AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 13, 2003
REGISTRATION NO. 333-102395
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DEX MEDIA EAST LLC
DEX MEDIA EAST FINANCE CO.
DEX MEDIA INTERNATIONAL, INC.
(Exact names of registrants as specified in their charters)
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DEX MEDIA EAST LLC DEX MEDIA EAST FINANCE CO. DEX MEDIA INTERNATIONAL, INC.
DELAWARE DELAWARE DELAWARE
(State or other jurisdiction of (State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization) incorporation or organization)
42-1554575 14-1855761 13-3498232
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
2741 9995 2741
(Primary Standard Industrial (Primary Standard Industrial (Primary Standard Industrial
Classification Code Number) Classification Code Number) Classification Code Number)
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198 INVERNESS DRIVE WEST
ENGLEWOOD, COLORADO 80112
(303) 784-2900
(Address, including zip code, and telephone number, including area code, of
each of the
registrants' principal executive offices)
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ROBERT NEUMEISTER, JR.
CHIEF FINANCIAL OFFICER AND EXECUTIVE VICE PRESIDENT
DEX MEDIA EAST LLC
198 INVERNESS DRIVE WEST
ENGLEWOOD, COLORADO 80112
(303) 784-2900
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
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Copies to:
GREGORY A. EZRING, ESQ.
LATHAM & WATKINS LLP
885 THIRD AVENUE
SUITE 1000
NEW YORK, NEW YORK 10022
(212) 906-1200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED EXCHANGE OFFER: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are being offered
in connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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PROSPECTUS
SUBJECT TO COMPLETION, DATED FEBRUARY 13, 2003.
DEX MEDIA EAST LLC
DEX MEDIA EAST FINANCE CO.
OFFER TO EXCHANGE
$450,000,000 PRINCIPAL AMOUNT OF THEIR 9 7/8% SERIES B SENIOR NOTES DUE 2009,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OF THEIR OUTSTANDING 9 7/8% SERIES A SENIOR NOTES DUE 2009
AND
$525,000,000 PRINCIPAL AMOUNT OF THEIR 12 1/8% SERIES B
SENIOR SUBORDINATED NOTES DUE 2012, WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT, FOR ANY AND ALL OF THEIR OUTSTANDING 12 1/8% SERIES A
SENIOR SUBORDINATED NOTES DUE 2012.
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We are offering to exchange our 9 7/8% Series B Senior Notes due 2009, or the
"senior exchange notes," for our currently outstanding 9 7/8% Series A Senior
Notes due 2009, or the "outstanding senior notes" and our 12 1/8% Series B
Senior Subordinated Notes due 2012, or the "senior subordinated exchange notes"
and together with the senior exchange notes, the "exchange notes," for our
currently outstanding 12 1/8% Series A Senior Subordinated Notes due 2012, or
the "outstanding senior subordinated notes" and together with the outstanding
senior notes, the "outstanding notes." The exchange notes are substantially
identical to the outstanding notes, except that the exchange notes have been
registered under the federal securities laws and will not bear any legend
restricting their transfer. The exchange notes will represent the same debt as
the outstanding notes, and we will issue the exchange notes under the same
indentures.
The senior exchange notes will be guaranteed on a senior unsecured basis, and
the senior subordinated exchange notes will be guaranteed on a senior
subordinated unsecured basis, by Dex Media International, Inc., which is
currently our only subsidiary (other than Dex Media East Finance Co.), and each
of our future subsidiaries that is a guarantor or direct borrower under our new
credit facilities. Dex Media East Finance is a wholly-owned subsidiary of Dex
Media East LLC that was incorporated in Delaware for the purpose of serving as
a co-issuer of the notes.
The principal features of the exchange offer are as follows:
o The exchange offer expires at 5:00 p.m., New York City time, on
____________, 2003, unless extended.
o We will exchange all outstanding notes that are validly tendered and not
validly withdrawn prior to the expiration of the exchange offer.
o You may withdraw tendered outstanding notes at any time prior to the
expiration of the exchange offer.
o The exchange of outstanding notes for exchange notes pursuant to the
exchange offer will not be a taxable event for U.S. federal income tax
purposes.
o We will not receive any proceeds from the exchange offer.
o We do not intend to apply for listing of the exchange notes on any
securities exchange or automated quotation system.
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
delivered with this prospectus 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 of 1933. 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, for a period of 180 days after the completion
of the exchange offer, we will make this prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
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INVESTING IN THE EXCHANGE NOTES INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 16.
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NEITHER THE U.S. SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR
STATE AGENCY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES TO BE
DISTRIBUTED IN THE EXCHANGE OFFER, NOR HAVE ANY OF THESE
ORGANIZATIONS DETERMINED THAT THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS _________, 2003.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and we are not solicitating an offer to buy
these securities in any state where the offer or sale is not permitted.
TABLE OF CONTENTS
PROSPECTUS SUMMARY ........................................ 1
RISK FACTORS .............................................. 16
FORWARD-LOOKING STATEMENTS ................................ 29
MARKET AND INDUSTRY DATA .................................. 29
THE EXCHANGE OFFER ........................................ 31
USE OF PROCEEDS ........................................... 39
CAPITALIZATION ............................................ 40
UNAUDITED PRO FORMA FINANCIAL INFORMATION ................. 41
SELECTED HISTORICAL FINANCIAL DATA ........................ 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................ 50
BUSINESS .................................................. 68
THE TRANSACTIONS .......................................... 83
MANAGEMENT ................................................ 93
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ............................................... 100
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............ 103
DESCRIPTION OF SENIOR EXCHANGE NOTES ...................... 107
DESCRIPTION OF SENIOR SUBORDINATED EXCHANGE NOTES ......... 148
BOOK-ENTRY; DELIVERY AND FORM ............................. 190
MATERIAL FEDERAL INCOME TAX CONSEQUENCES .................. 192
LEGAL MATTERS ............................................. 197
EXPERTS ................................................... 197
WHERE YOU CAN FIND MORE INFORMATION ....................... 197
INDEX TO COMBINED FINANCIAL STATEMENTS .................... F-1
Until ____, 2003, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
WE HAVE NOT AUTHORIZED ANY DEALER, SALESMAN OR OTHER PERSON TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS. YOU MUST NOT RELY UPON ANY
INFORMATION OR REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS AS IF WE HAD AUTHORIZED IT. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE REGISTERED SECURITIES TO WHICH IT RELATES, NOR DOES THIS PROSPECTUS
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SECURITIES IN
ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION.
In addition, Qwest and its affiliates (including Qwest Corporation) are
not responsible for, and are not making any representations concerning, our
future performance or the accuracy or completeness of this prospectus.
ii
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. Because this is only a summary, it does not contain all of the
information that may be important to you. This prospectus includes specific
terms of the exchange offer, as well as information regarding our business and
detailed financial data. The information regarding our business and detailed
financial data, while important to an understanding of our future cost
structure, results of operations, financial position and cash flows, does not
directly impact your decision as to whether or not to participate in the
exchange offer. Information directly relating to the exchange offer can be
found in this summary under the subheadings "--The Offering," "--The Exchange
Offer," "--Terms of the Exchange Notes" and elsewhere in this prospectus under
the headings "The Exchange Offer," "Description of Senior Exchange Notes" and
"Description of Senior Subordinated Exchange Notes." You should read this
entire prospectus and should consider, among other things, the matters set
forth under the headings "Risk Factors," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our combined financial
statements and related notes thereto appearing elsewhere in this prospectus.
In this prospectus:
o "Dex Media East," "we," "our" or "us" refers to Dex Media East LLC
(formerly known as SGN LLC), a co-issuer of the notes;
o "Issuers" refers to Dex Media East and Dex Media East Finance;
o "Dex Holdings" refers to Dex Holdings LLC;
o "Dex Media International" refers to Dex Media International, Inc. (known
as LCI International, Inc. until January 2003), currently the only
guarantor of the notes;
o "Qwest" refers to Qwest Communications International Inc. and its
subsidiaries, other than Qwest Corporation, the local exchange carrier
subsidiary of Qwest, which we refer to as "Qwest LEC;" and
o "outstanding notes" refers collectively to the 9 7/8% Series A Senior
Notes due 2009 and the 12 1/8% Series A Senior Subordinated Notes due
2012 that were issued on November 8, 2002 and "exchange notes" refers
collectively to the 9 7/8% Series B Senior Notes due 2009 and the 12 1/8%
Series B Senior Subordinated Notes due 2012 offered pursuant to this
prospectus. We sometimes refer to the outstanding notes and the exchange
notes collectively as the "notes."
BACKGROUND INFORMATION
On August 19, 2002, Dex Holdings, the parent of Dex Media, entered into
two purchase agreements with Qwest to acquire the print and internet directory
businesses of Qwest Dex, Inc., the directory services subsidiary of Qwest, in
two separate phases. Pursuant to the purchase agreement relating to the first
phase, Dex Holdings agreed to purchase Qwest Dex's print and internet directory
businesses in Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and
South Dakota and the standard metropolitan statistical area of El Paso, Texas.
Dex Holdings assigned its right to purchase these businesses to us and we
consummated the first phase on November 8, 2002. We currently operate the print
and internet directory businesses in Colorado, Iowa, Minnesota, Nebraska, New
Mexico, North Dakota and South Dakota and the standard metropolitan statistical
area of El Paso, Texas, which we refer to as our region. We refer to the states
of Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South
Dakota as the Dex East States.
Pursuant to the purchase agreement relating to the second phase, Dex
Holdings agreed to purchase Qwest Dex's print and internet directory businesses
in Arizona, Idaho, Montana, Oregon, Utah, Washington and Wyoming, which we
refer to as the Dex West States. We expect
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the second phase to be consummated by the end of 2003. A separate indirect
subsidiary of Dex Media will operate the print and internet directory
businesses that Dex Media will acquire in the Dex West States. Unless the
context otherwise requires, this prospectus assumes only the consummation of
the acquisition of the print and internet directory businesses of Qwest Dex in
our region, which we refer to as the acquisition of Dex Media East. The
historical information, including the historical financial data, included in
this prospectus is that of our predecessor, Qwest Dex Holdings, Inc. and its
subsidiary in our region prior to the acquisition of Dex Media East, which we
refer to as Dex East.
THE BUSINESS
We are the largest print directory publisher in the Dex East States and
the sixth largest print directory publisher in the United States. We are the
exclusive official directory publisher in our region for Qwest LEC, which is
the primary local exchange carrier in most service areas within the Dex East
States. We, or our predecessors, have been publishing print directories for
over 100 years. In 2001, we had an aggregate 87% market share in our top 10
geographic markets, which accounted for approximately 72% of our revenues in
that year. In 2001, we published 150 directories and distributed approximately
19 million copies of these directories to business and residential consumers in
our region. As of December 31, 2001, we had a total of approximately 206,000
local advertising customers consisting primarily of small and medium-sized
businesses and approximately 5,600 national advertisers. We also provide
related services, including an internet-based directory and direct marketing
services. For the year ended December 31, 2001, after giving pro forma effect
to the transactions related to the acquisition of Dex Media East, we generated
$666 million in revenues. Approximately 98% of our total revenues for the year
ended December 31, 2001 were generated from the publication of print
directories. Approximately 96% of these revenues for this period came from the
sale of advertising in our yellow pages directories, and 4% of these revenues
for this period came from the sale of advertising in our white pages
directories.
We believe that the U.S. directory advertising industry is attractive due
to its stable and consistent revenue growth. Industry revenues have increased
each year since 1985, growing from approximately $5.8 billion in 1985 to
approximately $14.4 billion in 2001, with a compounded annual growth rate of
approximately 5.8% over that same period. In addition, during the last two
recessions in 1991 and 2001, the U.S. directory advertising industry
experienced positive growth, while other major advertising media, including
radio, television and newspaper, experienced revenue declines. We believe that
this is driven in large part by the fact that print directories are, in many
cases, the primary form of paid advertising used by small and medium-sized
businesses. In addition, we believe that the once-yearly publication cycle and
the priority placement given to renewal advertisements result in a high
customer renewal rate even during weak economic times.
COMPETITIVE STRENGTHS
Incumbent Position Provides Significant Competitive Advantage. As the
exclusive official publisher for Qwest LEC in our region, we believe that we
derive a substantial competitive advantage over independent directory
advertising providers.
Greater Value Proposition for our Target Advertisers. We believe that
directory advertising provides our target advertisers, which are primarily
small and medium-sized businesses, with a greater value proposition than most
other major media. Our directory advertisements allow our advertisers to reach
a broad target audience, providing a permanent reference source to search for
particular products and services.
Industry Leading Sales Force. We believe that we have one of the most
experienced sales forces in the U.S. directory advertising industry. As of
September 30, 2002, we had approximately 429 sales representatives in 24 local
offices who average nine years of employment with us.
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Strong Financial Profile with Stable Cash Flow. Our business benefits from
consistent revenues and cash flow, high margins and low capital expenditure
requirements.
Diversified Customer Base. We have a large diversified customer base. We
believe that the diversity of our customer base helps mitigate the effect of a
downturn in any particular sector of the economy or geographic area within our
states of operation.
Experienced Management Team. We have assembled a strong and experienced
senior management team with an average of 19 years of experience in their
respective areas of expertise.
Strong Sponsorship. Our sponsors, The Carlyle Group and Welsh, Carson,
Anderson & Stowe, are both leading equity investor firms and are among the
largest private equity groups in the world.
BUSINESS STRATEGY
We intend to leverage our leading market position to further grow our core
directory business and identify opportunities to enhance the value proposition
that we offer our advertisers. In executing this strategy, we will rely on the
core strengths of our business, including our industry-leading sales force,
long-term relationships with our customers and the significant brand awareness
that we enjoy as the result of our incumbent status. The principal elements of
our business strategy will continue to include:
o introducing and selling new products that provide enhanced options to
businesses and consumers, focusing on white pages and awareness products;
o increasing sales of our existing products by improving sales
productivity; and
o increasing the retention rate of existing customers and acquiring new
customers with more sophisticated pricing approaches.
THE TRANSACTIONS
The outstanding notes were issued in connection with the transactions
summarized below, pursuant to which we became a stand-alone company and acquired
Dex Media International, currently the only guarantor of the outstanding notes.
While an understanding of the transactions summarized below is important to your
understanding of our future cost structure, results of operations, financial
position and cash flows, the transactions do not directly impact your decision
as to whether or not to participate in the exchange offer, our future corporate
structure or the future corporate structure of Dex Media International.
On August 19, 2002, Dex Holdings, the parent of Dex Media, Inc. entered
into two purchase agreements with Qwest to acquire the print and internet
directory businesses of Qwest Dex, the directory services subsidiary of Qwest,
for an aggregate consideration of $7.05 billion (excluding fees and expenses
and subject to adjustments relating to working capital levels). Dex Holdings
assigned its right to purchase the print and internet directory businesses in
our region to Dex Media East.
The acquisition will be executed in two phases to accommodate the
regulatory requirements in the applicable states. In the first phase,
consummated on November 8, 2002, we acquired Qwest Dex's print and internet
directory businesses in our region and currently operate that business. We are a
co-issuer of the exchange notes offered hereby and the borrower under our new
credit facilities. We also acquired Dex Media International, which was a
subsidiary of Qwest and is currently the only guarantor of the exchange notes
offered hereby and a guarantor of our new credit facilities. The total amount of
consideration paid for Qwest Dex's print and internet directory businesses in
our region was $2.75 billion (excluding fees and expenses and subject to
adjustments relating to adjusted EBITDA and working capital levels).
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In the second phase, which we expect will be consummated by the second
half of 2003, Dex Media, Inc. will purchase all of Qwest Dex's print and
internet directory business in the Dex West States for $4.3 billion (excluding
fees and expenses and subject to adjustments relating to adjusted EBITDA and
working capital levels), of which we will provide $210 million to Dex Media,
Inc. to be paid by Dex Media, Inc. to Qwest, as further described below. We
will not own any of the interests in Dex Media West. In 2001, Qwest Dex's
business in the Dex West States published 119 directories and distributed
approximately 26 million copies of these directories in metropolitan areas and
local communities in the Dex West States. As of December 31, 2001, Qwest Dex's
businesses in the Dex West States had a total of 232,000 local advertising
customers consisting primarily of small and medium-sized businesses.
Upon the consummation of the transactions on November 8, 2002, we became a
stand-alone company and incurred incremental costs associated with operating as
a stand-alone company. We have identified two broad categories of incremental
stand-alone operating costs. The first category of operating costs consists of
those costs associated with operating Qwest Dex as a separate entity from
Qwest. The second category of costs consists of those costs we estimate we will
incur if the Dex Media West Acquisition is not consummated. These second
category costs are those that will result from operating Dex Media East as a
separate entity from Qwest Dex. If the acquisition of Dex Media West is
consummated, Dex Media West will reimburse us for a portion of these costs and
we will not incur other costs because we will benefit from certain economies of
scale as a result of sharing services relating to information technology,
operations, real estate, human resources and legal matters with Dex Media West.
Therefore, we believe that we will benefit from net synergies if the
acquisition of Dex Media West is consummated. See "Management's Discussion and
Analysis--Overview--Stand-Alone Company."
We will fund $210 million of the purchase price for Dex Media West which,
we believe, represents the fair value of the ongoing benefit of the synergies
to be realized by us in connection with that acquisition. The $210 million will
be paid to Dex Media, Inc. in the form of a dividend to the extent of Dex Media
East retained earnings, with any remaining balance paid as a return of capital,
immediately prior to the consummation of the acquisition of Dex Media West. Dex
Media, Inc. will use the funds to pay a portion of the purchase price for Dex
Media West to Qwest. We expect to fund that portion of the Dex Media West
purchase price through borrowings of $160 million pursuant to the delayed draw
portion of the tranche A term loan facility and an additional $50 million cash
equity contribution to us from the Sponsors, as defined, and their assignees
and designees. The commitment under the delayed draw portion of the tranche A
term loan facility terminates if the acquisition of Dex Media West is not
consummated. There can be no assurances that the acquisition of Dex Media West
will be consummated or that the anticipated synergies will be realized. See
"The Transactions--Synergies with Dex Media West."
