Borrowings under credit facility
|
|
|
328,000
|
|
|
|
|
|
|
|
|
|
Credit facility repayments
|
|
|
(328,000
|
)
|
|
|
|
|
|
|
|
|
Repurchase of redeemable convertible preferred stock and
redemption of purchase rights
|
|
|
|
|
|
|
(336,819
|
)
|
|
|
(277,197
|
)
|
(Decrease) increase in checks not yet presented for payment
|
|
|
(408
|
)
|
|
|
505
|
|
|
|
|
|
Proceeds from employee stock option exercises
|
|
|
13,412
|
|
|
|
31,665
|
|
|
|
7,383
|
|
Proceeds from the issuance of common stock
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(89,578
|
)
|
|
|
|
|
|
|
|
|
Repurchase of warrants
|
|
|
|
|
|
|
(53,128
|
)
|
|
|
|
|
Intercompany investments
|
|
|
(907,735
|
)
|
|
|
|
|
|
|
|
|
Intercompany debt
|
|
|
(300,000
|
)
|
|
|
|
|
|
|
(5,126
|
)
|
Dividends from subsidiaries
|
|
|
264,278
|
|
|
|
137,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
457,617
|
|
|
|
1,858,973
|
|
|
|
18,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash
|
|
|
(103,665
|
)
|
|
|
121,735
|
|
|
|
830
|
|
Cash at beginning of year
|
|
|
122,565
|
|
|
|
830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
18,900
|
|
|
$
|
122,565
|
|
|
$
|
830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-62
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
15.
|
Valuation
and Qualifying Accounts
|
Certain prior period amounts have been reclassified to conform
to the current periods presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Addition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to Allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business.com
|
|
|
Net Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Acquisition
|
|
|
Charged to
|
|
|
Write-offs
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
and Dex
|
|
|
Revenue and
|
|
|
and Other
|
|
|
End of
|
|
|
|
Period
|
|
|
Media Merger
|
|
|
Expense
|
|
|
Deductions
|
|
|
Period
|
|
|
Allowance for Doubtful Accounts and Sales Claims
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007
|
|
$
|
42,952
|
|
|
|
449
|
|
|
|
135,726
|
|
|
|
(136,310
|
)
|
|
$
|
42,817
|
|
For the year ended December 31, 2006
|
|
$
|
27,328
|
|
|
|
57,353
|
|
|
|
116,330
|
|
|
|
(158,059
|
)
|
|
$
|
42,952
|
|
For the year ended December 31, 2005
|
|
$
|
33,093
|
|
|
|
|
|
|
|
54,921
|
|
|
|
(60,686
|
)
|
|
$
|
27,328
|
|
Deferred Tax Asset Valuation Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007
|
|
$
|
5,978
|
|
|
|
|
|
|
|
7,748
|
|
|
|
|
|
|
$
|
13,726
|
|
For the year ended December 31, 2006
|
|
$
|
6,148
|
|
|
|
|
|
|
|
|
|
|
|
(170
|
)
|
|
$
|
5,978
|
|
For the year ended December 31, 2005
|
|
$
|
6,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,148
|
|
|
|
16.
|
Quarterly
Information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
(1)
|
|
$
|
661,296
|
|
|
$
|
667,028
|
|
|
$
|
671,195
|
|
|
$
|
680,780
|
|
Operating income
|
|
|
227,978
|
|
|
|
239,163
|
|
|
|
237,470
|
|
|
|
200,355
|
|
Net income (loss)
|
|
|
15,951
|
|
|
|
24,923
|
|
|
|
18,125
|
|
|
$
|
(12,140
|
)
|
Basic earnings (loss) per share
|
|
$
|
0.23
|
|
|
$
|
0.35
|
|
|
$
|
0.25
|
|
|
$
|
(0.17
|
)
|
Diluted earnings (loss) per share
|
|
$
|
0.22
|
|
|
$
|
0.34
|
|
|
$
|
0.25
|
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
(1)(2)
|
|
$
|
320,680
|
|
|
$
|
432,925
|
|
|
$
|
525,938
|
|
|
$
|
619,754
|
|
Operating
income
(3)
|
|
|
38,067
|
|
|
|
73,395
|
|
|
|
144,587
|
|
|
|
186,777
|
|
Net loss
|
|
|
(71,718
|
)
|
|
|
(79,827
|
)
|
|
|
(35,385
|
)
|
|
|
(50,774
|
)
|
Preferred
dividend
(4)
|
|
|
1,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on repurchase of preferred
stock
(4)
|
|
|
(31,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common shareholders
|
|
|
(42,497
|
)
|
|
|
(79,827
|
)
|
|
|
(35,385
|
)
|
|
|
(50,774
|
)
|
Basic and diluted loss per share
|
|
$
|
(0.76
|
)
|
|
$
|
(1.15
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.72
|
)
|
|
|
|
(1)
|
|
Adjustments for customer claims have been reclassified to net
revenue during 2007 and 2006. See Note 1, Business
and Presentation, for additional information regarding
this reclassification.
|
|
(2)
|
|
Revenue from the sale of advertising is recognized under the
deferral and amortization method, whereby revenue from
advertising sales is initially deferred when a directory is
published and recognized ratably over the life of the directory.
Due to purchase accounting rules, we were not able to recognize
any revenue from directories published by the Dex Media Business
or the AT&T Directory Business prior to each acquisition or
for any directories published in the months the acquisitions
were completed.
|
F-63
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Concluded)
|
|
|
(3)
|
|
Similar to the deferral and amortization method of revenue
recognition, certain costs directly related to the selling and
production of directories are initially deferred and recognized
ratably over the life of the directory. Due to purchase
accounting rules, we were not able to recognize any expenses
from directories published by the Dex Media Business or the
AT&T Directory Business prior to each acquisition or for
any directories published in the months the acquisitions were
completed.
|
|
(4)
|
|
On January 27, 2006, we repurchased the remaining
100,301 shares of our outstanding Preferred Stock from the
GS Funds for $336.1 million in cash, including accrued cash
dividends and interest pursuant to the terms of the Stock
Purchase Agreement. Based on the terms of the Stock Purchase
Agreement, the repurchase of the Preferred Stock became a
probable event on October 3, 2005, requiring the recorded
value of the Preferred Stock to be accreted to its redemption
value of $334.1 million at December 31, 2005, and as a
result of the GS Repurchase, $336.1 million at
January 27, 2006. The accretion to redemption value of
$2.0 million (which represented accrued dividends and
interest) for the quarter ended March 31, 2006 has been
recorded as an increase to loss available to common shareholders
on the consolidated statement of operations. In conjunction with
the GS Repurchase, we also reversed the previously recorded BCF
related to these shares and recorded a decrease to loss
available to common shareholders on the consolidated statement
of operations of approximately $31.2 million for the
quarter ended March 31, 2006.
|
F-64
R.H.
Donnelley Corporation and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
29,901
|
|
|
$
|
46,076
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
Billed
|
|
|
249,981
|
|
|
|
258,839
|
|
Unbilled
|
|
|
892,500
|
|
|
|
847,446
|
|
Allowance for doubtful accounts and sales claims
|
|
|
(43,129
|
)
|
|
|
(42,817
|
)
|
|
|
|
|
|
|
|
|
|
Net accounts receivable
|
|
|
1,099,352
|
|
|
|
1,063,468
|
|
Deferred directory costs
|
|
|
193,674
|
|
|
|
183,687
|
|
Short-term deferred income taxes, net
|
|
|
60,989
|
|
|
|
47,759
|
|
Prepaid expenses and other current assets
|
|
|
88,452
|
|
|
|
126,201
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,472,368
|
|
|
|
1,467,191
|
|
Fixed assets and computer software, net
|
|
|
182,251
|
|
|
|
187,680
|
|
Other non-current assets
|
|
|
137,514
|
|
|
|
139,406
|
|
Intangible assets, net
|
|
|
11,066,523
|
|
|
|
11,170,482
|
|
Goodwill
|
|
|
660,239
|
|
|
|
3,124,334
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
13,518,895
|
|
|
$
|
16,089,093
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
217,451
|
|
|
$
|
230,693
|
|
Accrued interest
|
|
|
156,900
|
|
|
|
198,828
|
|
Deferred directory revenues
|
|
|
1,198,459
|
|
|
|
1,172,035
|
|
Current portion of long-term debt
|
|
|
186,343
|
|
|
|
177,175
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,759,153
|
|
|
|
1,778,731
|
|
Long-term debt
|
|
|
9,894,503
|
|
|
|
9,998,474
|
|
Deferred income taxes, net
|
|
|
1,471,905
|
|
|
|
2,288,384
|
|
Other non-current liabilities
|
|
|
210,330
|
|
|
|
200,768
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
13,335,891
|
|
|
|
14,266,357
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Common stock, par value $1 per share, authorized
400,000,000 shares; issued 88,169,275 shares at
March 31, 2008 and December 31, 2007; outstanding
68,788,331 shares and 68,758,026 shares at
March 31, 2008 and December 31, 2007, respectively
|
|
|
88,169
|
|
|
|
88,169
|
|
Additional paid-in capital
|
|
|
2,412,878
|
|
|
|
2,402,181
|
|
Accumulated deficit
|
|
|
(2,008,651
|
)
|
|
|
(385,540
|
)
|
Treasury stock, at cost, 19,380,944 shares at
March 31, 2008 and 19,411,249 shares at
December 31, 2007
|
|
|
(256,296
|
)
|
|
|
(256,334
|
)
|
Accumulated other comprehensive loss
|
|
|
(53,096
|
)
|
|
|
(25,740
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
183,004
|
|
|
|
1,822,736
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
13,518,895
|
|
|
$
|
16,089,093
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
F-65
R.H.