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Assuming the consummation of the acquisition of Dex Media West, Dex
Media's corporate structure will be as follows:
[GRAPHIC OMITTED]
In connection with our acquisition of Qwest Dex's print and internet
directory businesses in our region, Qwest LEC granted us the exclusive right to
be its official directory publisher in our region until 2052. In addition,
Qwest LEC has agreed not to compete with us in the directory products business
in our region until 2042. We have entered into other agreements with Qwest LEC
and/or Qwest in connection with our acquisition of Qwest Dex's print and
internet directory businesses in our region, such as an agreement relating to
the simultaneous employment of six executives by us and Qwest Dex and an
agreement pursuant to which we will purchase various corporate services from
Qwest for a limited time. For a discussion of these agreements, see "The
Transactions--Agreements between Us, Qwest LEC and/or Qwest."
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SOURCES AND USES OF FUNDS
The following table sets forth the estimated sources and uses of funds for
the acquisition of Dex Media East. Actual amounts may vary from assumed amounts
based on final fees and expenses.
(DOLLARS IN MILLIONS)
SOURCES USES
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Revolving credit facility(1) ............ $ 50 Purchase price ....................... $2,754
Tranche A term loan facility(2) ......... 530 Working capital ...................... 15
Tranche B term loan facility ............ 700 Estimated fees and expenses .......... 141
Outstanding senior notes ................ 450
Outstanding senior subordinated
notes ................................. 525
Cash equity(3) .......................... 655
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TOTAL SOURCES ........................... $2,910 TOTAL USES ........................... $2,910
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(1) Total availability of $100 million, of which $50 million was borrowed to
fund the acquisition of Dex Media East. As of September 30, 2002, on a pro
forma basis after giving effect to the transactions related to the
acquisition of Dex Media East, we would have had $50 million available
under our new revolving credit facility.
(2) In addition, the tranche A term loan facility includes a $160 million
delayed draw commitment, which will terminate if the acquisition of Dex
Media West is not consummated.
(3) Represents the equity contribution from the Sponsors and their assignees
and designees. If the acquisition of Dex Media West is consummated, the
Sponsors and their assignees and designees will contribute an additional $50
million in cash equity to us, which will be used by Dex Media, together with
$160 million in borrowings under the delayed draw portion of the tranche A
term loan facility, to pay a portion of the purchase price for Dex Media
West to be paid to Qwest. The $210 million will be paid to Dex Media, Inc.
in the form of a dividend to the extent of Dex Media East retained earnings,
with any remaining balance paid as a return of capital, immediately prior to
the consummation of the acquisition of Dex Media West. See "The
Transactions--Synergies with Dex Media West."
The acquisition of Dex Media East, the issuance of the outstanding notes,
the borrowings under our new credit facilities and the equity contribution by
the Sponsors and their assignees and designees are collectively referred to in
this prospectus as the transactions related to the acquisition of Dex Media
East.
THE SPONSORS
The Carlyle Group is one of the largest global private equity firms with
more than $13.9 billion under management. Carlyle invests in buyouts, real
estate, high yield and venture in the United States, Europe and Asia, focusing
on aerospace and defense, consumer, industrial, energy, healthcare, technology
and telecommunications and media. Since its founding in 1987, the firm has
invested $7.2 billion and has completed 263 management buyouts and initial
investments. The Carlyle Group employs 510 people in 21 offices in 11
countries.
Welsh, Carson, Anderson & Stowe, or WCAS, is one of the largest private
equity firms in the United States and the largest in the world focused
exclusively on investments in the communications, information services and
healthcare services industries. WCAS has more than $12.0 billion under
management and, since its founding in 1979, has completed more than 100
management buyouts and initial investments.
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THE OFFERING
On November 8, 2002, Dex Media East and Dex Media East Finance completed
an offering of $450 million in aggregate principal amount of 9 7/8% Series A
Senior Notes due 2009 and $525 million in aggregate principal amount of 12 1/8%
Series A Senior Subordinated Notes due 2012, which was exempt from registration
under the Securities Act.
Outstanding Notes ....... Dex Media East and Dex Media East Finance sold the
outstanding notes to J.P. Morgan Securities Inc.,
Banc of America Securities LLC, Deutsche Bank
Securities Inc., Lehman Brothers Inc., Wachovia
Securities, Inc., Bear, Stearns & Co. Inc., Credit
Lyonnais Securities (USA) Inc., ING Financial
Markets LLC, The Royal Bank of Scotland plc and
Scotia Capital (USA) Inc., the initial purchasers,
on November 8, 2002. The initial purchasers
subsequently resold the outstanding notes to
qualified institutional buyers pursuant to Rule 144A
under the Securities Act and to non-U.S. persons
outside the United States in reliance on Regulation
S under the Securities Act.
Registration Rights
Agreements .............. In connection with the sale of the outstanding
notes, we, Dex East Media Finance and Dex Media
International entered into registration rights
agreements with the initial purchasers. Under the
terms of those agreements, we each agreed to:
o use all commercially reasonable efforts to file a
registration statement for the exchange offer and
the exchange notes and to consummate the exchange
offer within 180 days after the issue date of the
outstanding notes;
o use all commercially reasonable efforts to
consummate the exchange offer within 60 days after
the effective date of our registration statement;
and
o file a shelf registration statement for the sale
of the outstanding notes under certain
circumstances and use all commercially reasonable
efforts to cause such shelf registration statement
to become effective under the Securities Act.
If we, Dex Media East Finance and Dex Media
International do not meet one of these requirements,
we, Dex Media East Finance and Dex Media
International must pay additional interest on the
outstanding notes at an increase of 1.0% per annum
until the exchange offer is completed or the shelf
registration statement is declared effective. The
exchange offer is being made pursuant to the
registration rights agreements and is intended to
satisfy the rights granted under the registration
rights agreements, which rights terminate upon
completion of the exchange offer.
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THE EXCHANGE OFFER
The following is a brief summary of terms of the exchange offer. For a
more complete description of the exchange offer, see "The Exchange Offer."
Securities Offered ....... $450,000,000 in aggregate principal amount of
9 7/8% Series B Senior Notes due 2009 and
$525,000,000 in aggregate principal amount of 12
1/8% Series B Senior Subordinated Notes due 2012.
Exchange Offer ........... The exchange notes are being offered in exchange
for a like principal amount of outstanding notes. We
will accept any and all outstanding notes validly
tendered and not withdrawn prior to 5:00 p.m., New
York City time, on __________, 2003. Holders may
tender some or all of their outstanding notes
pursuant to the exchange offer. However, outstanding
notes may be tendered only in integral multiples of
$1,000 in principal amount. The form and terms of
the exchange notes are the same as the form and
terms of the outstanding notes except that:
o the exchange notes have been registered under the
federal securities laws and will not bear any
legend restricting their transfer;
o the exchange notes bear a series B designation and
a different CUSIP number than the outstanding
notes; and
o the holders of the exchange notes will not be
entitled to certain rights under the registration
rights agreements, including the provisions for an
increase in the interest rate on the outstanding
notes in some circumstances relating to the timing
of the exchange offer.
See "The Exchange Offer."
Expiration Date .......... The exchange offer will expire at 5:00 p.m., New
York City time, on ___________, 2003, unless we
decide to extend the exchange offer.
Conditions to the Exchange
Offer .................... The exchange offer is subject to certain customary
conditions, some of which may be waived by us. See
"The Exchange Offer--Conditions to the Exchange
Offer."
Procedures for Tendering
Outstanding Notes ........ If you wish to accept the exchange offer, you must
complete, sign and date the letter of transmittal,
or a facsimile of the letter of transmittal, in
accordance with the instructions contained in this
prospectus and in the letter of transmittal. You
should then mail or otherwise deliver the letter of
transmittal, or facsimile, together with the
outstanding notes to be exchanged and any other
required documentation, to the exchange agent at the
address set forth in this prospectus and in the
letter of transmittal.
By executing the letter of transmittal, you will
represent to us that, among other things:
o any exchange notes to be received by you will be
acquired in the ordinary course of business;
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8
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o you have no arrangement or understanding with any
person to participate in the distribution (within
the meaning of the Securities Act) of the exchange
notes in violation of the provisions of the
Securities Act;
o you are not an "affiliate" (within the meaning of
Rule 405 under Securities Act) of Dex Media East,
Dex Media East Finance or Dex Media International;
and
o if you are a broker-dealer that will receive
exchange notes for your own account in exchange
for outstanding notes that were acquired as a
result of market-making or other trading
activities, then you will deliver a prospectus in
connection with any resale of such exchange notes.
See "The Exchange Offer--Procedures for Tendering
Outstanding Notes" and "Plan of Distribution."
Effect of Not Tendering .. Any outstanding notes that are not tendered or that
are tendered but not accepted will remain subject to
the restrictions on transfer. Since the outstanding
notes have not been registered under the federal
securities laws, they bear a legend restricting
their transfer absent registration or the
availability of a specific exemption from
registration. Upon the completion of the exchange
offer, we will have no further obligations, except
under limited circumstances, to provide for
registration of the outstanding notes under the
federal securities laws. See "The Exchange
Offer--Effect of Not Tendering."
Interest on the Exchange
Notes and the Outstanding
Notes .................... The exchange notes will bear interest from the most
recent interest payment date to which interest has
been paid on the notes or, if no interest has been
paid, from November 8, 2002. Interest on the
outstanding notes accepted for exchange will cease
to accrue upon the issuance of the exchange notes.
Withdrawal Rights ........ Tenders of outstanding notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the
expiration date.
Federal Tax Consequences . There will be no federal income tax consequences to
you if you exchange your outstanding notes for
exchange notes in the exchange offer. See "Material
Federal Income Tax Consequences."
Use of Proceeds .......... We will not receive any proceeds from the issuance
of exchange notes pursuant to the exchange offer.
Exchange Agent ........... U.S. Bank National Association, the trustee under
the indentures, is serving as exchange agent in
connection with the exchange offer.
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TERMS OF THE EXCHANGE NOTES
The following is a brief summary of the terms of the exchange notes. The
financial terms and covenants of the exchange notes are the same as the
outstanding notes. For a more complete description of the terms of the exchange
notes, see "Description of Senior Exchange Notes" and "Description of Senior
Subordinated Exchange Notes."
Issuers .................. Dex Media East LLC, a Delaware limited liability
company, and Dex Media East Finance Co., a Delaware
corporation.
Securities Offered ....... $450,000,000 in aggregate principal amount of 97/8%
Series B Senior Notes due 2009.
$525,000,000 in aggregate principal amount of 121/8%
Series B Senior Subordinated Notes due 2012.
Maturity Date ............ November 15, 2009 for the senior exchange notes and
November 15, 2012 for the senior subordinated
exchange notes.
Interest Payment Dates ... May 15 and November 15 of each year beginning
May 15, 2003.
Guarantees ............... The senior exchange notes will be guaranteed on a
senior unsecured basis, and the senior subordinated
exchange notes will be guaranteed on a senior
subordinated unsecured basis, by Dex Media
International, Inc., which is currently our only
subsidiary (other than Dex Media East Finance Co.),
and each of our future subsidiaries that is a
guarantor or direct borrower under our new credit
facilities.
Ranking .................. The senior exchange notes will be senior unsecured
obligations of the Issuers and the guarantors and
will:
o rank equally in right of payment to all existing
and future senior indebtedness of the Issuers and
the guarantors;
o rank senior in right of payment to all existing
and future senior subordinated indebtedness and
subordinated indebtedness of the Issuers and the
guarantors;
o be effectively subordinated in right of payment to
the secured debt of the Issuers and the guarantors
by virtue of the secured creditors' security
interest in the assets securing the secured debt,
to the extent of the value of the assets securing
such debt; and
o be structurally subordinated to all liabilities
and preferred stock of each of the Issuers' future
direct and indirect subsidiaries that do not
guarantee the senior notes.
As of September 30, 2002, on a pro forma basis after
giving effect to the transactions related to the
acquisition of Dex Media East, the senior exchange
notes would have ranked (1) effectively subordinated
to approximately $1,280 million of secured
indebtedness under our new credit facilities
(excluding approximately $50 million available for
additional borrowing under our new revolving credit
facility), and (2) senior to $525 million of
indebtedness.
The senior subordinated exchange notes will be
senior subordinated unsecured obligations of
the Issuers and the guarantors and will:
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10
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o rank junior in right of payment to all existing
and future senior indebtedness of the Issuers and
the guarantors;
o rank equally in right of payment with all existing
and future senior subordinated indebtedness of the
Issuers and the guarantors;
o rank senior in right of payment to all future
subordinated indebtedness of the Issuers and the
guarantors;
o be effectively subordinated in right of payment to
secured debt of the Issuers and the guarantors by
virtue of the secured creditors' security interest
in the assets securing the secured debt, to the
extent of the value of the assets securing such
debt; and
o be structurally subordinated to all liabilities
and preferred stock of each of the Issuers' future
direct and indirect subsidiaries that do not
guarantee the senior notes.
As of September 30, 2002, on a pro forma basis after
giving effect to the transactions related to the
acquisition of Dex Media East, the senior
subordinated exchange notes would have ranked junior
to approximately $1,730 million of indebtedness
(excluding approximately $50 million available for
additional borrowing under our new revolving credit
facility).
Optional Redemption ...... We may redeem some or all of the senior exchange
notes at any time on or after November 15, 2006 at
the redemption prices listed under "Description of
Senior Exchange Notes--Optional Redemption."
We may redeem some or all of the senior subordinated
exchange notes at any time on or after November 15,
2007 at the redemption prices listed under
"Description of Senior Subordinated Exchange
Notes--Optional Redemption."
In addition, before November 15, 2005, we may redeem
up to 35% of each of the senior notes and the senior
subordinated notes with the net cash proceeds from
certain equity offerings at the prices listed under
"Description of Senior Exchange Notes--Optional
Redemption" and "Description of Senior Subordinated
Exchange Notes--Optional Redemption," respectively.
Change of Control ........ Upon the occurrence of a change of control, unless
we have exercised our right to redeem all of the
exchange notes of an issue as described above, you
will have the right to require us to purchase all or
a portion of your exchange notes at a purchase price
in cash equal to 101% of the principal amount, plus
accrued and unpaid interest, if any, to the date of
purchase. See "Description of Senior Exchange
Notes--Change of Control" and "Description of Senior
Subordinated Exchange Notes--Change of Control."
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Covenants ................ The indentures governing the exchange notes contain
covenants that impose significant restrictions on
our business. The restrictions these covenants place
on us and our restricted subsidiaries (which include
Dex Media East Finance, Dex Media International and
any future subsidiary that we form or acquire and do
not subsequently designate as an unrestricted
subsidiary in accordance with the provisions set
forth in the indentures) include limitations on our
ability and the ability of our restricted
subsidiaries to:
o incur additional indebtedness;
o pay dividends or make distributions in respect of
our capital stock or to make certain other
restricted payments or investments;
o sell assets, including capital stock of restricted
subsidiaries;
o agree to payment restrictions affecting restricted
subsidiaries;
o consolidate, merge, sell or otherwise dispose of
all or substantially all of our assets;
o enter into transactions with our affiliates; and
o designate any of our subsidiaries as unrestricted
subsidiaries.
In addition, the indenture governing the senior
exchange notes limits our ability and the ability of
our restricted subsidiary to incur liens.
No Public Market for
the Exchange Notes ..... The exchange notes are new issues of securities and
will not be listed on any securities exchange or
included in any automated quotation system. The
initial purchasers of the outstanding notes have
advised us that they intend to make a market in the
exchange notes. The initial purchasers are not
obligated, however, to make a market in the exchange
notes, and any such market-making may be
discontinued by the initial purchasers in their
discretion at any time without notice. See "Plan of
Distribution."
RISK FACTORS
You should carefully consider all the information in this prospectus prior
to participating in the exchange offer. In particular, we urge you to consider
carefully the factors set forth under "Risk Factors" beginning immediately
after this "Prospectus Summary."
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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary historical financial data as of and for the years ended
December 31, 1999, 2000 and 2001 have been derived from our combined financial
statements, included elsewhere in this prospectus, which have been audited by
KPMG LLP, independent auditors. The summary historical financial data as of and
for the nine months ended September 30, 2001 and 2002 have been derived from
our unaudited combined financial statements, which have been prepared on a
basis consistent with our annual combined financial statements, which are
included elsewhere in this prospectus. In the opinion of management, such
unaudited financial data reflects all adjustments, consisting only of normal
and recurring adjustments, necessary for a fair presentation of the results for
those periods. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year or any
future period.
The summary pro forma financial data for the year ended December 31, 2001
and as of and for the nine months ended September 30, 2002have been prepared to
give pro forma effect to the transactions related to the acquisition of Dex
Media East as if they had occurred on September 30, 2002, in the case of
summary unaudited pro forma balance sheet data, and on January 1, 2001, in the
case of summary unaudited pro forma statements of operations data.
While we have been a stand-alone company since the consummation of the
transactions related to the acquisition of Dex Media East on November 8, 2002,
we have historically operated as the print and internet directory businesses of
Qwest Dex, Inc. in our region. Because our relationship with Qwest Dex Holdings
and Qwest Dex as well as Qwest and its other affiliates has changed as a result
of the acquisition of Dex Media East, we expect that our cost structure will
change significantly from that reflected in our summary historical and pro
forma operating results. As a result, our summary historical and pro forma
results of operations, financial position and cash flows would have been
different if we had operated as a stand-alone company without the shared
resources of Qwest and its affiliates. The summary pro forma financial data is
for informational purposes only and should not be considered indicative of
actual results that would have been achieved had the transactions related to
the acquisition of Dex Media East actually been consummated on the dates
indicated and do not purport to indicate balance sheet data or results of
operations as of any future date or for any future period. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Sensitivity Analysis Relating to EBITDA", "Unaudited Pro Forma
Financial Information", "The Transactions" and our combined financial
statements and related notes thereto, included elsewhere in this prospectus.