Donnelley Corporation and Subsidiaries
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenues
|
|
$
|
674,654
|
|
|
$
|
661,296
|
|
Expenses
|
|
|
|
|
|
|
|
|
Production, publication and distribution expenses (exclusive of
depreciation and amortization shown separately below)
|
|
|
109,177
|
|
|
|
114,621
|
|
Selling and support expenses
|
|
|
186,316
|
|
|
|
178,236
|
|
General and administrative expenses
|
|
|
34,889
|
|
|
|
37,431
|
|
Depreciation and amortization
|
|
|
118,263
|
|
|
|
103,030
|
|
Goodwill impairment
|
|
|
2,463,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2,912,260
|
|
|
|
433,318
|
|
Operating (loss) income
|
|
|
(2,237,606
|
)
|
|
|
227,978
|
|
Interest expense, net
|
|
|
(195,874
|
)
|
|
|
(201,615
|
)
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(2,433,480
|
)
|
|
|
26,363
|
|
Benefit (provision) for income taxes
|
|
|
810,369
|
|
|
|
(10,412
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,623,111
|
)
|
|
$
|
15,951
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(23.60
|
)
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(23.60
|
)
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing (loss) earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
68,778
|
|
|
|
70,663
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
68,778
|
|
|
|
72,003
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (Loss) Income
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,623,111
|
)
|
|
$
|
15,951
|
|
Unrealized loss on interest rate swaps, net of tax
|
|
|
(27,610
|
)
|
|
|
(5,629
|
)
|
Benefit plans adjustment, net of tax
|
|
|
254
|
|
|
|
314
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(1,650,467
|
)
|
|
$
|
10,636
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
F-66
R.H.
Donnelley Corporation and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,623,111
|
)
|
|
$
|
15,951
|
|
Reconciliation of net (loss) income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
2,463,615
|
|
|
|
|
|
Depreciation and amortization
|
|
|
118,263
|
|
|
|
103,030
|
|
Deferred income tax (benefit) provision
|
|
|
(812,114
|
)
|
|
|
10,207
|
|
Provision for bad debts
|
|
|
29,782
|
|
|
|
21,009
|
|
Stock based compensation expense
|
|
|
10,816
|
|
|
|
13,938
|
|
Other non-cash items, net
|
|
|
(8,414
|
)
|
|
|
11,383
|
|
Changes in assets and liabilities, net of effects from
acquisitions:
|
|
|
|
|
|
|
|
|
(Increase) in accounts receivable
|
|
|
(65,666
|
)
|
|
|
(58,054
|
)
|
Decrease in other assets
|
|
|
21,622
|
|
|
|
31,487
|
|
(Decrease) in accounts payable and accrued liabilities
|
|
|
(52,918
|
)
|
|
|
(56,453
|
)
|
Increase in deferred directory revenues
|
|
|
26,424
|
|
|
|
43,086
|
|
(Decrease) increase in other non-current liabilities
|
|
|
(8,363
|
)
|
|
|
8,168
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
99,936
|
|
|
|
143,752
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Additions to fixed assets and computer software
|
|
|
(10,118
|
)
|
|
|
(13,120
|
)
|
Equity investment disposition (investment)
|
|
|
4,318
|
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(5,800
|
)
|
|
|
(15,620
|
)
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Credit facilities repayments and note repurchases
|
|
|
(91,418
|
)
|
|
|
(193,528
|
)
|
Revolver borrowings
|
|
|
215,300
|
|
|
|
207,250
|
|
Revolver repayments
|
|
|
(232,350
|
)
|
|
|
(226,350
|
)
|
Repurchase of common stock
|
|
|
(6,112
|
)
|
|
|
|
|
Increase (decrease) in checks not yet presented for payment
|
|
|
4,180
|
|
|
|
(6,203
|
)
|
Proceeds from employee stock option exercises
|
|
|
89
|
|
|
|
9,111
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(110,311
|
)
|
|
|
(209,720
|
)
|
Decrease in cash and cash equivalents
|
|
|
(16,175
|
)
|
|
|
(81,588
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
46,076
|
|
|
|
156,249
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
29,901
|
|
|
$
|
74,661
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information:
|
|
|
|
|
|
|
|
|
Cash paid:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
214,322
|
|
|
$
|
217,221
|
|
|
|
|
|
|
|
|
|
|
Income taxes, net
|
|
$
|
551
|
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
F-67
R.H.
Donnelley Corporation and Subsidiaries
(tabular amounts in thousands, except share and per share
data)
|
|
1.
|
Business
and Basis of Presentation
|
The interim condensed consolidated financial statements of R.H.
Donnelley Corporation and its direct and indirect wholly-owned
subsidiaries (the Company, RHD,
we, us and our) have been
prepared in accordance with the instructions to Quarterly Report
on
Form 10-Q
and should be read in conjunction with the financial statements
and related notes included in our Annual Report on
Form 10-K
for the year ended December 31, 2007. The interim condensed
consolidated financial statements include the accounts of RHD
and its direct and indirect wholly-owned subsidiaries. As of
March 31, 2008, R.H. Donnelley Inc. (RHDI), Dex
Media, Inc. (Dex Media) and Business.com, Inc.
(Business.com) were our only direct wholly-owned
subsidiaries. Effective January 1, 2008, Local Launch, Inc.
(Local Launch), a former direct wholly-owned
subsidiary of RHD, was merged with and into Business.com. All
intercompany transactions and balances have been eliminated. The
results of interim periods are not necessarily indicative of
results for the full year or any subsequent period. In the
opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair statement
of financial position, results of operations and cash flows at
the dates and for the periods presented have been included.
We are one of the nations largest Yellow Pages and online
local commercial search companies, based on revenues, with 2007
revenues of approximately $2.7 billion. We publish and
distribute advertiser content utilizing our own Dex brand and
three of the most highly recognizable brands in the industry,
Qwest, Embarq and AT&T. 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. During 2007, we published and
distributed print directories in many of the countrys most
attractive markets including Albuquerque, Chicago, Denver, Las
Vegas, Orlando and Phoenix.
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 periods 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 periods
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Reclass
|
|
|
Reclassified
|
|
|
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
|
|
F-68
R.H. Donnelley Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
In addition, certain prior period amounts included in the
condensed consolidated statement of cash flows have been
reclassified to conform to the current periods
presentation.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Identifiable
Intangible Assets and Goodwill
In connection with the Companys prior business
combinations, certain long-term intangible assets were
identified in accordance with Statement of Financial Accounting
Standards (SFAS) No. 141,
Business
Combinations
(SFAS No. 141) and
recorded at their estimated fair values. In accordance with
SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142), the fair values of the
identifiable intangible assets are being amortized over their
estimated useful lives in a manner that best reflects the
economic benefit derived from such assets. Goodwill is not
amortized but is subject to impairment testing on an annual
basis or more frequently if we believe indicators of impairment
exist. Amortization expense was $104.0 million and
$89.8 million for the three months ended March 31,
2008 and 2007, respectively.