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DEX MEDIA
DEX MEDIA EAST LLC
EAST LLC DEX EAST HISTORICAL PRO FORMA
(DOLLARS IN MILLIONS, OTHER THAN DEX EAST HISTORICAL PRO FORMA ----------------------- --------------
PRINTED REVENUES PER ----------------------------------- -------------- NINE MONTHS ENDED NINE MONTHS
ADVERTISER (LOCAL)) YEAR ENDED DECEMBER 31, YEAR ENDED SEPTEMBER 30, ENDED
- ------------------------------------- ----------------------------------- DECEMBER 31, ----------------------- SEPTEMBER 30,
1999 2000 2001 2001 2001 2002 2002
----------- ----------- ----------- -------------- ----------- ----------- --------------
STATEMENT OF INCOME DATA:
Directory services revenues ......... $ 587 $ 619 $ 647 $ 647 $ 483 $ 500 $ 500
Directory services revenues,
affiliates ......................... 5 5 6 6 4 5 5
Other revenues ...................... 9 14 13 13 11 11 11
Total revenues(a) .................. 601 638 666 666 498 516 516
Cost of revenues ................... 232 238 209 209 156 156 156
General and administrative
expense ........................... 87 49 48 50 41 42 44
Depreciation and amortization
expense ........................... 14 15 12 236 10 8 176
Merger-related expenses(b) ......... -- 6 4 4 4 -- --
Impairment charges(c) .............. -- -- 7 7 -- -- --
Total operating expenses .......... 333 308 280 506 211 206 376
Operating income ................... 268 330 386 160 287 310 140
Interest expense, net(d) ........... 124 123 110 211 84 72 158
OTHER FINANCIAL DATA:
Capital expenditures ............... 18 15 7 7 6 13 13
Cash interest expense .............. 193 145
Ratio of earnings to fixed
charges(e) ........................ 2.1x 2.7x 3.3x 1.2x 3.3x 4.2x 1.4x
OTHER OPERATIONAL DATA:
Number of local advertisers (at
period end) ....................... 215,294 211,087 205,715 205,715 206,705 201,836 201,836
Printed revenues per advertiser
(local) ........................... $ 2,293 $ 2,450 $ 2,622 $ 2,622 n/a n/a n/a
Local advertiser renewal rate ...... 94% 94% 93% 93% 93% 93% 93%
Number of directories
published ......................... 153 152 150 150 112 112 112
BALANCE SHEET DATA (AT PERIOD
END):
Total cash and cash
equivalents ....................... -- -- $ 55 $ 148 $ 62 $ 15
Working capital(f) ................. $ (1,687) $ (1,519) (1,267) (1,321) (1,045) 90
Total assets ....................... 299 313 348 420 356 2,994
Total senior debt .................. 1,730
Total debt(g) ...................... 1,741 1,603 1,391 1,460 1,178 2,255
Owner's (deficit) equity ........... (1,673) (1,493) (1,250) (1,300) (998) 655
- ---------------
(a) We estimate that our revenues and expenses for the twelve months following
the consummation of the transactions related to the acquisition of Dex
Media East will be approximately $76 million and $24 million lower,
respectively, than they would have been had the transactions not occurred
because the transactions will be accounted for under the purchase method
of accounting, under which the deferred revenue and deferred directory
costs would be fair valued. Had these purchase accounting adjustments not
been made, approximately $76 million of deferred revenue would have been
recorded as revenue and $24 million of deferred directory costs would have
been recorded as expense over the twelve months following the consummation
of the transactions. The purchase method of accounting will not affect our
revenues and directory costs in periods subsequent to this twelve-month
period. This purchase accounting adjustment is non-recurring and has no
historical or future cash impact.
(b) Merger-related expenses reflect expenses incurred in connection with
Qwest's acquisition of U S WEST, or the Merger, including contractual
settlements incurred to cancel various commitments no longer deemed
necessary as a result of the Merger, severance and employee-related
expenses (offset against a post-retirement benefit plan curtailment gain)
and rebranding expenses.
(c) Impairment charges reflect capitalized software costs that were written off
as certain internal software projects in progress were discontinued.
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(d) Historical interest expense, net includes interest on that portion of a
Qwest Dex line of credit borrowing arrangement with an affiliate of Qwest
which was apportioned to us. Note 2a to our combined financial statements
included in this prospectus sets forth additional information regarding
this apportionment. Pro forma interest expense gives effect to the
transactions related to the acquisition of Dex Media East and includes $18
million and $14 million for the year ended December 31, 2001 and the nine
months ended September 30, 2002, respectively, of non-cash charges
consisting of amortization of debt issuance costs relating to our new
credit facilities and the outstanding notes.
(e) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose, earnings include pre-tax income from
continuing operations and fixed charges include interest, whether expensed
or capitalized, and an estimate of interest within rental expense.
(f) Working capital is defined as current assets less current liabilities.
Working capital includes cash that was not acquired by Dex Media East from
its predecessor and adjusted short-term borrowings from affiliates. These
short-term borrowings were eliminated after the consummation of the
transactions related to the acquisition of Dex Media East. The following
table summarizes the effects of these items on adjusted net working
capital for the periods indicated:
DEX MEDIA
EAST LLC
PRO FORMA
--------------
DEX EAST HISTORICAL NINE
--------------------------------------------------------------- MONTHS
NINE MONTHS ENDED ENDED
(DOLLARS IN MILLIONS) YEAR ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
- ----------------------------------- ---------------------------------- ------------------------ -------------
1999 2000 2001 2001 2002 2002
--------- --------- --------- ----------- --------- -------------
Working capital ................... $ (1,687) $ (1,519) $ (1,267) $(1,321) $ (1,045) $ 90
Adjustments to working
capital:
Cash and cash equivalents ......... -- -- (55) (148) (62) (15)
Short term borrowings ............. 1,741 1,603 1,391 1,460 1,178 --
-------- -------- -------- ------- -------- -----
Working capital, excluding
cash and short-term
borrowings ....................... $ 54 $ 84 $ 69 $ (9) $ 71 $ 75
-------- -------- -------- --------- -------- -----
Working capital, excluding cash and short-term borrowings, is included in
this prospectus to provide additional information with respect to the
working capital of Dex Media East, as it excludes cash and short term
borrowings that were not acquired by Dex Media East from its predecessor.
Working capital, excluding cash and short-term borrowings is not
calculated under generally accepted accounting principles, or GAAP, and
should not be considered in isolation or as a substitute for working
capital prepared in accordance with GAAP. In addition, working capital,
excluding cash and short-term borrowings as presented is not necessarily
comparable to other similarly titled captions of other companies due to
the potential inconsistencies in the method of calculation.
(g) Historical total debt consists of that portion of a Qwest Dex line of
credit borrowing arrangement with an affiliate of Qwest which was
apportioned to us. Note 2a to our combined financial statements included
in this prospectus sets forth additional information regarding this
apportionment. Pro forma total debt consists of our new credit facilities
with JP Morgan Chase Bank, as administrative agent and collateral agent,
and Bank of America, N.A., Lehman Commercial Paper Inc., Wachovia Bank,
National Association and Deutsche Bank Trust Company Americas, as
co-syndication agents, and the outstanding notes. See "Unaudited Pro Forma
Financial Information."
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15
RISK FACTORS
You should carefully consider the risks described below as well as the
other information contained in this prospectus before making a decision to
participate in the exchange offer. The risks described below are not the only
risks facing us. Additional risks and uncertainties not currently known to us
or that we currently deem to be immaterial may also materially adversely affect
our business operations. Any of the following risks could materially adversely
affect our business, financial condition or results of operations.
RISKS RELATED TO OUR BUSINESS
THE LOSS OF ANY OF OUR KEY AGREEMENTS WITH QWEST LEC COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.
In connection with the transactions related to the acquisition of Dex
Media East, we entered into several agreements with Qwest LEC, including a
publishing agreement, a non-competition agreement and a billing and collection
services agreement. Under the publishing agreement, we are the exclusive
official publisher of directories for Qwest LEC, the local exchange carrier
subsidiary of Qwest, in our region for 50 years. We believe that acting as the
exclusive publisher of directories for the incumbent telephone company provides
us with a competitive advantage. Under the non-competition agreement, Qwest LEC
agreed for 40 years not to sell directory products consisting principally of
listings and classified advertisements for subscribers in the geographic areas
in our region in which Qwest LEC provides local telephone service that are
directed primarily at customers in those geographic areas. Under the billing
and collection services agreement, Qwest LEC agreed to continue to bill and
collect, on our behalf, amounts owed by customers in connection with our
directory services and purchase the associated accounts receivable from us. In
2001, Qwest LEC billed approximately 54% of our revenues on our behalf as part
of Qwest LEC's telephone bill and held these collections in joint accounts with
Qwest LEC's own collections. The termination of any of these agreements or the
failure by Qwest LEC to satisfy its obligations under these agreements could
have a material adverse effect on our business. See "The
Transactions--Agreements between Us, Qwest LEC and/or Qwest."
Qwest is currently highly leveraged and has a significant amount of debt
maturing by the end of calendar year 2003 and thereafter. In addition, Qwest
has been facing significant liquidity issues as well as issues relating to its
compliance with certain covenants contained in the agreements governing its
indebtedness. Accordingly, while we believe the consummation of the
transactions related to the acquisition of Dex Media East mitigated Qwest's
immediate liquidity and covenant compliance issues, we cannot assure you that
Qwest will not seek protection under U.S. bankruptcy laws. If Qwest were forced
to seek protection under U.S. bankruptcy laws, Qwest LEC, which is controlled
by Qwest, might also seek such protection notwithstanding the facts that Qwest
LEC has substantially less outstanding debt (according to its public filings),
may be solvent and Qwest LEC's own creditors may object to such action. In
addition, Qwest LEC is a highly regulated entity and we cannot predict what
action, if any, regulatory authorities may take in response to any such actions
by Qwest or Qwest LEC. As a result, we cannot predict whether Qwest will seek
U.S. bankruptcy law protection and if it does, whether Qwest LEC would seek
similar protection in a separate or jointly administered proceeding.
If Qwest and/or Qwest LEC does seek U.S. bankruptcy law protection, our
agreements with Qwest LEC, and Qwest LEC's ability to provide the services
under those agreements, could be adversely impacted. For example, in bankruptcy
proceedings, Qwest LEC, or a bankruptcy trustee acting on its behalf, could
seek to reject those agreements as "executory" contracts under U.S. bankruptcy
law. If the bankruptcy court were to hold that any such contracts are
executory, Qwest LEC would be able to avoid its obligations under such
contracts and we would have a claim for substantial damages, including
substantial liquidated damages, against the bankruptcy estate, which may or may
not be paid in the bankruptcy proceeding. 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
our business.
16
In addition, in a bankruptcy, Qwest LEC could seek to sell certain of its
assets, including the assets relating to Qwest LEC's local telephone business,
to third parties pursuant to the approval of the bankruptcy court. In such
case, any third parties acquiring Qwest LEC's assets would be required pursuant
to current laws and orders of certain government entities to publish and
deliver white pages directories in every area in which the third parties
provide local telephone service. To satisfy their publishing obligations, it
would be necessary for the third parties to make substantial capital
investments or to outsource the publishing of their white pages directories to
a company with extensive publishing resources. While the third party purchasers
in any such asset sale could elect to keep our agreements with Qwest LEC in
place or to enter into similar contracts with us, making us their outsourced
publisher, they might not be required to do so, although such action would give
us a claim for damages, including substantial liquidated damages, against the
bankruptcy estate. Therefore, the purchaser of any such assets might be able to
avoid, among other things, our publishing agreement and non-competition
agreement with Qwest LEC.
Pursuant to the billing and collection services agreement, Qwest LEC
prepares settlement statements 10 times per month for each state in our region
summarizing the amounts due to us and purchases our accounts receivables billed
by it within approximately nine business days following such settlement date.
In the event that Qwest LEC were involved in a bankruptcy proceeding, we may
have difficulties obtaining the funds collected by Qwest LEC on our behalf at
the time such proceeding was instituted. Further, if Qwest LEC continued to
bill our customers pursuant to the billing and collection services agreement
following any such bankruptcy filing, customers of Qwest LEC may be less likely
to pay on time, or at all, bills received, including the amount owed to us.
Qwest LEC has completed the preparation of its billing and collection system so
that we will be able to transition from the Qwest LEC billing and collection
system to our own billing and collection system within approximately two weeks
should we choose to do so. However, if Qwest LEC were involved in a bankruptcy
proceeding, it could have a material adverse effect on our ability to collect
unpaid receivables or receivables billed by Qwest after the commencement of
such proceedings. See "The Transactions--Agreements between Us, Qwest LEC
and/or Qwest--Billing and Collection Services Agreement."
WE OPERATE IN THE COMPETITIVE DIRECTORY ADVERTISING INDUSTRY.
The U.S. directory advertising industry is competitive. There are a number
of independent directory publishers, such as TransWestern Publishing Company
LLC, the U.S. business of Yell Group Ltd. and McLeodUSA Media Group Inc. (which
has been acquired by Yell Group Ltd.), and we compete with one or more of them
throughout our region. In addition, we currently compete to a limited extent
with other directory publishers in some of our markets, including local
exchange carriers such as SBC Communications Inc. and Verizon Communications
Inc., and these other directory publishers could elect to publish directories
in the future in any of our markets in which they do not currently publish
directories. Through our internet-based directory, we compete with these
publishers and with other internet sites providing classified directory
information, such as Overture.com, Citysearch.com, Zagats.com and
Moviefone.com, and with search engines such as Yahoo!, AltaVista and Excite,
some of which have entered into affiliate agreements with other major directory
publishers. We cannot assure you that we will be able to compete effectively
with these other companies, some of which may have greater resources than we
do, for advertising in the future. In addition, we compete against other media,
including newspapers, radio, television, the internet, billboards and direct
mail, for business and professional advertising, and we cannot assure you that
we will be able to compete successfully against these and other media for such
advertising.
The Telecommunications Act of 1996 effectively opened local telephone
markets to increased competition. Consequently, there can be no assurance that
Qwest LEC will remain the dominant local telephone service provider in its
local service area. If Qwest LEC were no longer the dominant local telephone
service provider in its local service area, we may not realize some of the
anticipated benefits under our publishing agreement with Qwest LEC, which could
have a material adverse effect on our business.
17
WE COULD BE MATERIALLY ADVERSELY AFFECTED BY DECLINING USAGE OF PRINTED YELLOW
PAGES DIRECTORIES.
Based on industry sources, we believe that we believe that overall usage of
printed yellow pages directories in the United States declined by a compound
annual rate of approximately 5% between 1997 and 2001. During that same period,
we believe that the overall usage of Qwest Dex's printed yellow pages
directories in our region declined as well. Notwithstanding these declines in
usage, we have been able to increase our annual revenues during that same period
by a compound annual growth rate of approximately 6% through, among other
things, increases in our advertising prices and the average size of
advertisements.
There can be no assurance that usage of our yellow pages directories will
not continue to decline at the existing rate or more severely. In addition,
there can be no assurance that we will be able to continue to increase prices
in the future. Several factors, including the publication of competing
directories and the increased usage of internet-based directories, could cause
usage of our printed directories to continue to decline.
Any declines in usage could:
o impair our ability to maintain or increase our advertising prices;
o cause businesses that purchase advertising in our yellow pages
directories to reduce or discontinue those purchases; and
o discourage businesses that do not purchase advertising in our yellow
pages directories from doing so.
Although we believe that the decline in the usage of our printed
directories will be offset in part by an increase in usage of our
internet-based directory, we cannot assure you that we will be able to provide
services over the internet successfully or to compete successfully with other
internet-based directory services. Any of the factors that may contribute to a
decline in usage of our printed directories, or a combination of them, could
impair our revenues and have a material adverse effect on our business.
QWEST, THE FORMER OWNER OF OUR BUSINESS, IS THE SUBJECT OF ONGOING
INVESTIGATIONS BY THE SEC AND THE U.S. ATTORNEY'S OFFICE.
On March 8, 2002, Qwest, the former owner of our business, received a
request from the Denver regional office of the SEC to voluntarily produce
documents and information as part of an informal inquiry into certain of its
accounting practices. On April 3, 2002, the SEC issued an order authorizing a
formal investigation of Qwest. The accounting practices under investigation
include, among others, the revenue recognition practices of Qwest Dex. We
understand that Qwest and Qwest Dex are fully cooperating with the ongoing SEC
investigation. In connection with the SEC investigation, representatives of
Qwest have provided testimony to the SEC. Representatives of Qwest have also
testified before Congress. We also understand that the SEC has asked or may ask
certain other representatives of Qwest to provide testimony. In addition, the
current and former Chief Executive Officers and the two former Chief Financial
Officers (including the current Vice President, Financial Planning and
Analysis) of Qwest Dex have been subpoenaed and have provided doents and
testimony to the SEC. In the investigation, the SEC may issue additional
subpoenas seeking documents and/or testimony from other current and former
Qwest Dex employees. We cannot assure you that the SEC investigation will not
result in any enforcement action against employees of Qwest Dex.
Prior to 1999, Qwest Dex (then known as U S WEST Dex) recognized revenue
and expenses related to publishing directories using the deferral and
amortization method. Under that accounting method, revenue and expenses were
recognized over the lives of the directories, which typically were 12 months.
Effective as of the first quarter of 1999, Qwest Dex changed to the point of
publication method of accounting, under which revenue and expenses were
recognized when a directory was published. As discussed in Qwest's public
filings made in August 2002, based on several factors, including comments
received from the Staff of the Division of Corporation Finance of the SEC during
the review of Qwest's proposed shelf registration statement and its 10-K for the
year ended
18
December 31, 2001, Qwest Dex reassessed its use of the point of publication
method and determined that the deferral and amortization method was more
appropriate under the circumstances. Qwest has announced its intent to restate
its consolidated financial statements for 2000 and 2001 to correct certain
matters relating to the accounting treatment of the sale by Qwest of optical
capacity assets, the sale of equipment by Qwest to certain customers, and Qwest
Dex's use of the point of publication method of accounting.
Our audited combined financial statements included in this prospectus have
been prepared on the basis of the deferral and amortization method. As a
result, we believe that our audited combined financial statements included in
this prospectus address all of the comments relating to Qwest Dex's directory
publishing business that the Staff of the Division of Corporation Finance of
the SEC has raised to date during its review of Qwest's public filings. There
can be no assurances, however, that the Staff of the SEC will not raise
additional issues in the course of its investigation of Qwest or otherwise. Any
such issues might impact the accounting policies and procedures of the Qwest
Dex business, which could require us to revise or restate our combined
financial statements.
In addition, on July 10, 2002, Qwest was informed by the U.S. Attorney's
office in Denver that it had begun a criminal investigation of Qwest. Although
the U.S. Attorney's office has not disclosed the subject matter of the
investigation, it has indicated that it is investigating the matters under
inquiry in the SEC investigation, which include Qwest Dex's recognition of
revenue under the point of publication method. It is not clear whether this
investigation involves the business or management of Qwest Dex's directory
business (other than its former revenue recognition policy) or employees that
work for the Qwest Dex business. We do not have any knowledge that current
employees of Qwest Dex are the subject of the U.S. Attorney's investigation.
None of the employees of Qwest Dex have informed us that they are the target of
the U.S. Attorney's investigation or have been contacted by the U.S. Attorney's
office in connection with the investigation.
Although we acquired only the assets of the Qwest Dex business located in
our region and not the Qwest Dex corporate entity and we did not assume in the
acquisition of Dex Media East any liabilities relating to the SEC or the U.S.
Attorney's office investigations, there can be no assurances that these
investigations or other investigations will not have a material adverse effect
on our business.
OUR BUSINESS COULD SUFFER IF THERE IS A PROLONGED ECONOMIC DOWNTURN.
We derive our net revenues from the sale of advertising in our
directories. Our advertising revenues, as well as those of yellow pages
publishers in general, generally do not fluctuate widely with economic cycles.
However, a prolonged national or regional economic recession could have a
material adverse effect on our business.
OUR DEPENDENCE ON THIRD-PARTY PROVIDERS OF PRINTING, DISTRIBUTION AND DELIVERY
SERVICES COULD MATERIALLY ADVERSELY AFFECT US.
We depend on third parties for the printing and distribution of our
directories. We have contracts with two companies, R.R. Donnelley & Sons
Company and Quebecor World Directory Sales Corporation, for the printing of our
directories. Although these contracts do not expire until December 31, 2006 and
July 30, 2008, respectively, because of the large print volume and specialized
binding of directories, there are only a small number of companies in the
printing industry that could service our needs. Accordingly, the inability or
unwillingness of Donnelley or Quebecor to provide printing services to us on
acceptable terms or at all could have a material adverse effect on our
business.
We have a contract with a single company, Product Development Corporation,
or PDC, for the distribution of our directories. Although this contract does
not expire until December 31, 2003, either party may terminate the contract
upon 180 days' written notice. There are only a small number of companies that
could service our distribution needs. Accordingly, the inability or
unwillingness of PDC to provide distribution services to us on acceptable terms
or at all could have a material adverse effect on our business.
19
We have a contract with Matson Intermodal System, Inc. to provide
logistical support and to transport our printed directories from our printers'
locations to PDC. Although this contract will not expire until December 31,
2003 and we have a right to extend the contract until December 31, 2004, we
rely on Matson's services extensively for our transportation and logistical
needs, and only a small number of companies could service our transportation
needs. Accordingly, any disruptions in the services provided to us by Matson or
by a third party upon termination of our contract with Matson, if it is not
renewed, could have a material adverse effect on our business.
FLUCTUATIONS IN THE PRICE OR AVAILABILITY OF PAPER COULD MATERIALLY ADVERSELY
AFFECT US.
The principal raw material that we use is paper. In 2001, paper costs
incurred comprised 4.4% of our revenues and 13.9% of our cost of revenues.
Approximately 93% of the paper that we use is supplied by two companies:
Daishowa America Co., Ltd. and Norske Skog Canada (USA), Inc. Pursuant to our
agreements with them, Daishowa and Norske are required to provide up to 60% and
40% of our annual paper supply, respectively. Prices under the two agreements
are set each year based on prevailing market rates. If, in a particular year,
the parties to either of the agreements are unable to agree on repricing,
either party may terminate the agreement. Both agreements expire on December
31, 2003. Furthermore, we purchase paper used for the covers of our directories
from Spruce Falls, Inc. Pursuant to our agreement, Spruce Falls is required to
provide 100% of our annual cover stock paper supply. Prices under this
agreement are negotiated each year. If, in a particular year, Spruce Falls and
we are unable to agree on repricing, either party may terminate this agreement.
Although this agreement expired on December 31, 2002, the parties are currently
negotiating to extend this agreement until December 31, 2003. We are currently
operating under the terms of the prior agreement. We do not engage in hedging
activities to limit our exposure to paper price increases. The price of paper
may fluctuate significantly in the future. Changes in the supply of or demand
for paper could affect delivery times and prices. We cannot assure you that we
will continue to have access to paper in the necessary amounts or at reasonable
prices or that any increases in the cost of paper will not have a material
adverse effect on our business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
WE COULD BE MATERIALLY ADVERSELY AFFECTED BY TURNOVER AMONG SALES
REPRESENTATIVES OR LOSS OF KEY PERSONNEL.
We depend on our ability to identify, hire, train and retain qualified
sales personnel. A loss of a significant number of experienced sales
representatives would likely result in fewer sales of advertising in our
directories and could materially adversely affect our business. We expend
significant resources and management time in identifying and training our sales
representatives. Our ability to attract and retain qualified sales personnel
depends, however, on numerous factors, including factors that we cannot
control, such as conditions in the local employment markets in which we
operate. We cannot assure you that we will be able to hire or retain a
sufficient number of sales representatives to achieve our financial objectives.
Furthermore, we depend on the continued services of key personnel,
including regional sales management personnel. Pursuant to a joint management
agreement, Qwest Dex and we simultaneously employ the following executives on a
full-time basis until the earlier of the consummation of the acquisition of Dex
Media West or a maximum of 120 days after the termination of the Dex Media West
purchase agreement: George Burnett, Maggie Le Beau, Linda Martin, Bradley
Richards, Robert Houston and Anthony Basile. Each of these shared executives
must divide his or her time, effort and resources between Qwest Dex and us. In
addition, upon consummation of the acquisition of Dex Media West, we expect to
enter into a similar agreement with Dex Media West under which these executives
will be employed solely by us and/or Dex Media, but will provide their services
to both us and Dex Media West. Consequently, the executives will not be able to
devote his or her full attention to our business. Although we believe that we
could replace our key employees within a reasonable time should the need arise,
the loss of key personnel could have a material adverse effect on our business.
20
WE MAY BE MATERIALLY ADVERSELY AFFECTED BY OUR PRACTICE OF EXTENDING CREDIT TO
SMALL AND MEDIUM-SIZED BUSINESSES.
In 2001, approximately 81% of our revenues were generated through the sale
of advertising to local businesses, which are generally small and medium-sized
businesses. In the ordinary course of our directory operations, we extend
credit to these customers for advertising purchases. As of December 31, 2001,
we had approximately 198,000 customers to which we extended credit with an
average amount due per customer of approximately $2,750. Full collection of
delinquent accounts can take many months or may never occur. In 2001, bad debt
expense for our customers amounted to $16 million, or approximately 2.4% of our
revenue. Small and medium-sized businesses tend to have fewer financial
resources and higher rates of failure than do larger businesses. Consequently,
although we attempt to mitigate exposure to the risks that result from
extending credit to small and medium-sized businesses through credit screening
and the collection of advance payments under certain circumstances, we cannot
assure you that we will not be materially adversely affected by our practice of
extending credit to small and medium-sized businesses.
OUR SALES OF ADVERTISING TO NATIONAL ACCOUNTS IS COORDINATED BY THIRD PARTIES
THAT WE DO NOT CONTROL.
Approximately 15% of our revenues in 2001 were derived from the sale of
advertising to national or large regional chains, such as rental car companies,
automobile repair shops and pizza delivery businesses, that purchase
advertising in several of the directories that we publish. In order to sell
advertising to these accounts, we contract with approximately 170 certified
marketing representatives, or CMRs, which 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 relationships with these national advertisers depend
significantly on the performance of these third party CMRs whom we do not
control. In particular, we rely heavily on one of our CMRs, TMP Worldwide Inc.,
or TMP, which accounted for approximately 5% of our revenues in 2001. Although
we believe that our relationship with TMP is mutually beneficial and that those
CMRs with whom we have existing relationships or other third parties could
service our needs if TMP were unable or unwilling to provide its services to 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
TMP or the other CMRs with whom we contract could harm our ability to generate
revenue from our national accounts and could materially adversely affect our
business.
OUR BUSINESS COULD SUFFER IF WE ARE UNSUCCESSFUL IN NEGOTIATING NEW COLLECTIVE
BARGAINING AGREEMENTS.
As of September 30, 2002, approximately 80% of our workforce was
represented by labor unions. One of our material collective bargaining
agreements will expire in 2003 and the other will expire in 2006. Although we
believe that our relations with our employees are good, we cannot assure you
that we will be successful in negotiating new collective bargaining agreements,
that such negotiations will not result in significant increases in the cost of
labor or that a breakdown in such negotiations will not result in the
disruption of our operations.
FUTURE CHANGES IN QWEST LEC'S DIRECTORY PUBLISHING OBLIGATIONS IN THE DEX EAST
STATES MAY INCREASE OUR COSTS.
Pursuant to the publishing agreement, we are required to discharge Qwest
LEC's regulatory obligation to publish white pages directories covering each
service territory in the Dex East States where it provides local telephone
service as the incumbent service provider. If the staff of a state public
utility commission in a Dex East State were to impose additional or changed
legal requirements in any of Qwest LEC's service territories with respect to
this obligation, we would be obligated to comply with these requirements on
behalf of Qwest LEC, even if such compliance were to increase our publishing
costs. Pursuant to the publishing agreement, Qwest LEC is only obligated to
reimburse us for one half of any material net increase in our costs of
publishing directories that satisfy Qwest LEC's publishing obligations (less
the amount of any previous reimbursements)
21
resulting from new governmental legal requirements, and this obligation expires
seven years after the consummation of the transactions related to the
acquisition of Dex Media East. Our competitive position relative to competing
directory publishers could be adversely affected if we are not able to recover
from Qwest LEC that portion of our increased costs that Qwest LEC has agreed to
reimburse and, moreover, we cannot assure you that we would be able to increase
our revenues to cover any unreimbursed compliance costs.
WE ARE CONTROLLED BY THE CARLYLE GROUP AND WELSH, CARSON, ANDERSON & STOWE,
WHOSE INTERESTS MAY NOT BE ALIGNED WITH YOURS.
A holding company equally controlled by Carlyle and WCAS and their
respective affiliates currently owns all of the fully diluted equity of our
indirect parent, Dex Media, and, therefore, Carlyle and WCAS have the power to
control our affairs and policies. They also control the election of directors,
the appointment of management, the entering into of mergers, sales of
substantially all of our assets and other extraordinary transactions. The
directors so elected have authority, subject to the terms of our debt, to issue
additional stock, implement stock repurchase programs, declare dividends and
make other decisions.
The interests of Carlyle, WCAS and their affiliates could conflict with
your interests. For example, if we encounter financial difficulties or are
unable to pay our debts as they mature, the interests of Carlyle and WCAS, as
equity holders, might conflict with your interests as a note holder. Affiliates
of Carlyle and WCAS may also have an interest in pursuing acquisitions,
divestitures, financings or other transactions that, in their judgment, could
enhance their equity investments, even though such transactions might involve
risks to you as a note holder.
RISKS RELATED TO THE EXCHANGE NOTES
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE EXCHANGE NOTES.
We are a highly leveraged company. As of September 30, 2002, we would have
had, on a pro forma basis after giving effect to the transactions related to
the acquisition of Dex Media East, $2,255 million of outstanding indebtedness,
including approximately $1,280 million of indebtedness under our new credit
facilities, $450 million of senior notes and $525 million of senior
subordinated notes. In addition, our ratio of total indebtedness to owner's
equity at September 30, 2002 would have been 3.4 to 1.0 on a pro forma basis.
This level of indebtedness could have important consequences to you, including
the following:
o it limits our ability to borrow money or sell stock to fund our working
capital, capital expenditures, acquisitions and debt service
requirements;
o our interest expense could increase if interest rates in general increase
because a substantial portion of our indebtedness will bear interest at
floating rates;
o it may limit our flexibility in planning for, or reacting to, changes in
our business and future business opportunities;
o we are more highly leveraged than some of our competitors, which may
place us at a competitive disadvantage;
o it may make us more vulnerable to a downturn in our business or the
economy;
o the debt service requirements of our indebtedness could make it more
difficult for us to make payments on the exchange notes;
o a substantial portion of our cash flow from operations is dedicated to
the repayment of our indebtedness, including indebtedness we may incur in
the future, and will not be available for other purposes; and
22
o there would be a material adverse effect on our business and financial
condition if we were unable to service our indebtedness or obtain
additional financing, as needed.
DESPITE OUR SUBSTANTIAL INDEBTEDNESS, WE MAY STILL INCUR SIGNIFICANTLY MORE
DEBT. THIS COULD EXACERBATE THE RISKS DESCRIBED ABOVE.
Although covenants under our new credit facilities and the indentures
limit our ability and the ability of our restricted subsidiaries to incur
additional indebtedness, the terms of our new credit facilities and the
indentures permit us to incur significant additional indebtedness in the future
if conditions are satisfied. As of September 30, 2002, on a pro forma basis
after giving effect to the transactions related to the acquisition of Dex Media
East, we would have had $50 million available for additional borrowing under
our new revolving credit facility. In addition, if the acquisition of Dex Media
West is consummated, we expect to borrow an additional $160 million under the
delayed draw portion of our tranche A term loan facility. All borrowings under
our new credit facilities, including any borrowings under the delayed draw term
loan facility, will rank senior in right of payment to the senior subordinated
exchange notes and any future guarantees thereof and will be effectively senior
(to the extent of the value of the collateral securing the borrowings) to the
senior exchange notes and any future guarantees thereof. See "Our New Credit
Facilities."
TO SERVICE OUR INDEBTEDNESS, INCLUDING THE EXCHANGE NOTES, WE WILL REQUIRE A
SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY
FACTORS BEYOND OUR CONTROL.
Our ability to make payments on and to refinance our indebtedness,
including the exchange notes, and to fund planned capital expenditures will
depend on our ability to generate cash from our operations in the future. This,
to a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control.
Based on our current level of operations, we believe our cash flow from
operations, available cash and available borrowings under our new revolving
credit facility will be adequate to meet our future liquidity needs for at
least the next 12 months.
We cannot assure you, however, that our business will generate sufficient
cash flow from operations or that future borrowings will be available to us
under our new credit facilities or otherwise in an amount sufficient to enable
us to pay our indebtedness, including the exchange notes, or to fund our other
liquidity needs. If we consummate an acquisition, our debt service requirements
could increase. We may need to refinance or restructure all or a portion of our
indebtedness, including the exchange notes, on or before maturity. We cannot
assure you that we will be able to refinance any of our indebtedness, including
our new credit facilities and the exchange notes, on commercially reasonable
terms or at all. If we cannot service our indebtedness, we may have to take
actions such as selling assets, seeking additional equity or reducing or
delaying capital expenditures, strategic acquisitions, investments and
alliances. We cannot assure you that any such actions, if necessary, could be
effected on commercially reasonable terms, or at all.
Exchange noteholders' right to receive payments on the exchange notes is
effectively subordinated to the rights of our existing and future secured
creditors. Further, the guarantees of the exchange notes will be effectively
subordinated to the guarantors' secured indebtedness.
Holders of the Issuers' secured indebtedness and the secured indebtedness
of any guarantors will have claims that are prior to your claims as holders of
the exchange notes to the extent of the value of the assets securing that other
indebtedness. Notably, our new credit facilities will be secured by liens on
substantially all of our assets and the assets of our existing and future
domestic subsidiaries. The exchange notes and the guarantees will be
effectively subordinated to all such secured indebtedness to the extent of the
value of its collateral. In the event of any distribution or payment of our or
any guarantor's assets in any foreclosure, dissolution, winding-up,
liquidation, reorganization or other bankruptcy proceeding, holders of secured
indebtedness will have a prior claim to the assets that constitute their
collateral. Holders of the exchange notes will participate ratably with all
holders of our unsecured indebtedness that is deemed to be of the same class as
the respective exchange
23
notes, and potentially with all of our other general creditors, based upon the
respective amounts owed to each holder or creditor, in our remaining assets. In
any of the foregoing events, we cannot assure you that there will be sufficient
assets to pay amounts due on the exchange notes. As a result, holders of
exchange notes may receive less, ratably, than holders of secured indebtedness.
As of September 30, 2002, on a pro forma basis after giving effect to the
transactions related to the acquisition of Dex Media East, the aggregate amount
of the Issuers' secured indebtedness would have been approximately $1,280
million, and approximately $50 million would have been available for additional
borrowing under our new revolving credit facility. As of September 30, 2002, on
a pro forma basis after giving effect to the transactions, Dex Media
International (the only guarantor as of the consummation of the transactions)
would have had no secured indebtedness, other than its guarantee of our new
credit facilities. In addition, if the acquisition of Dex Media West is
consummated, we expect to borrow an additional $160 million under the delayed
draw term loan portion of the tranche A term loan facility, which will be
secured. We and the guarantors will be permitted to borrow significant
additional indebtedness, including secured indebtedness, in the future under
the terms of the indentures and our new credit facilities. See "Our New Credit
Facilities," "Description of Senior Exchange Notes--Certain Covenants" and
"Description of Senior Subordinated Exchange Notes--Certain Covenants."
THE RIGHT OF HOLDERS OF SENIOR SUBORDINATED EXCHANGE NOTES TO RECEIVE PAYMENTS
ON THE SENIOR SUBORDINATED EXCHANGE NOTES WILL BE JUNIOR TO THE BORROWINGS
UNDER OUR NEW CREDIT FACILITIES AND THE SENIOR EXCHANGE NOTES, AND ALL FUTURE
SENIOR INDEBTEDNESS. FURTHER, THE GUARANTEES OF THE SENIOR SUBORDINATED
EXCHANGE NOTES WILL BE JUNIOR TO THE GUARANTORS' SENIOR INDEBTEDNESS.
The senior subordinated exchange notes will rank behind all of the
Issuers' existing indebtedness, including the senior exchange notes and
borrowings under our new credit facilities, and the Issuers' future
indebtedness, and the guarantees of the senior subordinated exchange notes will
rank behind any guarantor's existing and future indebtedness, including
guarantees of the senior exchange notes and borrowings under our new credit
facilities except, in each case, any indebtedness that expressly provides that
it ranks equal with, or is subordinated in right of payment to, the senior
subordinated exchange notes or the guarantees of the senior subordinated
exchange notes, as applicable. As a result, upon any distribution to the
Issuers' creditors or the creditors of any guarantors in a bankruptcy,
liquidation or reorganization or similar proceeding relating to the Issuers or
any guarantors or their respective property, the holders of the Issuers' senior
indebtedness and the senior indebtedness of any guarantors will be entitled to
be paid in full in cash before any payment may be made with respect to the
senior subordinated exchange notes or any guarantees of the senior subordinated
exchange notes.