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,
Accounting
for the Impairment or Disposal of Long-Lived Assets
(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 the fair value of the
Company with the carrying amount of its assets and liabilities,
including goodwill. The fair value of the Company 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 the Companys
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 for the Company using a discount
rate that results in the present value of assets and liabilities
equal to the current fair value of the Companys 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.
In addition to the non-cash goodwill impairment charge, we
recognized a change in goodwill of $0.5 million related to
the Business.com Acquisition (defined in Note 3,
Acquisitions) 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
the assets and liabilities of the Company 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.
F-69
R.H. Donnelley Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
Interest
Expense and Deferred Financing Costs
Certain costs associated with the issuance of debt instruments
are capitalized and included in other non-current assets on the
condensed consolidated balance sheets. These costs are amortized
to interest expense over the terms of the related debt
agreements. The bond outstanding method is used to amortize
deferred financing costs relating to debt instruments with
respect to which we make accelerated principal payments. Other
deferred financing costs are amortized using the effective
interest method. Amortization of deferred financing costs
included in interest expense was $5.4 million and
$6.8 million for the three months ended March 31, 2008
and 2007, respectively. Apart from business combinations, it is
the Companys policy to recognize losses incurred in
conjunction with debt extinguishments as a component of interest
expense. In conjunction with our acquisition of Dex Media on
January 31, 2006 (the Dex Media Merger) and as
a result of purchase accounting required under generally
accepted accounting principles (GAAP), we recorded
Dex Medias debt at its fair value on January 31,
2006. We recognize an offset to interest expense in each period
subsequent to the Dex Media Merger 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.
Advertising
Expense
We recognize advertising expenses as incurred. These expenses
include media, public relations, promotional and sponsorship
costs and on-line advertising. Total advertising expense was
$16.7 million and $7.6 million for the three months
ended March 31, 2008 and 2007, respectively. Total
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 three months ended
March 31, 2007.
Concentration
of Credit Risk
Approximately 85% of our directory advertising revenues are
derived from the sale of advertising to local small- and
medium-sized businesses. Most new advertisers and advertisers
desiring to expand their advertising programs are subject to a
credit review. While we do not believe that extending credit to
our local advertisers will have a material adverse effect on our
results of operations or financial condition, no assurances can
be given. During the three months ended March 31, 2008, we
experienced adverse bad debt trends attributable to economic
challenges in our markets. We do not require collateral from our
advertisers, although we do charge interest to advertisers that
do not pay by specified due dates. The remaining approximately
15% of our directory advertising revenues are derived from the
sale of advertising to national or large regional chains.
Substantially all of the revenues derived through national
accounts are serviced through certified marketing
representatives (CMRs) from which we accept orders.
We receive payment for the value of advertising placed in our
directories, net of the CMRs commission, directly from the
CMR. While we are still exposed to credit risk, the amount of
losses from these accounts has been historically less than the
local accounts as the advertisers, and in some cases the CMRs,
tend to be larger companies with greater financial resources
than local advertisers.
At March 31, 2008, we had interest rate swap agreements
with major financial institutions with a notional value of
$2.7 billion. We are exposed to credit risk in the event
that one or more of the counterparties to the agreements does
not, or cannot, meet their obligation. The notional amount is
used to measure interest to be paid or received and does not
represent the amount of exposure to credit loss. Any loss would
be limited to the amount that would have been received over the
remaining life of the swap agreement. The counterparties to the
swap agreements are major financial institutions with credit
ratings of AA- or higher. We do not currently foresee a material
credit risk associated with these swap agreements; however, no
assurances can be given.
F-70
R.H. Donnelley Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
|
|
(Loss)
|
Earnings
Per Share
|
We account for (loss) earnings per share (EPS) in
accordance with SFAS No. 128,
Earnings Per Share
(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
(SARs) and restricted stock, the dilutive effect of
which is calculated using the treasury stock method.
The calculation of basic and diluted EPS is presented below.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,623,111
|
)
|
|
$
|
15,951
|
|
Weighted average common shares outstanding
|
|
|
68,778
|
|
|
|
70,663
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(23.60
|
)
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,623,111
|
)
|
|
|
15,951
|
|
Weighted average common shares outstanding
|
|
|
68,778
|
|
|
|
70,663
|
|
Dilutive effect of stock awards(1)
|
|
|
|
|
|
|
1,340
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
68,778
|
|
|
|
72,003
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(23.60
|
)
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Due to the reported net loss for the three months ended
March 31, 2008, the effect of all stock-based awards was
anti-dilutive and therefore not included in the calculation of
diluted EPS. For the three months ended March 31, 2008 and
2007, 6.1 million and 1.1 million shares,
respectively, of stock-based awards had exercise prices that
exceeded the average market price of the Companys common
stock for the respective period.
|
Stock-Based
Awards
We account for stock-based compensation under
SFAS No. 123(R),
Share-Based Payment
(SFAS No. 123(R)). The Company
recorded stock-based compensation expense related to stock-based
awards granted under our various employee and non-employee stock
incentive plans of $10.8 million and $13.9 million for
the three months ended March 31, 2008 and 2007,
respectively.
On March 4, 2008, the Company granted 2.2 million SARs
to certain employees, including executive officers, in
conjunction with its annual grant of stock incentive awards.
These SARs, which are settled in our common stock, were granted
at a grant price of $7.11 per share, which was equal to the
market value of the Companys common stock on the grant
date, and vest ratably over three years. In accordance with
SFAS No. 123(R), we recognized non-cash compensation
expense related to these SARs of $3.0 million for the three
months ended March 31, 2008.
F-71
R.H. Donnelley Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
Fair
Value of Financial Instruments
In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 157,
Fair Value
Measurements
(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 impact our
consolidated financial position and results of operations. In
accordance with SFAS No. 157, the following table
represents our assets and liabilities that are measured at fair
value on a recurring basis at March 31, 2008 and the level
within the fair value hierarchy in which the fair value
measurements are included.
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
March 31, 2008
|
|
|
|
Using Significant Other
|
|
Description
|
|
Observable Inputs (Level 2)
|
|
|
Derivatives Assets
|
|
$
|
1,703
|
|
Derivatives Liabilities
|
|
$
|
(69,816
|
)
|
In February 2008, the FASB issued Staff Position
FAS 157-2,
Effective Date of FASB Statement No. 157
(FSP
No. 157-2),
which defers the effective date of SFAS No. 157 for
non-financial assets and liabilities, except for items that are
recognized or disclosed at fair value on a recurring basis, to
fiscal years beginning after November 15, 2008 and interim
periods within those fiscal years. The Company has elected the
deferral option permitted by FSP
No. 157-2
for its non-financial assets and liabilities initially measured
at fair value in prior business combinations including
intangible assets and goodwill.
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and
certain expenses and the disclosure of contingent assets and
liabilities. Actual results could differ materially from those
estimates and assumptions. Estimates and assumptions are used in
the determination of recoverability of long-lived assets, sales
allowances, allowances for doubtful accounts, depreciation and
amortization, employee benefit plans expense, restructuring
reserves, and certain assumptions pertaining to our stock-based
awards, among others.
New
Accounting Pronouncements
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities
an amendment of FASB Statement
No. 133
(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. The Company is
currently evaluating the potential impact the adoption of
SFAS No. 161 will have on its consolidated financial
statements.
We have reviewed other accounting pronouncements that were
issued as of March 31, 2008, which the Company has not yet
adopted, and do not believe that these pronouncements will have
a material impact on our financial position or operating results.
On August 23, 2007, we acquired Business.com, a leading
business search engine and directory and performance based
advertising network (the Business.com Acquisition).
Business.com now operates as a
F-72
R.H. Donnelley Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
direct, wholly-owned subsidiary of RHD. The results of
Business.com have been included in our consolidated results
commencing August 23, 2007.
On January 31, 2006, we acquired Dex Media. The acquired
business of Dex Media and its subsidiaries (Dex Media
Business) operates through Dex Media, Inc., one of
RHDs direct, wholly-owned subsidiaries. The results of the
Dex Media Business have been included in the Companys
operating results commencing February 1, 2006.