In addition, all payments on the senior subordinated exchange notes and
any guarantees of the senior subordinated exchange notes will be blocked in the
event of a payment default on senior debt and may be blocked for up to 179
consecutive days in the event of certain non-payment defaults on senior
indebtedness.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to the Issuers or any guarantors, holders of the senior
subordinated exchange notes will participate with trade creditors and all other
holders of the Issuers and any guarantor's senior subordinated indebtedness in
the assets remaining after the Issuers and any guarantors have paid all of
their respective senior indebtedness. However, because the indenture governing
the senior subordinated exchange notes requires that amounts otherwise payable
to holders of the senior subordinated exchange notes in a bankruptcy or similar
proceeding be paid to holders of senior indebtedness instead, holders of the
senior subordinated exchange notes may receive less, ratably, than holders of
trade payables in any such proceeding. In any of these cases, we and the
guarantors may not have sufficient funds to pay all of our creditors and
holders of senior subordinated exchange notes may receive less, ratably, than
the holders of senior indebtedness.
Assuming we had consummated the transactions related to the acquisition of
Dex Media East on September 30, 2002, the senior subordinated exchange notes
would have been subordinated to $1,730 million of senior indebtedness and
approximately $50 million would have been available for
24
borrowing as additional senior indebtedness under our new revolving credit
facility. In addition, if the acquisition of Dex Media West is consummated, we
expect to borrow an additional $160 million under a delayed draw term loan
facility, which will be senior indebtedness. We will be permitted to borrow
substantial additional indebtedness, including senior indebtedness, in the
future under the terms of the indenture governing the senior subordinated
exchange notes.
RESTRICTIVE COVENANTS IN OUR NEW CREDIT FACILITIES AND THE INDENTURES MAY
RESTRICT OUR ABILITY TO PURSUE OUR BUSINESS STRATEGIES.
Our new credit facilities and the indentures limit our ability, among
other things, to:
o incur additional indebtedness;
o issue preferred stock;
o pay dividends or make distributions in respect of our capital stock or to
make certain other restricted payments or investments;
o sell assets, including capital stock of restricted subsidiaries;
o agree to payment restrictions affecting our restricted subsidiaries;
o consolidate, merge, sell or otherwise dispose of all or substantially
all of our assets;
o enter into transactions with our affiliates;
o incur liens;
o designate any of our subsidiaries as unrestricted subsidiaries; and
o enter into new lines of businesses.
In addition, our new credit facilities include other and more restrictive
covenants and prohibit us from prepaying our other indebtedness, including the
exchange notes, while indebtedness under our new credit facilities is
outstanding. The agreement governing our new credit facilities also requires us
to achieve specified financial and operating results and maintain compliance
with specified financial ratios. Our ability to comply with these ratios may be
affected by events beyond our control.
The restrictions contained in the indentures and the agreement governing
our new senior credit facilities could:
o limit our ability to plan for or react to market conditions or meet
capital needs or otherwise restrict our activities or business plans; and
o adversely affect our ability to finance our operations, strategic
acquisitions, investments or alliances or other capital needs or to
engage in other business activities that would be in our interest.
A breach of any of these restrictive covenants or our inability to comply
with the required financial ratios could result in a default under the
agreement governing our new credit facilities. If a default occurs, the lenders
under our new credit facilities may elect to:
o declare all borrowings outstanding, together with accrued interest and
other fees, to be immediately due and payable; or
o prevent us from making payments on the exchange notes,
any of which would result in an event of default under the exchange notes.
The lenders will also have the right in these circumstances to terminate any
commitments they have to provide further borrowings. If we are unable to repay
outstanding borrowings when due, the lenders under our new credit facilities
will also have the right to proceed against the collateral, including our
available cash, granted to them to secure the indebtedness. If the indebtedness
under our new credit facilities and the exchange notes were to be accelerated,
we cannot assure you that our assets would be sufficient to repay in full that
indebtedness and our other indebtedness, including the exchange notes. See
25
"Description of Senior Exchange Notes--Ranking," "Description of Senior
Exchange Notes-- Certain Covenants," "Description of Senior Subordinated
Exchange Notes--Ranking," "Description of Senior Subordinated Exchange
Notes--Certain Covenants" and "Our New Credit Facilities."
FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
GUARANTEES AND REQUIRE NOTE HOLDERS TO RETURN PAYMENTS RECEIVED FROM
GUARANTORS.
Under the U.S. bankruptcy law and comparable provisions of state
fraudulent transfer laws, any guarantees of the exchange notes could be voided,
or claims in respect of a guarantee could be subordinated to all other debts of
that guarantor if, among other things, the guarantor, at the time it incurs the
indebtedness evidenced by its guarantee:
o receives less than reasonably equivalent value or fair consideration for
the incurrence of such guarantee; and
o either (1) is insolvent or rendered insolvent by reason of such
incurrence, (2) is engaged in a business or transaction for which the
guarantor's remaining assets constitute unreasonably small capital, or
(3) intends to incur, or believes that it will incur, debts beyond its
ability to pay such debts as they mature.
The court might also avoid a guarantee, without regard to those factors,
if it found that the guarantor entered into its guarantee with actual intent to
hinder, delay or defraud its creditors.
A court would likely find that a guarantor did not receive reasonably
equivalent value or fair consideration for its guarantee unless it benefited
directly or indirectly from the issuance of the exchange notes.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if:
o the sum of its debts, including contingent liabilities, was greater than
the fair saleable value of all of its assets; or
o if the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
o it could not pay its debts as they become due.
We cannot assure you as to what standard a court would apply in making
this determination. If a court voided a guarantee, you would no longer have a
claim against the guarantor. In addition, the court might direct you to repay
any amounts already received from the guarantor. If the court were to avoid any
guarantee, we cannot assure you that funds would be available to pay the
exchange notes from another guarantor or from any other source.
THE EXCHANGE NOTES MAY LOSE THEIR SUBSIDIARY GUARANTEES.
The exchange notes will be guaranteed by Dex Media International, Inc.,
which is currently our only subsidiary (other than Dex Media East Finance Co.),
and each of our future subsidiaries that is a guarantor or direct borrower
under our new credit facilities. A subsidiary will no longer guarantee the
exchange notes in any of the following circumstances:
o in connection with any sale of all of the capital stock of that
subsidiary guarantor (including by way of merger or consolidation) to a
person or group of persons that is not (either before or after giving
effect to such transaction) a restricted subsidiary, if the sale complies
with the covenants in the indentures governing the notes;
o if we designate that subsidiary guarantor as an unrestricted subsidiary
in accordance with the provisions set forth in the indentures; or
26
o if that subsidiary guarantor is released from its guarantee of, and all
pledges and security interests granted in connection with, our new credit
facilities. For example, a subsidiary guarantor would be released if the
lenders under our new credit facilities agreed to release such subsidiary
guarantor, our obligations under our new credit facilities were repaid in
full, or the subsidiary guarantor ceased to be our subsidiary upon the
consummation of any transaction permitted by the terms of our new credit
facility.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE ANY CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURES.
Upon the incurrence of specific kinds of change of control events, we may
need to refinance large amounts of our debt, including the exchange notes and
borrowings under our new credit facilities. If a change of control occurs, we
must offer to purchase the exchange notes for a price equal to 101% of the
principal amount of the exchange notes, plus any accrued and unpaid interest.
We cannot assure you that there will be sufficient funds available for us to
make any required repurchases of the exchange notes upon a change of control.
In addition, our new credit facilities prohibit us from repurchasing the
exchange notes until we first repay our new credit facilities in full. If we
fail to repurchase the exchange notes in that circumstance, we will go into
default under each of the indentures governing the exchange notes and under our
new credit facilities. Any future debt that we incur may also contain
restrictions on repayment upon a change of control. If any change of control
occurs, we cannot assure you that we will have sufficient funds to satisfy all
of our debt obligations. The purchase requirements contained in our debt
instruments could also delay or make it harder for others to effect a change of
control. However, certain other corporate events, such as a leveraged
recapitalization that would increase our level of indebtedness, would not
necessarily constitute a change of control under the indentures governing the
exchange notes. See "Our New Credit Facilities," "Description of Senior
Exchange Notes--Change of Control" and "Description of Senior Subordinated
Exchange Notes--Change of Control."
THERE IS NO PUBLIC MARKET FOR THE EXCHANGE NOTES, AND WE CANNOT ASSURE YOU THAT
A MARKET FOR THE EXCHANGE NOTES WILL DEVELOP OR THAT YOU WILL BE ABLE TO SELL
YOUR EXCHANGE NOTES.
The exchange notes are new issues of securities for which there is no
established public market. We do not intend to have the exchange notes listed
on a national securities exchange or included in any automated quotation
system, although application will be made to make the exchange notes eligible
for trading in The PORTAL Market. The initial purchasers of the outstanding
notes have advised us that they currently intend to make a market in the
exchange notes as permitted by applicable laws and regulations. However, the
initial purchasers are not obligated to make a market in the exchange notes,
and they may discontinue their market-making activities at any time without
notice. Therefore, we cannot assure you that an active market for the exchange
notes will develop or, if developed, that it will continue. Historically, the
market for non-investment grade debt has been subject to disruptions that have
caused substantial volatility in the prices of securities similar to the
exchange notes. We cannot assure you that any such disruptions may not
adversely affect the prices at which you may sell your exchange notes. In
addition, subsequent to their initial issuance, the exchange notes may trade at
a discount from their initial offering price, depending upon prevailing
interest rates, the market for similar notes, our performance and other
factors.
IF YOU DO NOT PROPERLY TENDER YOUR OUTSTANDING NOTES, YOU WILL CONTINUE TO HOLD
UNREGISTERED OUTSTANDING NOTES AND YOUR ABILITY TO TRANSFER OUTSTANDING NOTES
WILL BE ADVERSELY AFFECTED.
We will only issue exchange notes in exchange for outstanding notes that
are timely received by the exchange agent together with all required documents,
including a properly completed and signed letter of transmittal. Therefore, you
should allow sufficient time to ensure timely delivery of the outstanding notes
and you should carefully follow the instructions on how to tender your
outstanding notes. Neither we nor the exchange agent are required to tell you
of any defects or irregularities with respect to your tender of the outstanding
notes. If you do not tender your outstanding notes or if we do not accept your
outstanding notes because you did not tender your outstanding notes properly,
then, after we consummate the exchange offer, you may continue to hold
outstanding notes that are subject to the existing transfer restrictions. In
addition, if you tender your outstanding notes for the purpose of participating
in a distribution of the exchange notes, you will be required to comply with
27
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale of the exchange notes. If you are a broker-dealer
that receives exchange notes for your own account in exchange for outstanding
notes that you acquired as a result of market-making activities or any other
trading activities, you will be required to acknowledge that you will deliver a
prospectus in connection with any resale of such exchange notes. After the
exchange offer is consummated, if you continue to hold any outstanding notes,
you may have difficulty selling them because there will be less outstanding
notes outstanding. In addition, if a large amount of outstanding notes are not
tendered or are tendered improperly, the limited amount of exchange notes that
would be issued and outstanding after we consummate the exchange offer could
lower the market price of such exchange notes.
28
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance, and involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. These
risks and other factors include, among other things, those listed in "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Stand-Alone Company" and "--Sensitivity Analysis
Relating to EBITDA" and elsewhere in this prospectus. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "intends," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," "continue," "assumption" or the negative
of these terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially. In evaluating
these statements, you should specifically consider various factors, including
the risks outlined in "Risk Factors." These factors may cause our actual
results to differ materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. 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 SEC, we assume no
obligation to update or revise them or to provide reasons why actual results
may differ.
We do not undertake any responsibility to release publicly any revisions
to these forward-looking statements to take into account events or
circumstances that occur after the date of this prospectus. Additionally, we do
not undertake any responsibility to update you on the occurrence of any
unanticipated events which may cause actual results to differ from those
expressed or implied by the forward-looking statements contained in this
prospectus.
MARKET AND INDUSTRY DATA
Unless otherwise indicated, information contained in this prospectus
concerning the U.S. directory advertising industry, the U.S. advertising
industry and their respective segments, our general expectations concerning
such industries and their segments and our market position and market share
within such industries and their segments are derived from data from various
third party sources. We have not independently verified any of such information
and cannot assure you of its accuracy or completeness. In addition, this
prospectus presents similar information based on management estimates. Such
estimates are derived from third party sources as well as data from our
internal research and on assumptions made by us, based on such data and our
knowledge of the U.S. directory advertising industry, which we believe to be
reasonable. Our internal research has not been verified by any independent
source. While we are not aware of any misstatements regarding any industry or
similar data presented herein, such data involves risks and uncertainties and
is subject to change based on various factors, including those discussed under
the caption "Risk Factors" in this prospectus.
Data on our market position and market share within our industry is based
on U.S. directory advertising sales. Our competitors generally utilize the
point of publication accounting method of recognizing revenues and expenses
under which revenues and expenses are recognized when a directory is published.
We utilize the deferral and amortization accounting method under which revenues
and expenses are recognized over the lives of the directories. As a result,
while we believe that the information presented herein with respect to
ourselves and our competitors is comparable, comparisons made beyond the scope
of those made in this prospectus may be impacted by the differing accounting
methods. Except where otherwise noted, the calculation of advertiser renewal
and retention rates is based on local advertisers and excludes the loss of
advertisers as a result of business failures, which we believe is the customary
calculation method in our industry. Our revenue per advertiser (local) for a
given period is calculated by dividing the total local advertising revenue in
29
a given period by the total number of local advertisers at the end of such
period. Our market penetration for a given period is calculated by dividing the
total number of yellow page advertisers in such area by the total businesses
with free listings in a given area, in each case, at the end of such period.
Printed revenues are revenues related to printed directories (excluding
revenues from affiliates).
--------------
The DEX(Reg. TM) trademark referred to in this prospectus is a registered
trademark of Dex Media, Inc. The QWEST DEX(Reg. TM) and QWEST DEX
ADVANTAGE(Reg. TM) trademarks referred to in this prospectus are registered
trademarks of Qwest and are used by us under license.
30
THE EXCHANGE OFFER
PURPOSE AND EFFECT
Together with the sale by us of the outstanding notes on November 8, 2002,
we, Dex Media East Finance and Dex Media International entered into two
registration rights agreements, each dated November 8, 2002, with the initial
purchasers of the outstanding notes, which require that we file a registration
statement under the Securities Act with respect to the exchange notes and, upon
the effectiveness of that registration statement, offer to the holders of the
outstanding notes the opportunity to exchange their outstanding notes for a
like principal amount of exchange notes. The exchange notes will be issued
without a restrictive legend and generally may be reoffered and resold without
registration under the Securities Act. The registration rights agreements
further provide that we must use all commercially reasonable efforts to cause
the registration statement with respect to the exchange offer to be declared
effective and to consummate the exchange offer within 180 days of the issue
date of the outstanding notes. It further provides that we must use all
commercially reasonable efforts to consummate the exchange offer within 60 days
after the effective date of our registration statement.
Except as described below, upon the completion of the exchange offer, our
obligations with respect to the registration of the outstanding notes and the
exchange notes will terminate. A copy of each of the registration rights
agreements has been filed as an exhibit to the registration statement of which
this prospectus is a part, and this is a summary of the material provisions of
each of the registration rights agreements. For a more complete understanding
of the registration rights agreements, we encourage you to read the actual
agreements as it, and not this description, governs your rights as holders of
outstanding notes. We have filed the agreements as exhibits to the registration
statement which includes this prospectus. As a result of the timely filing and
the effectiveness of the registration statement, we will not have to pay
certain additional interest on the outstanding notes provided in the
registration rights agreements. Following the completion of the exchange offer,
holders of outstanding notes not tendered will not have any further
registration rights other than as set forth in the paragraphs below, and those
outstanding notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for the outstanding notes
could be adversely affected upon consummation of the exchange offer.
In order to participate in the exchange offer, a holder must represent to
us, among other things, that:
o any exchange notes to be received by the holder will be acquired in the
ordinary course of business;
o the holder has no arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities
Act) of the exchange notes in violation of the provisions of the
Securities Act;
o the holder is not an "affiliate" (within the meaning of Rule 405 under
Securities Act) of us, Dex Media East Finance or Dex Media International;
and
o if the holder is a broker-dealer that will receive exchange notes for its
own account in exchange for outstanding notes that were acquired as a
result of market-making or other trading activities, then the holder will
deliver a prospectus in connection with any resale of such exchange
notes.
In the event that:
o we, Dex Media East Finance and Dex Media International determine that an
exchange offer registration statement is not available or that
registration of exchange notes pursuant to an exchange offer registration
statement may not be completed as soon as practicable after the
expiration date of the exchange offer because it would violate any
applicable law or applicable interpretations of the Staff of the SEC;
o the exchange offer is not, for any other reason, completed by May 7,
2003; or
31
o the exchange offer has been completed and, in the opinion of counsel for
the initial purchasers of the outstanding notes, a registration statement
must be filed and a prospectus must be delivered by the initial
purchasers in connection with any offering or sale of outstanding notes
originally purchased and still held by the initial purchasers;
we, Dex Media East Finance and Dex Media International must use all
commercially reasonable efforts to cause to be filed a "shelf" registration
statement for a continuous offering in connection with the outstanding notes
pursuant to Rule 415 under the Securities Act.
Based on an interpretation by the SEC's staff set forth in no-action
letters issued to third parties unrelated to us, we believe that, with the
exceptions set forth below, exchange notes issued in the exchange offer may be
offered for resale, resold and otherwise transferred by the holder of exchange
notes without compliance with the registration and prospectus delivery
requirements of the Securities Act, unless the holder:
o acquired the exchange notes other than in the ordinary course of the
holder's business;
o the holder has an arrangement with any person to engage in the
distribution of exchange notes;
o is an "affiliate" of ours, Dex Media East Finance or Dex Media
International within the meaning of Rule 405 under the Securities Act; or
o is a broker-dealer who purchased outstanding notes directly from us for
resale under Rule 144A or Regulation S or any other available exemption
under the Securities Act.
Any holder who tenders in the exchange offer for the purpose of
participating in a distribution of the exchange notes cannot rely on this
interpretation by the SEC's staff and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction. Each broker-dealer that receives exchange notes
for its own account 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, must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. See "Plan of
Distribution." Broker-dealers who acquired outstanding notes directly from us
and not as a result of market making activities or other trading activities may
not rely on the SEC's staff's interpretations discussed above or participate in
the exchange offer and must comply with the prospectus delivery requirements of
the Securities Act in order to sell the outstanding notes.
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 5:00 p.m., New York City time, on
__________ __, 2003 or such date and time to which we extend the offer. We will
issue $1,000 in principal amount of exchange notes in exchange for each $1,000
principal amount of outstanding notes accepted in the exchange offer. Holders
may tender some or all of their outstanding notes pursuant to the exchange
offer. However, outstanding notes may be tendered only in integral multiples of
$1,000 in principal amount.
The exchange notes will evidence the same debt as the outstanding notes
and will be issued under the terms of, and entitled to the benefits of, the
applicable indenture relating to the outstanding notes.
As of the date of this prospectus, outstanding notes representing $450
million in aggregate principal amount of senior notes and $525 million in
aggregate principal amount of senior subordinated notes were outstanding and
there was one registered holder, a nominee of The Depository Trust Company.
This prospectus, together with the letter of transmittal, is being sent to the
registered holder and to others believed to have beneficial interests in the
outstanding notes. We intend to conduct the exchange offer in accordance with
the applicable requirements of the Exchange Act and the rules and regulations
of the SEC promulgated under the Exchange Act.
32
We will be deemed to have accepted validly tendered outstanding notes
when, as, and if we have given oral or written notice thereof to U.S. Bank
National Association, the exchange agent. The exchange agent will act as agent
for the tendering holders for the purpose 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 certain other events set forth under the
heading "--Conditions to the Exchange Offer" or otherwise, certificates for any
such unaccepted outstanding notes will be returned, without expense, to the
tendering holder of those outstanding notes promptly after the expiration date
unless the exchange offer is extended.
Holders 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 of
outstanding notes in the exchange offer. We will pay all charges and expenses,
other than certain applicable taxes, applicable to the exchange offer. See
"--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The expiration date shall be 5:00 p.m., New York City time, on __________
__, 2003, unless we, in our sole discretion, extend the exchange offer, in
which case the expiration date shall be the latest date and time to which the
exchange offer is extended. In order to extend the exchange offer, we will
notify the exchange agent and each registered holder of any extension by press
release or other public announcement prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date. We
reserve the right, in our sole discretion:
o to delay accepting any outstanding notes, to extend the exchange offer
or, if any of the conditions set forth under "Conditions to Exchange
Offer" shall not have been satisfied, to terminate the exchange offer, by
giving oral or written notice of that delay, extension or termination to
the exchange agent, or
o to amend the terms of the exchange offer in any manner.
In the event that we make a fundamental change to the terms of the
exchange offer, we will file a post-effective amendment to the registration
statement.
PROCEDURES FOR TENDERING
Only a holder of outstanding notes may tender outstanding notes in the
exchange offer. Except as set forth under the heading "--Book-Entry Transfer,"
to tender in the exchange offer a holder must complete, sign, and date the
letter of transmittal, or a copy of the letter of transmittal, have the
signatures on the letter of transmittal guaranteed if required by the letter of
transmittal, and mail or otherwise deliver the letter of transmittal or copy to
the exchange agent prior to the expiration date. In addition:
o certificates for the outstanding notes must be received by the exchange
agent along with the letter of transmittal prior to the expiration date;
o a timely confirmation of a book-entry transfer, which we refer to as a
book-entry confirmation, of the outstanding notes, if that procedure is
available, into the exchange agent's account at The Depository Trust
Company, which we refer to as the book-entry transfer facility, following
the procedure for book-entry transfer described below, must be received
by the exchange agent prior to the expiration date; or
o you must comply with the guaranteed delivery procedures described below.
To be tendered effectively, the letter of transmittal and other required
documents must be received by the exchange agent at the address set forth under
the heading "--Exchange Agent" prior to the expiration date.
33
Your tender, if not withdrawn before the expiration date will constitute
an agreement between you and us in accordance with the terms and subject to the
conditions set forth herein 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 ELECTION AND
RISK. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT YOU USE AN OVERNIGHT
OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF
TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT TO US. YOU MAY REQUEST YOUR
BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THESE
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 should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. If the beneficial
owner wishes to tender on the owner's own behalf, the owner must, prior to
completing and executing the letter of transmittal and delivering the owner's
outstanding notes, either make appropriate arrangements to register ownership
of the outstanding notes in the beneficial owner's name or obtain a properly
completed bond power from the registered holder. The transfer of registered
ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act, which we refer to as an
eligible institution, unless outstanding notes tendered pursuant thereto are
tendered:
o by a registered holder who has not completed the box entitled "Special
Registration Instruction" or "Special Delivery Instructions" on the
letter of transmittal; or
o for the account of an eligible institution.
If signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, the guarantee must be by any
eligible guarantor institution that is a member of or participant in the
Securities Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Signature Program or an eligible institution.
If the letter of transmittal is signed by a person other than the
registered holder of any outstanding notes listed in the letter of transmittal,
the outstanding notes must be endorsed or accompanied by a properly completed
bond power, signed by the registered holder as that registered holder's name
appears on the outstanding notes.
If the letter of transmittal or any outstanding notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations, or others acting in a fiduciary or representative
capacity, such 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 waived by us.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance, and withdrawal of tendered outstanding notes will be
determined by us in our sole discretion, and our determination 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 waived, any defects or
irregularities in connection with tenders of outstanding notes must be cured
within such time as we shall determine. Although we intend to notify holders of
defects or irregularities with respect to tenders of outstanding notes, neither
we, the exchange agent, nor any other person shall incur any liability for
failure to give that notification. Tenders of outstanding notes will not be
deemed to have been made until such defects or
34
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, unless otherwise provided in the letter of
transmittal, promptly following the expiration date, unless the exchange offer
is extended.
In addition, we reserve the right in our sole discretion to purchase or
make offers for any outstanding notes that remain outstanding after the
expiration date or, as set forth under the heading "--Conditions to the
Exchange Offer," to terminate the exchange offer and, to the extent permitted
by applicable law, purchase outstanding notes in the open market, in privately
negotiated transactions, or otherwise. The terms of any such purchases or
offers could differ from the terms of the exchange offer.
By tendering, you will be representing to us that, among other things:
o any exchange notes to be received by you will be acquired in the
ordinary course of business;
o you have no arrangement or understanding with any person to participate
in the distribution (within the meaning of the Securities Act) of the
exchange notes in violation of the provisions of the Securities Act;
o you are not an "affiliate" (within the meaning of Rule 405 under
Securities Act) of us, Dex Media East Finance or Dex Media International;
and
o if you are a broker-dealer that will receive exchange notes for your own
account in exchange for outstanding notes that were acquired as a result
of market-making or other trading activities, then you will deliver a
prospectus in connection with any resale of such exchange notes.
In all cases, issuance of exchange notes for outstanding notes that are
accepted for exchange in the exchange offer will be made only after timely
receipt by the exchange agent of certificates for such outstanding notes or a
timely book-entry confirmation of such outstanding notes into the exchange
agent's account at the book-entry transfer facility, a properly completed and
duly executed letter of transmittal or, with respect to The Depository Trust
Company and its participants, electronic instructions in which the tendering
holder acknowledges its receipt of and agreement to be bound by the 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 than the holder desires to exchange, such unaccepted or
non-exchanged outstanding notes will be returned without expense to the
tendering holder or, in the case of outstanding notes tendered by book-entry
transfer into the exchange agent's account at the book-entry transfer facility
according to the book-entry transfer procedures described below, those
non-exchanged outstanding notes will be credited to an account maintained with
that book-entry transfer facility, in each case, as promptly as practicable
after the expiration or termination of the exchange offer.
Each broker-dealer that receives exchange notes for its own account in
exchange for outstanding notes, where those outstanding notes were acquired by
such broker-dealer as a result of market making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of those exchange notes. See "Plan of Distribution."
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with
respect to the outstanding notes at the book-entry transfer facility for
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
book-entry transfer facility's systems may make book-entry delivery of
outstanding notes being tendered by causing the book-entry transfer facility to
transfer such outstanding notes into the exchange agent's account at the
book-entry transfer facility in accordance with that book-entry transfer
facility's procedures for transfer. However, although delivery of outstanding
notes may be effected through book-entry transfer at the book-entry transfer
facility, the letter of transmittal or copy of the letter of transmittal, with
any required signature guarantees and any other required documents, must, in
any
35
case other than as set forth in the following paragraph, be transmitted to and
received by the exchange agent at the address set forth under the heading
"--Exchange Agent" on or prior to the expiration date or the guaranteed
delivery procedures described below must be complied with.
The Depository Trust Company's Automated Tender Offer Program, or ATOP, is
the only method of processing exchange offers through The Depository Trust
Company. To accept the exchange offer through ATOP, participants in The
Depository Trust Company must send electronic instructions to The Depository
Trust Company through The Depository Trust Company's communication system
instead of sending a signed, hard copy letter of transmittal. The Depository
Trust Company is obligated to communicate those electronic instructions to the
exchange agent. To tender outstanding notes through ATOP, the electronic
instructions sent to The Depository Trust Company and transmitted by The
Depository Trust Company to the exchange agent must contain the character by
which the participant acknowledges its receipt of and agrees to be bound by the
letter of transmittal.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the outstanding notes desires to tender
outstanding notes and the outstanding notes are not immediately available, or
time will not permit that holder's outstanding notes or other required
documents to reach the exchange agent before the expiration date, or the
procedure for book-entry transfer cannot be completed on a timely basis, a
tender may be effected if:
o the tender is made through an eligible institution;
o prior to the expiration date, the exchange agent receives from that
eligible institution a properly completed and duly executed letter of
transmittal or a facsimile of duly executed letter of transmittal and
notice of guaranteed delivery, substantially in the form provided by us,
by telegram, telex, fax transmission, mail or hand delivery, setting
forth the name and address of the holder of outstanding notes and the
amount of outstanding notes tendered and stating that the tender is being
made by guaranteed delivery and guaranteeing that within three New York
Stock Exchange, Inc., or NYSE, trading days after the date of execution
of the notice of guaranteed delivery, the certificates for all physically
tendered outstanding notes, in proper form for transfer, or a book-entry
confirmation, as the case may be, will be deposited by the eligible
institution with the exchange agent; and
o the certificates for all physically tendered outstanding notes, in proper
form for transfer, or a book-entry confirmation, as the case may be, are
received by the exchange agent within three NYSE trading days after the
date of execution of the notice of guaranteed delivery.
WITHDRAWAL RIGHTS
Tenders of outstanding notes may be withdrawn at any time prior to 5:00
p.m., New York City time, on the expiration date.
For a withdrawal of a tender of outstanding notes to be effective, a
written or, for The Depository Trust Company participants, electronic ATOP
transmission notice of withdrawal, must be received by the exchange agent at
its address set forth under the heading "--Exchange Agent" prior to 5:00 p.m.,
New York City time, on the expiration date. Any such notice of withdrawal must:
o specify the name of the person having deposited the outstanding notes to
be withdrawn, whom we refer to as the depositor;
o identify the outstanding notes to be withdrawn, including the certificate
number or numbers and principal amount of such outstanding notes;
o be signed by the holder in the same manner as the original signature on
the letter of transmittal by which such outstanding notes were tendered,
including any required signature guarantees, or be accompanied by
documents of transfer sufficient to have the trustee register the
transfer of such outstanding notes into the name of the person
withdrawing the tender; and
36
o specify the name in which any such outstanding notes are to be
registered, if different from that of the depositor.
All questions as to the validity, form, eligibility and time of receipt of
such notices will be determined by us, whose determination shall be final and
binding on all parties. Any outstanding notes so withdrawn will be deemed not
to have been validly tendered for exchange for purposes of the exchange offer.
Any outstanding notes which have been tendered for exchange but which are not
exchanged for any reason will be returned to the holder of those outstanding
notes without cost to that holder as soon as practicable after withdrawal,
rejection of tender, or termination of the exchange offer. Properly withdrawn
outstanding notes may be retendered by following one of the procedures under
the heading "--Procedures for Tendering" at any time on or prior to the
expiration date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, we will not be
required to accept for exchange, or to issue exchange notes in exchange for,
any outstanding notes and may terminate or amend the exchange offer if at any
time before the acceptance of those outstanding notes for exchange or the
exchange of the exchange notes for those outstanding notes, we determine that
the exchange offer violates any applicable law or applicable interpretation of
the Staff of the SEC.
The foregoing conditions are for our sole benefit and may be asserted by
us regardless of the circumstances giving rise to any such condition or may be
waived by us in whole or in part at any time and from time to time prior to the
expiration of the exchange offer in our sole discretion. The failure by us at
any time to exercise any of the foregoing rights shall not be deemed a waiver
of any of those rights and each of those rights shall be deemed an ongoing
right which may be asserted at any time and from time to time prior to the
expiration of the exchange offer.
In addition, we will not accept for exchange any outstanding notes
tendered, and no exchange notes will be issued in exchange for those
outstanding notes, if at such time any stop order shall be threatened or in
effect with respect to the registration statement of which this prospectus
constitutes a part. We are required to use commercially reasonable efforts to
obtain the withdrawal of any stop order at the earliest possible time.
EXCHANGE AGENT
All executed letters of transmittal should be directed to the exchange
agent. U.S. Bank National Association has been appointed as exchange agent for
the exchange offer. Questions, requests for assistance and requests for
additional copies of this prospectus or of the letter of transmittal should be
directed to the exchange agent addressed as follows:
By Registered or Certified Mail, Hand Delivery or Overnight Courier:
U.S. Bank National Association
180 East 5th Street
St. Paul, Minnesota 55101
Attn: Specialized Finance Department
By Facsimile: (Eligible Institutions Only) (651) 244-1537
For Information or Confirmation by Telephone: (800) 934-6802
Originals of all documents sent by facsimile should be sent promptly by
registered or certified mail, by hand or by overnight delivery service.
FEES AND EXPENSES
We will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. The principal solicitation is being made by
mail; however, additional solicitations may be made in person or by telephone
by our officers and employees. The estimated cash expenses to be incurred in
connection with the exchange offer will be paid by us and will include
accounting, legal, printing, and related fees and expenses.
37
TRANSFER TAXES
Holders who tender their outstanding notes for exchange will not be
obligated to pay any transfer taxes in connection with that tender or exchange,
except that holders who instruct us to register exchange notes in the name of,
or request that outstanding notes not tendered or not accepted in the exchange
offer be returned to, a person other than the registered tendering holder will
be responsible for the payment of any applicable transfer tax on those
outstanding notes.
38
USE OF PROCEEDS
This exchange offer is intended to satisfy our obligations under both of
the registration rights agreements, each dated November 8, 2002, by and among
us, Dex Media East Finance, Dex Media International and the initial purchasers
of the outstanding notes. We will not receive any proceeds from the issuance of
the exchange notes in the exchange offer. We will receive in exchange
outstanding notes in like principal amount. We will retire or cancel all of the
outstanding notes tendered in the exchange offer.
On November 8, 2002, we issued and sold the outstanding notes. We used the
proceeds from the offering of the outstanding notes, together with borrowings
under our new credit facilities and equity contributions from the Sponsors and
their assignees and designees, to fund payment of the consideration for the
transactions related to the acquisition of Dex Media East, pay related fees and
expenses and for working capital purposes.
39
CAPITALIZATION
The following table sets forth our capitalization as of September 30,
2002, on a pro forma basis after giving effect to the transactions related to
the acquisition of Dex Media East. The information in this table should be read
in conjunction with "The Transactions," "Unaudited Pro Forma Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our combined financial statements and related notes thereto
included elsewhere in this prospectus.
SEPTEMBER 30, 2002
PRO FORMA
(IN MILLIONS) (UNAUDITED)
- ---------------------------------------------------- -------------------
Cash and cash equivalents ....................... $ 15
======
Total debt:
New credit facilities:
Revolving credit facility(1) ................. $ 50
Tranche A term loan facility(2) .............. 530
Tranche B term loan facility ................. 700
Outstanding senior notes ...................... 450
Outstanding senior subordinated notes ......... 525
------
Total debt ................................ $2,255
Total owner's equity(3) ......................... 655
------
Total capitalization ...................... $2,910
======
- --------------
(1) Total availability of $100 million, of which $50 million was borrowed to
fund the acquisition of Dex Media East. As of September 30, 2002, on a pro
forma basis after giving effect to the transactions, we estimate that we
would have had $50 million available under our new revolving credit
facility.
(2) In addition, the tranche A term loan facility includes a $160 million
delayed draw commitment, which will terminate if the acquisition of Dex
Media West is not consummated.
(3) Represents the equity contribution from the Sponsors and their assignees
and designees. If the acquisition of Dex Media West is consummated, the
Sponsors and their assignees and designees will contribute an additional
$50 million in cash equity to us, which will be used by Dex Media,
together with $160 million in borrowings under the delayed draw portion of
the tranche A term loan facility, to pay a portion of the purchase price for
Dex Media West to be paid to Qwest. The $210 million will be paid to Dex
Media, Inc. in the form of a dividend to the extent of Dex Media East
retained earnings, with any remaining balance paid as a return of capital,
immediately prior to the consummation of the acquisition of Dex Media West.
See "The Transactions--Synergies with Dex Media West."
40
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information of Dex Media East
has been derived by the application of pro forma adjustments to the historical
combined financial statements of Dex East included elsewhere in this
prospectus. The pro forma statements of income for the year ended December 31,
2001 and the nine months ended September 30, 2002 give effect to the
transactions related to the acquisition of Dex Media East as if the
transactions were consummated as of January 1, 2001. The pro forma balance
sheet gives effect to the transactions as if the transactions had occurred as
of September 30, 2002. The adjustments, which are based upon available
information and upon assumptions that management believes to be reasonable, are
described in the accompanying notes. The pro forma financial information is for
informational purposes only and should not be considered indicative of actual
results that would have been achieved had the transactions been consummated on
the dates indicated and do not purport to indicate balance sheet data or
results of operations as of any future date or for any future period. In
addition, the pro forma financial information does not reflect (1) the
consummation of the acquisition of Dex Media West or the anticipated effects
therefrom, which include the borrowings of $160 million pursuant to the delayed
draw portion of the tranche A term loan facility, an additional $50 million
cash equity contribution to us from the Sponsors and their assignees and
designees and the synergies that we would have realized with Dex Media West,
(2) certain changes to our cost structure, which may be significant, that are
described under "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Stand-Alone Company" and "--Sensitivity Analysis
Relating to EBITDA" or (3) if the acquisition of Dex Media West is not
consummated, the costs which we will be obligated to pay to obtain the
permanent right to use certain intellectual property, as described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Post-transactions." The unaudited
pro forma financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "The transactions" and the historical combined financial
statements and the notes thereto included elsewhere in this prospectus.