The table below highlights the activity in our restructuring
reserves for the three months ended March 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
|
|
|
|
Actions
|
|
|
Actions
|
|
|
Actions
|
|
|
Total
|
|
|
Balance at December 31, 2007
|
|
$
|
763
|
|
|
$
|
3,327
|
|
|
$
|
5,542
|
|
|
$
|
9,632
|
|
Additions to reserve charged to earnings
|
|
|
|
|
|
|
|
|
|
|
404
|
|
|
|
404
|
|
Payments
|
|
|
(67
|
)
|
|
|
(581
|
)
|
|
|
(1,229
|
)
|
|
|
(1,877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
$
|
696
|
|
|
$
|
2,746
|
|
|
$
|
4,717
|
|
|
$
|
8,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2007, we recognized a
restructuring charge to earnings of $5.5 million associated
with planned headcount reductions and consolidation of
responsibilities to be effectuated during 2008 (2007
Restructuring Actions). During the three months ended
March 31, 2008, we recognized a restructuring charge to
earnings of $0.4 million associated with the 2007
Restructuring Actions. During the three months ended
March 31, 2008, payments of $1.2 million were made
associated with the 2007 Restructuring Actions.
As a result of the Dex Media Merger and integration of the Dex
Media Business, approximately 120 employees were affected
by a restructuring plan, of which 110 were terminated and 10
were relocated to our corporate headquarters in Cary, North
Carolina. Additionally, we vacated certain of our leased Dex
Media facilities in Colorado, Minnesota, Nebraska and Oregon.
The costs associated with these actions are shown in the table
above under the caption 2006 Restructuring Actions.
Payments made with respect to severance during the three months
ended March 31, 2008 and 2007 totaled $0.1 million and
$0.8 million, respectively. Payments of $0.5 million
and $0.6 million were made with respect to the vacated
leased Dex Media facilities during the three months ended
March 31, 2008 and 2007, respectively. The remaining lease
payments for these facilities will be made through 2016.
In connection with a prior business combination, a liability was
established for vacated leased facilities, the costs of which
are shown in the table above under the caption 2003
Restructuring Actions. Payments for the three months ended
March 31, 2008 reflect lease payments associated with those
facilities. Remaining payments related to the 2003 Restructuring
Actions will be made through 2012.
At March 31, 2008, total outstanding debt under our credit
facilities was $3,640.6 million, comprised of
$1,507.6 million under the RHDI credit facility,
$1,101.9 million under the Dex Media East credit facility
and $1,031.1 million under the Dex Media West credit
facility.
RHDI
As of March 31, 2008, outstanding balances under
RHDIs senior secured credit facility, as amended and
restated (RHDI Credit Facility), totaled
$1,507.6 million, comprised of $301.2 million under
Term Loan D-1
F-73
R.H. Donnelley Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
and $1,206.4 million under Term Loan D-2 and no amount was
outstanding under the $175.0 million revolving credit
facility (the RHDI Revolver) (with an additional
$0.3 million utilized under a standby letter of credit).
All Term Loans require quarterly principal and interest
payments. The RHDI Credit Facility provides for a new Term Loan
C for potential borrowings up to $400.0 million, such
proceeds, if borrowed, to be used to fund acquisitions,
refinance certain indebtedness or to make certain restricted
payments. The RHDI Revolver matures in December 2009 and Term
Loans D-1 and D-2 require accelerated amortization beginning in
2010 through final maturity in June 2011. The weighted average
interest rate of outstanding debt under the RHDI Credit Facility
was 4.39% and 6.50% at March 31, 2008 and December 31,
2007, respectively.
On May 8, 2008, we announced our intention to amend the
RHDI Credit Facility. See Note 11, Subsequent
Events for additional information.
Dex Media
East
As of March 31, 2008, outstanding balances under the Dex
Media East credit facility totaled $1,101.9 million,
comprised of $700.0 million under Term Loan A and
$400.0 million under Term Loan B and $1.9 million was
outstanding under the $100.0 million revolving loan
facility (Dex Media East Revolver) (with an
additional $3.0 million utilized under three standby
letters of credit). The Dex Media East Revolver and Term Loan A
will mature in October 2013, and the Term Loan B will mature in
October 2014. The weighted average interest rate of outstanding
debt under the Dex Media East credit facility was 4.75% and
6.87% at March 31, 2008 and December 31, 2007,
respectively.
Dex Media
West
As of March 31, 2008, outstanding balances under the Dex
Media West credit facility totaled $1,031.1 million,
comprised of $135.8 million under Term Loan A,
$307.1 million under Term Loan B-1, and $583.1 million
under Term Loan B-2 and $5.1 million was outstanding under
the $100.0 million revolving loan facility (Dex Media
West Revolver). The Term Loan A and Dex Media West
Revolver will mature in September 2009 and the Term Loan B-1 and
Term Loan B-2 will mature in March 2010. The weighted average
interest rate of outstanding debt under the Dex Media West
credit facility was 4.49% and 6.51% at March 31, 2008 and
December 31, 2007, respectively.
On May 8, 2008, we announced our intention to refinance the
Dex Media West credit facility. See Note 11,
Subsequent Events for additional information.
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.
F-74
R.H. Donnelley Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
The following table summarizes the significant differences
between the U.S. Federal statutory tax rate and our
effective tax rate, which has been applied to the Companys
(loss) income before income taxes.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Statutory U.S. Federal tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local taxes, net of U.S. Federal tax benefit
|
|
|
3.1
|
|
|
|
3.5
|
|
Non-deductible goodwill impairment charge
|
|
|
(4.7
|
)
|
|
|
|
|
Other non-deductible expenses
|
|
|
|
|
|
|
1.0
|
|
Change in valuation allowance
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
33.3
|
%
|
|
|
39.5
|
%
|
|
|
|
|
|
|
|
|
|
In accordance with SFAS No. 132,
Employers
Disclosures About Pensions and Other Postretirement Benefits
(Revised 2003),
the following table provides the components
of net periodic benefit cost for the three months ended
March 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Service cost
|
|
$
|
3,512
|
|
|
$
|
3,282
|
|
|
$
|
497
|
|
|
$
|
637
|
|
Interest cost
|
|
|
4,586
|
|
|
|
4,533
|
|
|
|
1,393
|
|
|
|
1,377
|
|
Expected return on plan assets
|
|
|
(5,058
|
)
|
|
|
(4,940
|
)
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
49
|
|
|
|
33
|
|
|
|
167
|
|
|
|
430
|
|
Amortization of net loss
|
|
|
196
|
|
|
|
272
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
3,285
|
|
|
$
|
3,180
|
|
|
$
|
2,066
|
|
|
$
|
2,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2008, the Company
made contributions of $2.0 million to its pension plans.
The Company did not make any contributions to its pension plans
during the three months ended March 31, 2007. During the
three months ended March 31, 2008 and 2007, the Company
made contributions of $0.9 million and $1.1 million,
respectively, to its postretirement plan. We expect to make
total contributions of approximately $15.8 million and
$6.8 million to our pension plans and postretirement plan,
respectively, in 2008.
Management reviews and analyzes its business of providing local
commercial search products and solutions, including publishing
yellow pages directories, as one operating segment.
We are involved in various legal proceedings arising in the
ordinary course of our business, as well as certain litigation
and tax matters. In many of these matters, plaintiffs allege
that they have suffered damages from errors or omissions in
their advertising or improper listings, in each case, contained
in directories published by us.
F-75
R.H. Donnelley Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
We are also exposed to potential defamation and breach of
privacy claims arising from our publication of directories and
our methods of collecting, processing and using advertiser and
telephone subscriber data. If such data were determined to be
inaccurate or if data stored by us were improperly accessed and
disseminated by us or by unauthorized persons, the subjects of
our data and users of the data we collect and publish could
submit claims against the Company. Although to date we have not
experienced any material claims relating to defamation or breach
of privacy, we may be party to such proceedings in the future
that could have a material adverse effect on our business.
We periodically assess our liabilities and contingencies in
connection with these matters based upon the latest information
available to us. For those matters where it is probable that we
have incurred a loss and the loss or range of loss can be
reasonably estimated, we record a liability in our consolidated
financial statements. In other instances, we are unable to make
a reasonable estimate of any liability because of the
uncertainties related to both the probable outcome and amount or
range of loss. As additional information becomes available, we
adjust our assessment and estimates of such liabilities
accordingly.
Based on our review of the latest information available, we
believe our ultimate liability in connection with pending or
threatened legal proceedings will not have a material adverse
effect on our results of operations, cash flows or financial
position. No material amounts have been accrued in our
consolidated financial statements with respect to any such
matters.
F-76
R.H. Donnelley Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
10. R.H.
Donnelley Corporation (Parent Company) Financial
Statements
The following condensed Parent Company financial statements
should be read in conjunction with the condensed consolidated
financial statements of RHD.