The transactions related to the acquisition of Dex Media East will be
accounted for using the purchase method of accounting in accordance with
Statement of Financial Accounting Standards No. 141, "Business Combinations"
and the resulting goodwill and other intangible assets will be accounted for
under Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets." The total purchase price has been preliminarily allocated
to the tangible and intangible assets acquired and liabilities assumed based
upon management's best estimates of current fair values. The actual purchase
price allocation and related depreciation and amortization periods will be
based on final appraisals, evaluations and estimates of fair values to be
undertaken by Dex Media East in conjunction with independent appraisers. As a
result, actual asset and liability values and related operating results,
including actual depreciation and amortization expense, could differ materially
from those reflected in the unaudited pro forma financial information included
herein.
41
DEX MEDIA EAST LLC
UNAUDITED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 2002
DEX EAST ASSETS & LIABILITIES DEX MEDIA EAST LLC
(DOLLARS IN MILLIONS) HISTORICAL(A) NOT ACQUIRED(A) ADJUSTMENTS(B) PRO FORMA
- ------------------------------------------------------ --------------- ---------------------- ---------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 62 $ (62) $ 15 $ 15
Accounts receivable, net ............................ 52 -- -- 52
Deferred directory costs ............................ 104 -- (24) 80
Current deferred taxes .............................. 48 (48) -- --
Other current assets ................................ 2 -- -- 2
------ ------- ------- -------
Total current assets .............................. 268 (110) (9) 149
Intangible assets .................................... -- -- 2,691 2,691
Deferred financing costs ............................. -- -- 129 129
Property, plant and equipment, net ................... 25 -- -- 25
Prepaid benefit obligations and other assets ......... 63 -- (63) --
------ ------- -------- -------
Total assets ...................................... $ 356 $ (110) $ 2,748 $ 2,994
------ ------- -------- -------
LIABILITIES AND OWNER'S (DEFICIT) EQUITY
Current liabilities:
Short-term borrowings ............................... $ 329 $ (329) -- --
Short-term borrowings from affiliate ................ 849 (849) -- --
Accounts payable .................................... 13 -- -- 13
Amounts due to related parties ...................... 25 -- -- 25
Employee compensation ............................... 12 -- -- 12
Deferred revenue and customer deposits .............. 77 -- (76) 1
Other accrued liabilities ............................ 8 -- -- 8
------ ------- -------- -------
Total current liabilities ......................... $1,313 $(1,178) $ (76) $ 59
------ ------- -------- -------
Deferred income taxes ................................ 7 (7) -- --
Post-retirement and other post-employment
benefit obligations ................................. 34 -- (9) 25
Revolving credit facility ............................ -- -- 50 50
Tranche A term loan facility ......................... -- -- 530 530
Tranche B term loan facility ......................... -- -- 700 700
Senior notes ......................................... -- -- 450 450
Senior subordinated notes ............................ -- -- 525 525
------ --------- -------- -------
Total liabilities ................................. $1,354 $(1,185) $2,170 $ 2,339
------ --------- -------- -------
Commitments and contingencies ........................
Owner's (deficit) equity ............................. (998) 1,075 578 655
------ --------- -------- -------
Total liabilities and owner's (deficit)
equity ........................................... $ 356 $ (110) $ 2,748 $ 2,994
====== ========= ======== =======
See accompanying notes to unaudited pro forma balance sheet.
42
DEX MEDIA EAST LLC
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
The pro forma financial data have been derived by the application of pro
forma adjustments to our historical financial statements as of the date noted.
(a) Pursuant to the purchase agreement, Dex Media East did not acquire
cash, cash equivalents or short-term borrowings from affiliates. In
addition, as the acquisition of Dex Media East is treated as an asset
purchase for federal income tax purposes, no deferred taxes or income
taxes payable were acquired or assumed by Dex Media East.
(b) Adjustments to the unaudited Pro Forma Balance Sheet are summarized in
the following table and are described in the notes that follow:
ACQUSITION OF TRANSACTION FEES TOTAL NET
FINANCING(1) DEX EAST(2) AND EXPENSES(3) ADJUSTMENT
-------------- --------------- ------------------ -----------
Cash and cash equivalents ............................ $ 2,910 $(2,754) $ (141) $ 15
Deferred directory costs ............................. -- (24) -- (24)
Intangible assets .................................... -- 2,679 12 2,691
Deferred financing costs ............................. -- -- 129 129
Prepaid benefit obligations and other assets ......... -- (63) -- (63)
Deferred revenue and customer deposits ............... -- (76) -- (76)
Post-retirement and other post-employment
benefit obligations ................................. -- (9) -- (9)
Revolving credit facility ............................ 50 -- -- 50
Tranche A term loan facility ......................... 530 -- -- 530
Tranche B term loan facility ......................... 700 -- -- 700
Senior notes ......................................... 450 -- -- 450
Senior subordinated notes ............................ 525 -- -- 525
Owner's equity (deficit) ............................. 655 (77) -- 578
- ----------------
(1) Sources and uses of funds for the acquisition of Dex Media East are as
follows:
Sources of funds:
Revolving credit facility ..................... $ 50
Tranche A term loan facility .................. 530
Tranche B term loan facility .................. 700
Outstanding senior notes ...................... 450
Outstanding senior subordinated notes ......... 525
Cash equity ................................... 655
------
Total ......................................... $2,910
------
Uses of funds:
Purchase price ................................ $2,754
Transaction expenses .......................... 141
Working capital ............................... 15
------
Total ......................................... $2,910
------
43
(2) The purchase price and preliminary pro forma calculation of the excess of
the purchase price over the book value of net assets acquired is as
follows:
Cash purchase price .................................................. $ 2,754
Owner's deficit adjusted for assets and liabilities not acquired ..... (77)
-------
Excess of purchase price over net book value ......................... 2,677
-------
Preliminary allocation of excess of purchase price over net book
value and related purchase accounting adjustments:
Deferred revenue and customer deposits .............................. $ 76
Post-retirement and other post-employment benefit obligations ....... 9
Prepaid benefit obligations and other current assets ................ (63)
Deferred directory costs ............................................ (24)
Intangible assets (A):
Local customer relationships ........................................ 917
National customer relationships ..................................... 246
Non-compete/Publishing Agreements ................................... 251
Trademarks .......................................................... 379
Advertising agreement ............................................... 24
Goodwill ............................................................ 862
-------
Total ................................................................ $ 2,677
-------
(A) Dex Media East's preliminary estimates indicate that the differences
between amounts allocated to goodwill and other intangible assets for
financial reporting purposes and the amounts allocated to goodwill and
other intangible assets for tax reporting purposes will be immaterial.
(3) Represents estimated fees and expenses incurred in connection with the
transactions related to the acquisition of Dex Media East of which $129
million is deferred financing costs.
44
DEX MEDIA EAST LLC
UNAUDITED PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2001
DEX EAST DEX MEDIA EAST LLC
(DOLLARS IN MILLIONS) HISTORICAL ADJUSTMENTS PRO FORMA
- -------------------------------------------------- ------------ --------------- -------------------
Revenues:
Directory services revenues ..................... $ 647 $ -- $ 647
Directory services revenues, affiliates ......... 6 -- 6
Internet yellow pages revenues .................. 9 -- 9
Other revenues .................................. 4 -- 4
----- ------- -----
Total revenues ............................... 666 -- 666
----- ------- -----
Operating expenses:
Cost of revenues ................................ 209 -- 209
General and administrative expense .............. 48 2 (a) 50
Depreciation and amortization expense ........... 12 224 (b) 236
Merger-related expenses ......................... 4 -- 4
Impairment charges .............................. 7 -- 7
----- ------- -----
Total operating expenses ..................... 280 226 506
----- ------- -----
Operating income ............................. 386 (226) 160
Other (income) expense:
Interest income ................................. (4) 4 (c) --
Interest expense ................................ 114 97 (c) 211
Other expense ................................... 7 -- 7
------ ------- -----
Income before income taxes ................... 269 (327) (58)
Provision (benefit) for income taxes ............. 108 (131)(d) (23)
------ ------- -----
Net income (loss) ............................ $ 161 $ (196) $ (35)
------ ------- -----
See accompanying notes to unaudited pro forma statements of income.
45
..
DEX MEDIA EAST LLC
UNAUDITED PRO FORMA STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
DEX EAST DEX MEDIA EAST
(DOLLARS IN MILLIONS) HISTORICAL ADJUSTMENTS LLC PRO FORMA
- -------------------------------------------------- ------------ -------------- ---------------
Revenues:
Directory services revenues ..................... $ 500 $ -- $ 500
Directory services revenues, affiliates ......... 5 -- 5
Internet yellow pages revenues .................. 7 -- 7
Other revenues .................................. 4 -- 4
----- ------- -----
Total revenues ............................... 516 -- 516
----- ------- -----
Operating expenses:
Cost of revenues ................................ 156 -- 156
General and administrative expense .............. 42 2 (a) 44
Depreciation and amortization expense ........... 8 168 (b) 176
----- ------- -----
Total operating expenses ..................... 206 170 376
----- ------- -----
Operating income ................................ 310 (170) 140
Other expense:
Interest income ................................. (1) 1 --
Interest expense ................................ 73 85 (c) 158
------ ------- -----
Income before income taxes ................... 238 (256) (18)
Provision (benefit) for income taxes ............. 96 (102)(d) (6)
------ ------- ------
Net income (loss) ............................... $ 142 $ (154) $(12)
------ ------- ------
See accompanying notes to unaudited pro forma statements of income.
46
DEX MEDIA EAST LLC
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF INCOME
We estimate that our revenues and expenses for the twelve months following
the consummation of the transactions related to the acquisition of Dex Media
East will be approximately $76 million and $24 million lower, respectively,
than they would have been had the transactions not occurred because the
transactions will be accounted for under the purchase method of accounting,
under which the deferred revenue and deferred directory costs will be fair
valued. Had these purchase accounting adjustments not been made, approximately
$76 million of deferred revenue would have been recorded as revenue and $24
million of deferred directory costs would have been recorded as expense over
the twelve months following the consummation of the transactions. The purchase
method of accounting will not affect our revenues and directory costs in
periods subsequent to this twelve-month period. This purchase accounting
adjustment is non-recurring and has no historical or future cash impact.
(a) Represents a $2 million annual fee expected to be paid to the Sponsors
under the management agreement.
(b) We have not yet completed the final analysis of the fair value of our
net assets in order to determine the allocation of the purchase price
to the net assets to be acquired. See Note 2 to the unaudited pro forma
balance sheet for our preliminary determination of identifiable
intangible assets acquired. For purposes of the unaudited pro forma
financial statements, we have estimated that the underlying expected
useful lives and related amortization periods of identifiable
intangible assets is as follows:
AMORTIZATION PERIOD
--------------------
Local customer relationships ............... 20 years (1)
National customer relationships ............ 25 years (1)
Non-compete/Publishing agreements .......... 40 years
Qwest Dex trademark ........................ 5 years (2)
Advertising agreement ...................... 15 years
(1) Annual amortization is calculated using a declining method in
relation to estimated retention lives of acquired customers.
(2) $311 million of the acquired trademarks related to the DEX(Reg. TM)
mark is a perpetual asset and not subject to amortization.
In the event that final appraisals determine that other material
amortizable intangibles exist, actual annual amortization could be
substantially higher than amounts presented in the unaudited pro forma
statement of income. For example, if the amount allocated to amortizable
intangibles increased from our current estimate of 56% to 66%, pro forma
amortization expense for the year ended December 31, 2001 and for the nine
months ended September 30, 2002 would increase by about $40 million and $30
million, respectively.
(c) The pro forma adjustment to interest expense reflects an interest rate
of 9 7/8% for the senior notes, an interest rate of 12 1/8% for the
senior subordinated notes, an estimated interest expense relating to
our new credit facilities (including the commitment fees on the unused
portions of our new revolving credit facility and the tranche A term
loan facility) and amortization of related debt issuance costs less the
historical interest expense on that portion of a Qwest Dex line of
credit borrowing arrangement with an affiliate of Qwest which was
apportioned to us. For the adjustment to cash interest expense with
respect to our new credit facilities, we used a weighted average
interest rate of 6.7% and an assumed London Interbank Offered Rate
("LIBOR") of 3%. Pro forma cash interest expense would have been $193
million and $145 million for the year ended December 31, 2001 and the
nine months ended September 30, 2002, respectively.
(d) Represents the estimated tax effect of the pro forma adjustments.
47
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data as of and for each of the years
ended December 31, 1999, 2000 and 2001 have been derived from our combined
financial statements, included elsewhere in this prospectus, which have been
audited by KPMG LLP, independent auditors. The selected historical financial
data as of and for each of the years ended December 31, 1997 and 1998 and as of
and for the nine months ended September 30, 2001 and 2002 were derived from our
unaudited combined financial statements which, in the case of the nine months
ended September 30, 2001 and 2002 are included elsewhere in this prospectus. In
the opinion of management, the unaudited financial data for the nine months
ended September 30, 2001 and 2002 reflect all adjustments, consisting only of
normal and recurring adjustments, necessary for a fair presentation of the
results for those periods. The results of operations for the nine months ended
September 30, 2002 are not necessarily indicative of the results to be expected
for the full year. The following data should be read in conjunction with
"Unaudited Pro Forma Financial Information," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our combined
financial statements and related notes thereto included elsewhere in this
prospectus.
While we have been a stand-alone company since the consummation of the
transactions related to the acquisition of Dex Media East on November 8, 2002,
we have historically operated as the print and internet directory businesses of
Qwest Dex, Inc. in our region. Because our relationship with Qwest Dex Holdings
and Qwest Dex as well as Qwest and its other affiliates has changed as a result
of the acquisition of Dex Media East, we expect our cost structure to change
significantly from that reflected in our historical operating results. As a
result, our historical results of operations, financial position and cash flows
are not indicative of what they would have been had we operated as a
stand-alone company without the shared resources of Qwest and its affiliates.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Sensitivity Analysis Relating to EBITDA."
(DOLLARS IN MILLIONS, OTHER THAN PRINTED)
REVENUES PER ADVERTISER (LOCAL)) YEAR ENDED DECEMBER 31,
- --------------------------------------------- -----------------------------------------------------------------
1997 1998 1999 2000 2001
----------- ------------- ------------- ------------- -----------
STATEMENT OF INCOME DATA:
Directory services revenues ................. $ 513 $ 555 $ 587 $ 619 $ 647
Directory services revenues, affiliates ..... -- -- 5 5 6
Other revenues .............................. 6 6 9 14 13
Total revenues .............................. 519 561 601 638 666
Cost of revenues ............................ 205 223 232 238 209
General and administrative expense .......... 79 76 87 49 48
Depreciation and amortization expense........ 16 14 14 15 12
Merger-related expenses(a) .................. -- -- -- 6 4
Impairment charges(b) ....................... -- -- -- -- 7
-------- --------- --------- --------- --------
Total operating expenses .................... 300 313 333 308 280
-------- --------- --------- --------- --------
Operating income ............................ $ 219 $ 248 $ 268 $ 330 $ 386
-------- --------- --------- --------- --------
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges(c) ....... 55.5x 62.8x 2.1x 2.7x 3.3x
OTHER OPERATIONAL DATA:
Number of local advertisers (at period
end) ....................................... 223,199 220,131 215,294 211,087 205,715
Printed revenues per advertiser (local) ..... $ 1,931 $ 2,108 $ 2,293 $ 2,450 $ 2,622
Local advertiser renewal rate ............... 94% 94% 94% 94% 93%
Number of directories published ............. 156 154 153 152 150
BALANCE SHEET DATA (AT PERIOD END):
Total cash and cash equivalents ............. -- -- -- -- $ 55
Working capital(d) .......................... $ 39 $ (1,559) $ (1,687) $ (1,519) (1,267)
Total assets ................................ 244 265 299 313 348
Total debt(e) ............................... 27 1,611 1,741 1,603 1,391
Owner's equity (deficit) .................... 49 (1,542) (1,673) (1,493) (1,250)
(DOLLARS IN MILLIONS, OTHER THAN PRINTED) NINE MONTHS
REVENUES PER ADVERTISER (LOCAL)) ENDED SEPTEMBER 30,
- --------------------------------------------- -----------------------
2001 2002
----------- -----------
STATEMENT OF INCOME DATA:
Directory services revenues ................. $ 483 $ 500
Directory services revenues, affiliates ..... 4 5
Other revenues .............................. 11 11
Total revenues .............................. 498 516
Cost of revenues ............................ 156 156
General and administrative expense .......... 41 42
Depreciation and amortization expense........ 10 8
Merger-related expenses(a) .................. 4 --
Impairment charges(b) ....................... -- --
--------- ---------
Total operating expenses .................... 211 206
--------- ---------
Operating income ............................ $ 287 $ 310
--------- ---------
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges(c) ....... 3.3x 4.2x
OTHER OPERATIONAL DATA:
Number of local advertisers (at period
end) ....................................... 206,705 201,836
Printed revenues per advertiser (local) ..... n/a n/a
Local advertiser renewal rate ............... 93% 93%
Number of directories published ............. 112 112
BALANCE SHEET DATA (AT PERIOD END):
Total cash and cash equivalents ............. $ 148 $ 62
Working capital(d) .......................... (1,321) (1,045)
Total assets ................................ 420 356
Total debt(e) ............................... 1,460 1,178
Owner's equity (deficit) .................... (1,300) (998)
48
- ----------------
(a) Merger-related expenses reflect expenses incurred in connection with
Qwest's acquisition of US WEST, or the Merger, including contractual
settlements incurred to cancel various commitments no longer deemed
necessary as a result of the Merger, severance and employee-related
expenses (offset against a post-retirement benefit plan curtailment gain)
and rebranding expenses.
(b) Impairment charges reflect capitalized software costs that were written off
as certain internal software projects were discontinued.
(c) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose, earnings include pre-tax income from
continuing operations and fixed charges include interest, whether expensed
or capitalized, and an estimate of interest within rental expense. The
decrease in the ratio of earnings to fixed charges in 1999 results from
the apportionment of a portion of a Qwest Dex line of credit borrowing
arrangement in 1999.
(d) Working capital is defined as current assets less current liabilities.