In general, under the terms of our credit facilities,
substantially all of the net assets of the Company and its
subsidiaries are restricted from being paid as dividends to any
third party, and our subsidiaries are restricted from paying
dividends, loans or advances to us with very limited exceptions.
R.H.
Donnelley Corporation
Condensed
Parent Company Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
1,637
|
|
|
$
|
18,900
|
|
Intercompany, net
|
|
|
210,422
|
|
|
|
279,244
|
|
Prepaid and other current assets
|
|
|
3,935
|
|
|
|
8,948
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
215,994
|
|
|
|
307,092
|
|
Investment in subsidiaries
|
|
|
3,663,321
|
|
|
|
5,231,597
|
|
Fixed assets and computer software, net
|
|
|
9,240
|
|
|
|
10,462
|
|
Other non-current assets
|
|
|
88,600
|
|
|
|
91,506
|
|
Intercompany note receivable
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,277,155
|
|
|
$
|
5,940,657
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Accounts payable and accrued liabilities
|
|
$
|
4,231
|
|
|
$
|
14,032
|
|
Accrued interest
|
|
|
107,543
|
|
|
|
123,882
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
111,774
|
|
|
|
137,914
|
|
Long-term debt
|
|
|
3,965,649
|
|
|
|
3,962,871
|
|
Deferred income taxes, net
|
|
|
5,331
|
|
|
|
5,161
|
|
Other non-current liabilities
|
|
|
11,397
|
|
|
|
11,975
|
|
Shareholders equity
|
|
|
183,004
|
|
|
|
1,822,736
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
4,277,155
|
|
|
$
|
5,940,657
|
|
|
|
|
|
|
|
|
|
|
F-77
R.H. Donnelley Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
R.H.
Donnelley Corporation
Condensed
Parent Company Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Expenses
|
|
$
|
6,872
|
|
|
$
|
3,024
|
|
Partnership and equity (loss) income
|
|
|
(2,345,035
|
)
|
|
|
82,352
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(2,351,907
|
)
|
|
|
79,328
|
|
Interest expense, net
|
|
|
(81,573
|
)
|
|
|
(52,965
|
)
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(2,433,480
|
)
|
|
|
26,363
|
|
Benefit (provision) for income taxes
|
|
|
810,369
|
|
|
|
(10,412
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,623,111
|
)
|
|
$
|
15,951
|
|
|
|
|
|
|
|
|
|
|
R.H.
Donnelley Corporation
Condensed Parent Company Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash flow from operating activities
|
|
$
|
(65,372
|
)
|
|
$
|
(107,756
|
)
|
Cash flow from investing activities:
|
|
|
|
|
|
|
|
|
Additions to fixed assets and computer software
|
|
|
(182
|
)
|
|
|
(2,556
|
)
|
Equity investment disposition (investment)
|
|
|
4,318
|
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
4,136
|
|
|
|
(5,056
|
)
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
Increase in checks not yet presented for payment
|
|
|
96
|
|
|
|
232
|
|
Proceeds from employee stock option exercises
|
|
|
89
|
|
|
|
9,111
|
|
Repurchase of common stock
|
|
|
(6,112
|
)
|
|
|
|
|
Dividends from subsidiaries
|
|
|
49,900
|
|
|
|
39,696
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
43,973
|
|
|
|
49,039
|
|
|
|
|
|
|
|
|
|
|
Change in cash
|
|
|
(17,263
|
)
|
|
|
(63,773
|
)
|
Cash at beginning of year
|
|
|
18,900
|
|
|
|
122,565
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
1,637
|
|
|
$
|
58,792
|
|
|
|
|
|
|
|
|
|
|
RHDI
RHD intends to amend the RHDI Credit Facility in order to, among
other things, provide additional covenant flexibility and extend
the maturity date of the RHDI Revolver to June 2011.
F-78
R.H. Donnelley Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
Dex
Media West
Dex Media West intends to refinance its credit facility. The new
Dex Media West credit facility is presently contemplated to
consist of a $140.0 million Term Loan A maturing in October
2013, a $950.0 million Term Loan B maturing in October 2014
and a $100.0 million revolving credit facility maturing in
October 2013. The new Dex Media West credit facility is
presently contemplated to include a $400.0 million
uncommitted incremental facility that may be incurred as
additional revolving loans or additional term loans. The
proceeds from the new Dex Media West credit facility is expected
to be used to refinance the existing Dex Media West credit
facility and pay related fees and expenses. We cannot assure you
that the covenants and other features of the new Dex Media West
credit facility will be as favorable as the corresponding terms
of the current Dex Media West credit facility.
We expect to incur additional interest expense in connection
with these refinancings. We cannot assure that any such
refinancings will be completed in a timely manner, without
conditions or at all.
F-79
Report of
Independent Registered Public Accounting Firm
The Board of Directors
R.H. Donnelley Corporation:
We have audited the accompanying consolidated statements of
operations of Dex Media, Inc. and subsidiaries for the one month
ended January 31, 2006 and the year ended December 31,
2005. These consolidated statements of operations are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
statements of operations based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated statements
of operations are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated statements of
operations. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall consolidated statement of
operations presentation. We believe that our audits of the
consolidated statements of operations provide a reasonable basis
for our opinion.
In our opinion, the consolidated statements of operations
referred to above present fairly, in all material respects, the
results of operations of Dex Media, Inc. and subsidiaries for
the one month ended January 31, 2006 and the year ended
December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 2 to the notes to consolidated
statements of operations, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment
, as of January 1, 2006.
/s/ KPMG LLP
Raleigh, North Carolina
March 31, 2008
F-81
DEX
MEDIA, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
One Month Ended
|
|
|
Year Ended
|
|
|
|
January 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Net revenues
|
|
$
|
139,895
|
|
|
$
|
1,658,235
|
|
Expenses
|
|
|
|
|
|
|
|
|
Cost of revenue (exclusive of depreciation and amortization
shown separately below)
|
|
|
21,194
|
|
|
|
219,968
|
|
Selling and support expenses
|
|
|
33,014
|
|
|
|
371,421
|
|
General and administrative expenses
|
|
|
39,555
|
|
|
|
164,314
|
|
Depreciation and amortization
|
|
|
26,810
|
|
|
|
377,231
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
120,573
|
|
|
|
1,132,934
|
|
Operating income
|
|
|
19,322
|
|
|
|
525,301
|
|
Interest expense, net
|
|
|
37,494
|
|
|
|
445,742
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(18,172
|
)
|
|
|
79,559
|
|
Provision for income taxes
|
|
|
1,872
|
|
|
|
32,776
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(20,044
|
)
|
|
$
|
46,783
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-82
DEX
MEDIA, INC. AND SUBSIDIARIES
(tabular
amounts in thousands, except share and per share data)
|
|
1.
|
Business
and Presentation
|
The consolidated statements of operations include the accounts
of Dex Media, Inc. and its direct and indirect wholly-owned
subsidiaries (the Company, Dex Media,
we, us and our). For the
periods ended January 31, 2006 and December 31, 2005,
Dex Media East LLC (Dex Media East) and Dex Media
West LLC (Dex Media West) were our only indirect
wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated.
Dex Media is the exclusive publisher of the official
yellow pages and white pages directories for Qwest Corporation,
the local exchange carrier of Qwest Communications International
Inc. (Qwest), in Colorado, Iowa, Minnesota,
Nebraska, New Mexico, North Dakota and South Dakota
(collectively, the Dex East States) and Arizona,
Idaho, Montana, Oregon, Utah, Washington and Wyoming
(collectively, the Dex West States and together with
the Dex East States, the Dex States). Dex Media East
operates the directory business in the Dex East States and Dex
Media West operates the directory business in the Dex West
States.
Reclassifications
Certain amounts included in the consolidated statements of
operations have been reclassified. Selling and support expenses
are now presented as a separate expense category in the
consolidated statements of operations. Previously, certain
selling and support expenses were included in cost of revenue
and others were included in general and administrative expenses.
Bad debt expense is now included under selling and support
expenses. Accordingly, we have reclassified bad debt expense in
2006 and 2005. These reclassifications had no impact on
operating income or net (loss) income for the one month ended
January 31, 2006 and the year ended December 31, 2005.
The table below summarizes these reclassifications.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Month Ended
|
|
|
|
|
|
|
January 31, 2006
|
|
|
Year Ended December 31, 2005
|
|
|
|
As
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Reclass
|
|
|
Reclassified
|
|
|
Reported
|
|
|
Reclass
|
|
|
Reclassified
|
|
|
|
(In thousands)
|
|
Cost of revenue
|
|
$
|
60,245
|
|
|
$
|
(39,051
|
)
|
|
$
|
21,194
|
|
|
$
|
665,541
|
|
|
$
|
(445,573
|
)
|
|
$
|
219,968
|
|
Selling and support expenses
|
|
|
|
|
|
|
33,014
|
|
|
|
33,014
|
|
|
|
|
|
|
|
371,421
|
|
|
|
371,421
|
|
General and administrative expenses
|
|
|
33,518
|
|
|
|
6,037
|
|
|
|
39,555
|
|
|
|
90,162
|
|
|
|
74,152
|
|
|
|
164,314
|
|
Historical
Overview
The Companys directory business was acquired from Qwest
Dex, Inc. (Qwest Dex) in a two phase purchase
between Dex Holdings LLC (Dex Holdings), the former
parent of the Company, and Qwest Dex. Dex Holdings and the
Company were formed by two private equity firms, The Carlyle
Group and Welsh, Carson, Anderson & Stowe (the
Selling Shareholders). In the first phase of the
purchase, which was consummated on November 8, 2002, Dex
Holdings assigned its right to purchase the directory business
of Qwest Dex in the Dex East States to the Company (the
Dex East Acquisition). In the second phase of the
purchase, which was consummated on September 9, 2003, Dex
Holdings assigned its right to purchase the directory business
of Qwest Dex in the Dex West States to the Company (the
Dex West Acquisition). Dex Holdings was dissolved
effective January 1, 2005.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Revenue Recognition.
We earn revenue
principally from the sale of advertising into our yellow pages
directories. Revenue from the sale of such advertising is
deferred when a directory is published, net of estimated sales
claims, and recognized ratably over the life of a directory,
which is typically 12 months (the
F-83
DEX
MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED STATEMENTS OF
OPERATIONS (Continued)
deferral and amortization method). The Company also
recognizes revenue for those Internet-based advertising products
that are sold with print advertising using the deferral and
amortization method. Revenue with respect to Internet-based
advertising that is not sold with print advertising is
recognized ratably over the period the advertisement appears on
the site. Revenue with respect to our other products and
services, such as search engine marketing (SEM) and
search engine optimization (SEO) services
(collectively referred to as Internet Marketing), is
recognized as delivered or fulfilled. Revenue from the sale of
local advertising was recorded net of actual sales claims
received.
The Company enters into transactions, such as exclusivity
arrangements, sponsorships and other media access transactions,
where the Companys products and services are promoted by a
third party and, in exchange, the Company carries the third
partys advertisement. The Company accounts for these
transactions in accordance with Emerging Issues Task Force
(EITF) Issue
No. 99-17,
Accounting for Advertising Barter Transactions
. Revenue
and expense related to such transactions are included in the
consolidated statements of operations consistent with, and only
to the extent of, reasonably similar and items sold or purchased
for cash.
In certain cases, the Company enters into agreements with
customers that involve the delivery of more than one product or
service. Revenue for such arrangements is allocated in
accordance with EITF Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables.
Cost of Revenue.
Costs directly related to the
selling and production of our directories are initially deferred
when incurred and recognized ratably over the life of a
directory, which is typically 12 months. These costs are
specifically identifiable to a particular directory and include
sales commissions and print, paper and initial distribution
costs.
Depreciation and Amortization.
Depreciation
and amortization of fixed assets and computer software are
provided over the estimated useful lives of the assets using the
straight-line method. Estimated useful lives are five years for
machinery and equipment, ten years for furniture and fixtures,
and three to five years for computer equipment and computer
software. Leasehold improvements are amortized on a
straight-line basis over the shorter of the term of the lease or
the estimated useful life of the improvement.
Depreciation and amortization expense on fixed assets and
computer software for the one month ended January 31, 2006
and the year ended December 31, 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
One Month Ended
|
|
|
December 31,
|
|
|
|
January 31, 2006
|
|
|
2005
|
|
Depreciation of fixed assets
|
|
$
|
789
|
|
|
$
|
11,727
|
|
Amortization of computer software
|
|
|
1,738
|
|
|
|
19,802
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization on fixed assets and computer
software
|
|
$
|
2,527
|
|
|
$
|
31,529
|
|
|
|
|
|
|
|
|
|
|
As a result of the Dex East Acquisition and the Dex West
Acquisition, certain intangible assets were identified and
recorded at their estimated fair value. Amortization expense for
intangible assets was $24.3 million and $345.7 million
for the one month ended January 31, 2006 and the year ended
December 31, 2005, respectively.
The fair values of local and national customer relationships
were determined based on the present value of estimated future
cash flows and were being amortized using a declining method in
relation to the estimated retention periods of the acquired
customers, which was twenty years and twenty-five years,
respectively. Other intangible assets including
non-compete/publishing agreements, the Qwest Dex trademark
agreement and the advertising agreement were amortized on a
straight-line basis over thirty-nine to forty years, four to
five years, and fourteen to fifteen years, respectively.
F-84
DEX
MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED STATEMENTS OF
OPERATIONS (Continued)
In accordance with SFAS No. 142, goodwill was not
amortized, but was subject to periodic impairment testing. No
impairment losses were recorded during the one month ended
January 31, 2006 or the year ended December 31, 2005.
Interest Expense and Deferred Financing
Costs.
Interest expense for the one month ended
January 31, 2006 and the year ended December 31, 2005
was $37.6 million and $446.4 million, respectively.
Certain costs associated with the issuance of debt instruments
were being amortized to interest expense over the terms of the
related debt agreements. The Company used the bond outstanding
method to amortize deferred financing costs relating to debt
instruments with respect to which we made accelerated principal
payments. Other deferred financing costs were amortized using
the effective interest method. Amortization of deferred
financing costs included in interest expense for the Company was
$2.3 million and $37.0 million for the one month ended
January 31, 2006 and the year ended December 31, 2005,
respectively.
Advertising Expense.
We recognize advertising
expenses as incurred. These expenses include media, public
relations, promotional and sponsorship costs and on-line
advertising. Total advertising expense was $4.5 million and
$33.2 million for the one month ended January 31, 2006
and the year ended December 31, 2005, respectively.
Derivative Financial Instruments and Hedging
Activities.
We account for our derivative
financial instruments and hedging activities in accordance with
SFAS No. 133,
Accounting for Derivative Instruments
and Hedging Activities
(SFAS No. 133)
,
as amended by
SFAS No. 138,
Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of
FAS 133
and SFAS No. 149,
Amendment of
Statement 133 on Derivative Instruments and Hedging Activities.
We do not use derivative financial instruments for trading
or speculative purposes and our derivative financial instruments
are limited to interest rate swap agreements. We utilize a
combination of fixed rate and variable rate debt to finance our
operations. The variable rate debt exposes us to variability in
interest payments due to changes in interest rates. Management
believes that it is prudent to mitigate the interest rate risk
on a portion of its variable rate borrowings. Additionally, our
credit facilities require that we maintain hedge agreements to
provide a fixed rate on at least 33% of their respective
indebtedness. To satisfy this objective, we have entered into
fixed interest rate swap agreements to manage fluctuations in
cash flows resulting from changes in interest rates on variable
rate debt.
On the day a derivative contract is executed, we may designate
the derivative instrument as a hedge of the variability of cash
flows to be received or paid (cash flow hedge). For all hedging
relationships we formally document the hedging relationship and
its risk-management objective and strategy for undertaking the
hedge, the hedging instrument, the item, the nature of the risk
being hedged, how the hedging instruments effectiveness in
offsetting the hedged risk will be assessed, and a description
of the method of measuring ineffectiveness. We formally assess,
both at the hedges inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions
are highly effective in offsetting changes in cash flows of
hedged items.
For derivative instruments that are not designed or do not
qualify as hedged transactions, the initial fair value, if any,
and any subsequent gains or losses on the change in the fair
value are reported in earnings as a component of interest
expense.
The Company discontinues hedge accounting prospectively when it
is determined that the derivative is no longer effective in
offsetting changes in the cash flows of the hedged item, the
derivative or hedged item is expired, sold, terminated,
exercised, or management determines that designation of the
derivative as a hedging instrument is no longer appropriate. In
situations in which hedge accounting is discontinued, we
continue to carry the derivative at its fair value on the
consolidated balance sheet and recognize any subsequent changes
in its fair value in earnings as a component of interest
expense. Any amounts previously recorded to accumulated
F-85
DEX
MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED STATEMENTS OF
OPERATIONS (Continued)
other comprehensive (loss) income will be amortized to interest
expense in the same period(s) in which the interest expense of
the underlying debt impacts earnings.
See Note 3, Derivative Financial Instruments,
for additional information regarding our derivative financial
instruments and hedging activities.
Pension and Postretirement Benefits.
Pension
and postretirement benefits represent estimated amounts to be
paid to employees in the future. The accounting for benefits
reflects the recognition of these benefit costs over the
employees approximate service period based on the terms of
the plan and the investment and funding decisions made. The
determination of the benefit obligation and the net periodic
pension and other postretirement benefit costs requires
management to make assumptions regarding the discount rate,
return on retirement plan assets, increase in future
compensation and healthcare cost trends. Changes in these
assumptions can have a significant impact on the projected
benefit obligation, funding requirement and net periodic benefit
cost. The assumed discount rate is the rate at which the pension
benefits could be settled. For 2005, to determine this rate, the
Company selected an actually computed composite rate based upon
high quality (AA-/Aa- rated or better), non-callable corporate
bonds whose cash flows matched the expected timing of the
settlement of the pension and post-retirement obligations. The
high quality corporate bond rates were based on information
obtained from Standard and Poors.
Please refer to Note 6, Benefit Plans, for
further information regarding our benefit plans.
Income Taxes.
We account for income taxes
under the asset and liability method in accordance with
SFAS No. 109,
Accounting for Income Taxes
(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.
Stock-Based Awards.
Upon adoption of
SFAS No. 123 (R), pro forma disclosure permitted by
SFAS No. 123,
Accounting for Stock Based
Compensation
(SFAS No. 123) is no
longer a permitted alternative. As the Company adopted
SFAS No. 123 (R), as of January 1, 2006, using
the Modified Prospective Method, the Company has provided below
the pro forma disclosures of the effect on net income for the
year ended December 31, 2005 as if the Company had
accounted for its employee stock awards granted under the fair
value method of SFAS No. 123.
For the one month ended January 31, 2006, the Company
accounted for the stock-based awards under the recognition and
measurement principles of SFAS No. 123 (R). Prior to
adopting SFAS No. 123 (R) on January 1,
2006, the Company accounted for stock-based awards granted to
employees and non-employee directors in accordance with the
intrinsic value-based method prescribed by APB No. 25.
Compensation expense related to the issuance of stock options to
employees or non-employee directors was only recognized if the
exercise price of the stock option was less than the market
value of the underlying common stock on the date of grant. In
accordance with the Modified Prospective Method, financial
statement amounts for the year ended December 31, 2005 have
not been restated to reflect the fair value method of expensing
stock-based compensation.
For the year ended December 31, 2005, the Company accounted
for the Stock Option Plan of Dex Media, Inc. (2002
Plan) and the Dex Media, Inc. 2004 Incentive Award Plan
(2004 Plan) under the recognition and measurement
principles of APB No. 25. Had the Company accounted for
employee stock option grants under the minimum value method for
options issued prior to becoming a publicly traded company and
the fair
F-86
DEX
MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED STATEMENTS OF
OPERATIONS (Continued)
value method after becoming a publicly traded company, both of
which are prescribed by SFAS No. 123, the pro forma
results of the Company would have been as follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2005
|
|
|
Net income as reported
|
|
$
|
46,783
|
|
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects
|
|
|
7,758
|
|
Deduct: Stock-based employee compensation expense determined
under minimum value or fair value based method, as applicable,
for all awards, net of related tax effects
|
|
|
(1,956
|
)
|
|
|
|
|
|
Pro forma
|
|
$
|
52,585
|
|
|
|
|
|
|
Estimates.
The preparation of financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and certain expenses and the
disclosure of contingent assets and liabilities. Actual results
could differ materially from those estimates and assumptions.
Estimates and assumptions are used in the determination of
recoverability of long-lived assets, sales allowances,
allowances for doubtful accounts, depreciation and amortization,
employee benefit plans expense, and certain assumptions
pertaining to RHDs stock-based awards, among others.
|
|
3.
|
Derivative
Financial Instruments
|
By using derivative financial instruments to hedge exposures to
changes in interest rates, the Company exposes itself to credit
risk and market risk. Credit risk is the possible failure of the
counterparty to perform under the terms of the derivative
contract. When the fair value of a derivative contract is
positive, the counterparty owes the Company, which creates
credit risk for the Company. When the fair value of a derivative
contract is negative, the Company owes the counterparty and,
therefore, is not subject to credit risk. The Company minimizes
the credit risk in derivative financial instruments by entering
into transactions with major financial institutions with credit
ratings of AA- or higher.
Market risk is the adverse effect on the value of a financial
instrument that results from a change in interest rates. The
market risk associated with interest-rate contracts is managed
by establishing and monitoring parameters that limit the types
and degree of market risk that may be undertaken.
For derivative instruments that are not designated or do not
qualify as hedged transactions, the initial fair value, if any,
and any subsequent gains or losses in the change in the fair
value are reported in earnings as a component of interest
expense. For the one month ended January 31, 2006 and the
year ended December 31, 2005, the Company recorded a
reduction to interest expense of $0.2 million and
$3.4 million, respectively, as a result of the change in
fair value of these interest rate swaps.
During the one month ended January 31, 2006, the Company
reclassified less than $0.1 million of hedging gains into
earnings. During the year ended December 31, 2005, the
Company reclassified $1.0 million of hedging losses into
earnings.
For the one month ended January 31, 2006, the Company
accounted for the stock-based awards under the recognition and
measurement principles of SFAS No. 123(R). Prior to
adopting SFAS No. 123(R) on January 1, 2006, the
Company accounted for stock-based awards granted to employees
and non-employee directors in accordance with the intrinsic
value-based method prescribed by APB No. 25. Compensation
expense related to the issuance of stock options to employees or
non-employee directors was only recognized if the exercise price
of the stock option was less than the market value of the
underlying common stock on the date of grant.
F-87
DEX
MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED STATEMENTS OF
OPERATIONS (Continued)
In accordance with the Modified Prospective Method, financial
statement amounts for the year ended December 31, 2005 have
not been restated to reflect the fair value method of expensing
stock-based compensation.
On October 5, 2005, the Company entered into Letter
Agreements with its officers which, among other things, included
terms to accelerate the vesting of certain stock options upon
consummation of the merger with R.H. Donnelley Corporation
(RHD Merger) (modifications). As a
result of the modifications, stock options to purchase
approximately 1.3 million shares of Dex Media common stock
became fully exercisable immediately prior to the consummation
of the RHD Merger. The Company recorded stock-based compensation
expense for stock options of $2.2 million during the one
month ended January 31, 2006, under the guidance of
SFAS No. 123(R), including $2.0 million as a
result of these modifications. Had such compensation expense
been determined under APB No. 25, the Company would have
recorded stock-based compensation expense of $23.4 million
during the one month ended January 31, 2006, of which
$23.2 million related to the modifications.
Under the terms of the restricted stock agreements, all unvested
shares became vested upon consummation of the RHD Merger. The
Company recorded stock-based compensation expense for restricted
stock of $1.7 million during the one month ended
January 31, 2006, including $1.6 million related to
this acceleration of vesting.
Deferred tax assets and liabilities are determined based on the
estimated future tax effects of temporary differences between
the financial statement and tax bases of assets and liabilities,
as measured by tax rates at which temporary differences are
expected to reverse. Deferred tax provision is the result of
changes in the deferred tax assets and liabilities.
Provision for income taxes consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
One Month
|
|
|
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
January 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Current provision
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
|
|
|
$
|
|
|
State and local
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
|
|
|
|
10
|
|
Deferred provision
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
1,553
|
|
|
|
25,661
|
|
State and local
|
|
|
319
|
|
|
|
7,105
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision
|
|
|
1,872
|
|
|
|
32,766
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
1,872
|
|
|
$
|
32,776
|
|
|
|
|
|
|
|
|
|
|
F-88
DEX
MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED STATEMENTS OF
OPERATIONS (Continued)
The following table summarizes the significant differences
between the U.S. Federal statutory tax rate and our
effective tax rate, which has been applied to the Companys
(loss) income before income taxes.
|
|
|
|
|
|
|
|
|
|
|
One Month
|
|
|
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
January 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Statutory U.S. Federal tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local taxes, net of U.S. Federal tax benefit
|
|
|
4.3
|
|
|
|
3.9
|
|
Non-deductible expense
|
|
|
(0.3
|
)
|
|
|
0.4
|
|
Valuation allowance
|
|
|
(50.1
|
)
|
|
|
5.6
|
|
Other, net
|
|
|
0.8
|
|
|
|
(3.7
|
)
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(10.3
|
)%
|
|
|
41.2
|
%
|
|
|
|
|
|
|
|
|
|
Dex Media East and Dex Media West were included in the
consolidated federal income tax return and combined or
consolidated state income tax returns, where permitted, for Dex
Media. Dex Media had no other business operations or investments.
No additional valuation allowance had been provided for, except
as described below. In managements judgment, it was more
likely than not that the remaining net operating loss
carryforwards would be utilized before the end of the expiration
periods. This presumption was based upon the book and taxable
income expected to be generated by the Company over the next
several years.
The provision for income taxes was $1.9 million for the one
month ended January 31, 2006. The January 2006 deferred tax
provision resulted in an effective tax rate of (10.3)%. The
effective rate for the one month ended January 31, 2006
reflects a valuation allowance for deferred tax assets
associated with capitalized merger costs more likely than not to
be unrealizable in the future.
Management of the Company believed that it was more likely than
not that some of the deferred tax assets associated with
capitalized merger and stock offering costs would not be
realized in the future. Therefore, a valuation allowance was
established for the year ended December 31, 2005, in the
amount of $4.5 million to reduce the noncurrent deferred
tax asset to its realizable value. The 2005 tax deduction for
stock options was $1.4 million.
Pension Plan.
The Company has a
noncontributory defined benefit pension plan covering
substantially all management and occupational (union) employees.
Annual pension costs are determined using the projected unit
credit actuarial cost method. Our funding policy is to
contribute an amount at least equal to the minimum legal funding
requirement. No contributions were required or made to the plan
for the one month ended January 31, 2006 or the year ended
December 31, 2005. The underlying pension plan assets are
invested in diversified portfolios consisting primarily of
equity and debt securities. A measurement date of December 31 is
used for all of our plan assets.
Savings Plan.
The Company offers a defined
contribution 401(k) savings plan to substantially all employees.
For management employees, the Company contributes 100% of the
first 4% of each participating employees salary and 50% of
the next 2%. For management employees, the Company match is
limited to 5% of each participating employees eligible
earnings. For occupational employees, the Company contributes
81% of the first 6% of each participating employees salary
not to exceed 4.86% of eligible earnings for any one pay period.
Company matching contributions are limited to $4,860 per
occupational employee annually. Contributions under this plan
were $0.8 million for the one month ended January 31,
2006. For the year ended December 31, 2005, matching
contributions were $6.3 million.
F-89
DEX
MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED STATEMENTS OF
OPERATIONS (Continued)
Postretirement Benefits.
The Company has an
unfunded postretirement benefit plan that provides certain
healthcare and life insurance benefits to certain full-time
employees who reach retirement eligibility while working for the
Company.
Components
of Net Periodic Benefit Expense
The net periodic benefit expense of the pension plan for the one
month ended January 31, 2006 and the year ended
December 31, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
One Month Ended
|
|
|
Year Ended
|
|
|
|
January 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Service cost
|
|
$
|
708
|
|
|
$
|
9,769
|
|
Interest cost
|
|
|
879
|
|
|
|
11,959
|
|
Expected return on plan assets
|
|
|
(1,056
|
)
|
|
|
(15,629
|
)
|
Amortization of unrecognized net loss
|
|
|
(17
|
)
|
|
|
(208
|
)
|
Settlement gain
|
|
|
|
|
|
|
3,307
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense
|
|
$
|
514
|
|
|
$
|
9,198
|
|
|
|
|
|
|
|
|
|
|
The net periodic benefit expense of the postretirement plan for
the one month ended January 31, 2006 and the year ended
December 31, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
One Month Ended
|
|
|
Year Ended
|
|
|
|
January 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Service cost
|
|
$
|
167
|
|
|
$
|
2,334
|
|
Interest cost
|
|
|
308
|
|
|
|
3,741
|
|
Amortization of unrecognized prior service cost
|
|
|
(39
|
)
|
|
|
(470
|
)
|
Amortization of unrecognized net loss
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense
|
|
$
|
436
|
|
|
$
|
5,648
|
|
|
|
|
|
|
|
|
|
|
Assumptions
The following assumptions were used in determining the net
periodic benefit expense for the pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Month Ended
|
|
|
August 2
|
|
|
January 1
|
|
|
|
January 31,
|
|
|
December 31,
|
|
|
August 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
Weighted average discount rate
|
|
|
5.75
|
%
|
|
|
5.50
|
%
|
|
|
6.00
|
%
|
Rate of increase in future compensation
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Expected return on plan assets
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
The following assumptions were used in determining the net
periodic benefit expense for the postretirement plan:
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company
|
|
|
|
One Month Ended
|
|
|
Year Ended
|
|
|
|
January 31,2006
|
|
|
December 31, 2005
|
|
|
Weighted average discount rate
|
|
|
5.75
|
%
|
|
|
6.00
|
%
|
F-90
DEX
MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED STATEMENTS OF
OPERATIONS (Continued)
We lease office facilities and equipment under operating leases
with non-cancelable lease terms expiring at various dates
through 2017. Rent and lease expense for the one month ended
January 31, 2006 and the year ended December 31, 2005
was $1.2 million and $20.4 million, respectively.
We are involved in various legal proceedings arising in the
ordinary course of our business, as well as certain litigation
and tax matters. In many of these matters, plaintiffs allege
that they have suffered damages from errors or omissions in
their advertising or improper listings, in each case, contained
in directories published by us.
We are also exposed to potential defamation and breach of
privacy claims arising from our publication of directories and
our methods of collecting, processing and using advertiser and
telephone subscriber data. If such data were determined to be
inaccurate or if data stored by us were improperly accessed and
disseminated by us or by unauthorized persons, the subjects of
our data and users of the data we collect and publish could
submit claims against us. Although to date we have not
experienced any material claims relating to defamation or breach
of privacy, we may be party to such proceedings in the future
that could have a material adverse effect on our business.
We periodically assess our liabilities and contingencies in
connection with these matters based upon the latest information
available to us. For those matters where it is probable that we
have incurred a loss and the loss or range of loss can be
reasonably estimated, we record a liability in our consolidated
financial statements. In other instances, we are unable to make
a reasonable estimate of any liability because of the
uncertainties related to both the probable outcome and amount or
range of loss. As additional information becomes available, we
adjust our assessment and estimates of such liabilities
accordingly.
Based on our review of the latest information available, we
believe our ultimate liability in connection with pending or
threatened legal proceedings will not have a material adverse
effect on our results of operations, cash flows or financial
position. No material amounts have been accrued in our
consolidated financial statements with respect to any of such
matters.
Management reviews and analyzes its business of providing local
commercial search products and solutions, including publishing
yellow pages directories, as one operating segment.
|
|
10.
|
Valuation
and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Net Additions
|
|
|
Write-offs
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Charged to
|
|
|
and Other
|
|
|
End of
|
|
Predecessor Company
|
|
Period
|
|
|
Expense
|
|
|
Deductions
|
|
|
Period
|
|
|
Allowance for Doubtful Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the one month ended January 31, 2006
|
|
$
|
23,239
|
|
|
|
8,288
|
|
|
|
(6,926
|
)
|
|
$
|
24,601
|
|
For the year ended December 31, 2005
|
|
$
|
25,133
|
|
|
|
61,288
|
|
|
|
(63,182
|
)
|
|
$
|
23,239
|
|
Deferred Tax Asset Valuation Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the one month ended January 31, 2006
|
|
$
|
4,518
|
|
|
|
9,110
|
|
|
|
|
|
|
$
|
13,628
|
|
For the year ended December 31, 2005
|
|
$
|
|
|
|
|
4,518
|
|
|
|
|
|
|
$
|
4,518
|
|
F-91
Offer to Exchange
$1,235,260,000 aggregate
principal amount
8.875%
Series A-4
Senior Notes due 2017
R.H. Donnelley
Corporation
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