Working capital include cash that was not acquired by Dex Media East from
its predecessor and short-term borrowings were eliminated after the
consummation of the transactions related to the acquisition of Dex Media
East. The following table summarizes the effects of these items on
adjusted net working capital for the periods indicated:
NINE MONTHS ENDED
(DOLLARS IN MILLIONS) YEAR ENDED DECEMBER 31, SEPTEMBER 30,
- ------------------------------------------ ---------------------------------------------------------- ---------------------------
1997 1998 1999 2000 2001 2001 2002
------ ------------ ------------ ------------ ------------ -------------- ------------
Working capital ..................... $ 39 $ (1,559) $ (1,687) $ (1,519) $ (1,267) $(1,321) $ (1,045)
Adjustments to working capital:
Cash and cash equivalents .......... -- -- -- -- (55) (148) (62)
Short term borrowings .............. 27 1,611 1,741 1,603 1,391 1,460 1,178
---- -------- -------- -------- -------- ------- --------
Working capital, excluding cash and
short-term borrowings .............. $ 66 $ 52 $ 54 $ 84 $ 69 $ (9) $ 71
---- -------- -------- -------- -------- --------- --------
Working capital, excluding cash and short-term borrowings is included in
this prospectus to provide additional information with respect to the
working capital of Dex Media East, as it excludes cash and short term
borrowings that were not acquired by Dex Media East from its predecessor.
Working capital, excluding cash and short-term borrowings is not calculated
under generally accepted accounting principles, or GAAP, and should not be
considered in isolation or as a substitute for working capital prepared in
accordance with GAAP. In addition, working capital, excluding cash and
short-term borrowings as presented is not necessarily comparable to other
similarly titled captions of other companies due to the potential
inconsistencies in the method of calculation.
(e) Consists of that portion of a Qwest Dex line of credit borrowing
arrangement with an affiliate of Qwest which was apportioned to us. Note
2a to our combined financial statements included in this prospectus sets
forth additional information regarding this apportionment.
49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and
results of operations covers periods prior to the consummation of the
transactions related to the acquisition of Dex Media East. Accordingly, the
discussion and analysis of historical periods does not reflect the significant
impact that the transactions will have on us, including significantly increased
leverage and liquidity requirements. In addition, the statements in the
discussion and analysis regarding industry outlook, our expectations regarding
the future performance of our business and the other non-historical statements
in the discussion and analysis are forward-looking statements. These
forward-looking statements are subject to numerous risks and uncertainties,
including, but not limited to, the risks and uncertainties described in the
"Risk Factors" section. Our actual results may differ materially from those
contained in any forward-looking statements. You should read the following
discussion together with the section entitled "Risk Factors," "Unaudited Pro
Forma Financial Information," "Selected Historical Financial Data,"
"--Liquidity and Capital Resources" and our combined financial statements and
related notes thereto included elsewhere in this prospectus. The historical
information, including the historical financial data, included in this
prospectus is that of Qwest Dex Holdings, Inc. and its subsidiary in our region
prior to the acquisition of Dex East, our predecessor, which we refer to as Dex
East. In the following discussion and analysis only, "we," "our" or "us" refers
to Dex East with respect to any historical information.
OVERVIEW
We are the largest print directory publisher in the Dex East States and
the sixth largest print directory publisher in the United States. We are the
exclusive official directory publisher in our region for Qwest LEC, which is
the primary local exchange carrier in most service areas within the Dex East
States. We, or our predecessors, have been publishing print directories for
over 100 years. In 2001, we had an aggregate 87% market share in our top 10
geographic markets, which accounted for approximately 72% of our revenues in
that year. In 2001, we published 150 directories and distributed approximately
19 million copies of these directories to business and residential consumers in
our region. As of December 31, 2001, we had a total of approximately 206,000
local advertising customers consisting primarily of small and medium-sized
businesses and approximately 5,600 national advertisers. We also provide
related services, including an internet-based directory and direct marketing
services. For the year ended December 31, 2001, after giving pro forma effect
to the transactions related to the acquisition of Dex Media East, we generated
$666 million in revenues. Approximately 98% of our total revenues for the year
ended December 31, 2001 were generated from the publication of print
directories. Approximately 96% of these revenues for this period came from the
sale of advertising in our yellow pages directories, and 4% of these revenues
for this period came from the sale of advertising in our white pages
directories.
STAND-ALONE COMPANY
We have historically operated as the print and internet directory
businesses of Qwest Dex, Inc. in our region and not as a stand-alone company.
The combined financial statements included in this prospectus have been derived
from the historical consolidated financial statements of Qwest Dex Holdings,
the parent company of Qwest Dex, Inc., and include the assets, obligations and
activities of Qwest Dex Holdings and Qwest Dex for business conducted in our
region prior to the acquisition of Dex East. To prepare these combined
financial statements, management of Qwest Dex Holdings and Qwest Dex either
specifically identified, assigned or apportioned all assets, liabilities,
revenues and expenses of Qwest Dex Holdings and Qwest Dex to either Dex East or
to the print and internet directory business of Qwest Dex Holdings and Qwest
Dex in the Dex West States, which we refer to as Dex West. Whenever possible,
account balances and specific amounts that directly related to Dex East or Dex
West were assigned directly to Dex East or Dex West, as appropriate.
Substantially all of our revenues and cost of revenues have been directly
assigned on a directory-by-directory basis. When no direct assignment was
feasible, account balances were apportioned using a variety of factors based on
cost relationships to the account balance being apportioned. We believe these
specific identifications, assignments and apportionments are reasonable;
however, the resulting amounts could
50
differ from amounts that would be determined if we operated on a stand-alone
basis. Note 2a to our combined financial statements included in this prospectus
sets forth additional information regarding such identifications, assignments
and apportionments. Because of our relationship with Qwest Dex Holdings and
Qwest Dex as well as Qwest and its other affiliates, our historical results of
operations, financial position and cash flows are not indicative of what they
would be had we operated without the shared resources of Qwest and its
affiliates. Accordingly, our combined financial statements are not indicative
of our future results of operations, financial position and cash flows. See
"--Sensitivity Analysis Relating to EBITDA" and our combined financial
statements and related notes thereto included in this prospectus.
Historically, we reimbursed Qwest for services it and its affiliates
provided to Dex East based upon either (1) tariffed or negotiated contract
rates, (2) market prices or (3) fully distributed costs. Fully distributed
costs include costs associated with employees of Qwest or Qwest affiliates that
are entirely dedicated to functions within Qwest Dex, many of whom became our
employees upon consummation of the transactions related to the acquisition of
Dex Media East. Such fully distributed employee costs are paid by Qwest Dex
through shared payroll and benefit systems as incurred. Other affiliate service
costs are paid by Qwest Dex based upon presentation of periodic billings from
Qwest or affiliates of Qwest. For more detail regarding how we have
historically reimbursed Qwest for services Qwest and its affiliates provided to
us, see Note 9a to our combined financial statements included in this
prospectus. The allocation methodologies are consistent with the guidelines
established for Qwest reporting to federal and state regulatory bodies. The
historical costs for services provided to us by Qwest affiliates may not
necessarily reflect the expenses that we will incur as an independent entity.
Qwest and Qwest LEC will continue to provide certain services that they
have historically provided to us, including support services relating to
information technology, real estate, human resources and legal matters,
pursuant to the transition services agreement for a maximum of 18 months. We
believe that we will replace, or be able to replace, the services provided by
Qwest and Qwest LEC prior to the termination of the transition services
agreement with services provided internally or through arrangements with third
parties at the costs that are assumed in the analysis that follows. However,
there can be no assurances that we will be able to replace the services at the
costs that are assumed in the analysis that follows.
While we have been a stand-alone company since the consummation of the
transactions on November 8, 2002, we have historically operated the print and
internet directory businesses of Qwest Dex, Inc. in our region prior to the
acquisition of Dex Media East. We will incur incremental costs associated with
operating as a stand-alone company. We have identified two broad categories of
incremental stand-alone operating costs. The first category of operating costs
consists of those costs associated with operating Qwest Dex as a separate
entity from Qwest. The second category of costs consists of those costs we
estimate we will incur if the acquisition of Dex Media West is not consummated.
These second category costs are those that will result from operating Dex Media
East as a separate entity from Qwest Dex. If the acquisition of Dex Media West
is consummated, Dex Media West will reimburse us for a portion of these costs
and we will not incur other costs because we will benefit from certain
economies of scale as a result of sharing services relating to information
technology, operations, real estate, human resources and legal matters with Dex
Media West. Therefore, we believe that we will benefit from net synergies if
the acquisition of Dex Media West is consummated.
We will fund $210 million of the purchase price for Dex Media West to be
paid by Dex Media to Qwest in connection with the acquisition of Dex Media West
which, we believe, represents the fair value of the ongoing benefit of the
synergies to be realized by us in connection with that acquisition. Dex Media
West will be an indirect, wholly-owned subsidiary of Dex Media and we will not
own any of the interests in Dex Media West. The $210 million will be paid to
Dex Media in the form of a dividend to the extent of Dex Media East retained
earnings, with any remaining balance paid as a return of capital, immediately
prior to the consummation of the acquisition of Dex Media West. Dex Media will
use the funds to pay a portion of the purchase price for Dex Media West to
Qwest. We expect to fund that portion of the Dex Media West purchase price
through borrowings of $160 million pursuant to the delayed draw portion of the
tranche A term loan facility and an additional
51
$50 million cash equity contribution to us from the Sponsors and their
assignees and designees. The commitment under the delayed draw portion of the
tranche A term loan facility terminates if the acquisition of Dex Media West is
not consummated. See "The Transactions--Agreements between Us, Qwest LEC and/or
Qwest" and "The Transactions--Agreements between Us and Dex Media West and/or
Dex Media." The acquisition of Dex Media West is subject to a number of
conditions described in "The Transactions." In addition, certain shareholders
of Qwest are seeking to enjoin the sale of the Dex West assets. There can be no
assurances that the acquisition of Dex Media West will be consummated or that
the anticipated synergies will be realized.
Historically, we have been included in the consolidated federal income tax
returns filed by Qwest. We have had an informal agreement with Qwest pursuant
to which we were required to compute our provision for income taxes on a
separate return basis and pay to, or receive from, Qwest the separate U.S.
federal income tax return liability or benefit so computed, if any. For federal
income tax purposes, the acquisition of Dex Media East will be treated as an
asset purchase and, immediately after the consummation of the acquisition of
Dex Media East, Dex Media East, Inc., our direct parent, had a tax basis in the
acquired assets equal to the purchase price. As a result, for tax purposes,
following the consummation of the acquisition of Dex Media East, Dex Media
East, Inc. should generally be able to depreciate or amortize the acquired
assets, primarily intangibles, based on a higher tax basis. We estimate that
this step-up in tax basis for intangibles, which will be amortized over 15
years, will significantly reduce the cash taxes of Dex Media East, Inc. over
that period. See "Unaudited Pro Forma Financial Information."
In connection with the transactions related to the acquisition of Dex
Media East, we incurred substantial indebtedness, interest expense and
repayment obligations. On a pro forma basis after giving effect to the
transactions related to the acquisition of Dex Media East, as of September 30,
2002, we would have had outstanding $2,255 million in aggregate indebtedness,
excluding unused commitments, with an additional $50 million of additional
borrowing capacity available under our new credit facilities. Also on a pro
forma basis, for the year ended December 31, 2001 and the nine months ended
September 30, 2002, our interest expense would have been $211 million and $158
million, respectively. The interest expense relating to this debt will
adversely affect our net income by the amount of interest expense offset by the
related tax deduction. For detail regarding our repayment obligations, see the
table set forth below under the subheading "--Liquidity and Capital
Resources--Post-Transactions." Upon consummation of the transactions, we
incurred estimated one-time fees and expenses (such as transaction advisory
fees, legal fees, underwriting commissions relating to the notes, commitment
fees relating to the financing of the acquisition of Dex Media East and
information technology consulting fees) of approximately $141 million.
REVENUES
We derive virtually all of our revenues from the sale of advertising in
our printed directories, which we refer to as directory services revenues. We
also provide related services, including an internet-based directory and direct
marketing services. Growth in directory services revenues is affected by
several factors, including growth in advertising customers, increases in the
pricing of advertising, increases in the quantity of advertising purchased per
customer and the introduction of additional products which generate incremental
revenues. In the aggregate, directory services revenues also may increase
through the publication of new printed directories.
We estimate that our revenues and expenses for the twelve months following
the consummation of the transactions related to the acquisition of Dex Media
East will be lower than they would have been had the transactions not occurred
because the transactions will be accounted for under the purchase method of
accounting, under which the deferred revenue and deferred directory costs would
be fair valued. The purchase method of accounting will not affect our revenues
and directory costs in periods subsequent to this twelve-month period. This
purchase accounting adjustment is non-recurring and has no historical or future
cash impact.
Our combined financial statements included in this prospectus have been
prepared on the basis of the deferral and amortization method, under which
revenues and expenses are recognized ratably
52
over the life of each directory, commencing in the month of delivery. Revenues
from internet advertisements are recognized ratably over the twelve-month
period we commit to carry the advertisement.
COST OF REVENUES
We account for cost of revenues under the deferral and amortization
method. Accordingly, our cost of revenues recognized in a given period consist
of (1) costs incurred in the given period and recognized in the given period,
principally sales salaries and wages, (2) costs incurred in a prior period, a
portion of which is amortized and recognized in the given period and (3) costs
incurred in the given period, a portion of which is amortized and recognized in
the given period and the balance of which is deferred until future periods.
Consequently, there will be a difference between the cost of revenues
recognized in any given period and the costs incurred in the given period,
which difference may be significant.
Costs incurred in the current period and subject to deferral include
direct costs associated with the publication of directories, including sales
commissions, paper, printing, transportation, distribution and pre-press
production, employee costs relating to each of the foregoing, and information
technology costs for maintenance of production systems. Sales commissions
include commissions paid to third party certified marketing representatives, or
CMRs, which act as our channel to national advertisers. All deferred costs
related to the sales and production of directories are recognized ratably over
the life of each directory under the deferral and amortization method, with
cost recognition commencing in the month of delivery. Historically, cost of
revenues have included charges incurred by Qwest relating primarily to
information technology costs for maintenance of production systems allocated or
directly assigned to us. Costs incurred and recognized in the period in which
they are incurred include sales salaries and wages.
GENERAL AND ADMINISTRATIVE EXPENSE
Our general and administrative expense consists primarily of the costs of
advertising, promotion and marketing, administrative staff, information
technology, training, customer billing and corporate management and bad debt
expense. All of our general and administrative expense is recognized in the
period in which it is incurred. Historically, our general and administrative
expense has included the costs of other services, such as real estate,
information technologies, finance and human resources, shared among Qwest
affiliates; however, after the consummation of the transactions related to the
acquisition of Dex Media East and the termination of the transition services
agreement, we will incur these costs directly. We anticipate that our general
and administrative expense will increase as a stand-alone company. See
"--Stand-Alone Company."
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED) COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 (UNAUDITED)
NINE MONTHS ENDED NINE MONTHS ENDED
(DOLLARS IN MILLIONS) SEPTEMBER 30, 2002 SEPTEMBER 30, 2001 $ CHANGE % CHANGE
- -------------------------------------------- -------------------- -------------------- ---------- ---------
Revenues ................................... $ 516 $ 498 $ 18 3.6%
Cost of revenues ........................... $ 156 $ 156 $ -- 0%
------- ------- ---- ---
Gross profit .............................. $ 360 $ 342 $ 18 5.3%
Gross margin .............................. 69.8% 68.7% n/a n/a
------- ------- ---- ----
General and administrative expense ......... $ 42 $ 41 $ 1 2.4%
------- ------- ---- ----
REVENUES
Revenues increased by $18 million, or 3.6%, to $516 million for the nine
months ended September 30, 2002 from $498 million for the same period in 2001.
Included in total revenues for the nine months ended September 30, 2002 were
$500 million in directory services revenues and $16 million of directory
services revenues-affiliates and all other products.
53
Total directory services revenues, which consist of local and national
directory services revenues, increased by $17 million, or 3.5%, to $500 million
for the nine months ended September 30, 2002 from $483 million for the same
period in 2001. Local directory services revenues increased by $18 million, or
4.5%, to $421 million for the nine months ended September 30, 2002 from $403
million for the same period in 2001. Local directory services revenues
accounted for 81.6% of revenues for the nine months ended September 30, 2002 as
compared to 80.9% for the same period in 2001. While the number of local
advertisers declined by 2.4% for the twelve months ended September 30, 2002,
the average annual revenues per local advertiser increased 6.9%, to $2,760 for
the twelve months ended September 30, 2002 from $2,583 for the twelve month
period ended September 30, 2001. Growth in the average revenues per local
advertiser during the nine months ended September 30, 2002 resulted from price
increases and additional revenues from premium products, such as color
advertisements and awareness products. Sales to national advertisers for the
nine months ended September 30, 2002 increased $1 million, or 1.3%, to $77
million from $76 million for the same period in 2001, which was a result of
lower advertising volume purchased by national advertisers, offset by increases
in prices. Sales to national advertisers for the nine months ended September
30, 2002 accounted for 14.9% of revenues for the period as compared to 15.3%
for the same period in 2001. Other directory services revenues decreased by $2
million.
COST OF REVENUES
Cost of revenues recognized were unchanged at $156 million for the nine
months ended September 30, 2002 when compared to the same period in 2001. Cost
of revenues represented 30.2% of revenues for the nine months ended September
30, 2002, compared to 31.3% of revenues for the same period in 2001.
For the nine months ended September 30, 2002 and 2001, we incurred
employee costs, direct costs of publishing, sales commissions, services from
affiliates and other costs of $137 million and $136 million, respectively.
Under the deferral and amortization method, cost of revenues recognized for the
nine months ended September 30, 2002 and 2001 exceeded costs incurred by $19
million and $20 million, respectively.
Employee costs incurred during the period increased by $4 million, or
7.0%, to $61 million for the nine months ended September 30, 2002 from $57
million for the same period in 2001. The increase was primarily a result of
increases in contract labor costs and local commissions resulting from
increased sales compared to the prior period.
Direct costs of publishing incurred during the period, which include
paper, printing and distribution, were unchanged at $46 million for the nine
months ended September 30, 2002 when compared to the same period in 2001. In
order to increase efficiencies, we reduced the number of copies printed. These
savings were offset by increases in printing and distribution expenses in 2002
as compared to the 2001 period.
Services from affiliates incurred during the period, primarily associated
with maintenance of production systems, declined by $4 million, or 50%, to $4
million for the nine months ended September 30, 2002 from $8 million for the
same period in 2001. The reductions are a result of cost containment measures,
including reductions in employees and consolidation of facilities, by the Qwest
IT organization. All services from affiliates for the nine months ended
September 30, 2002 and 2001 were paid based on billings presented by
affiliates.
Other cost of revenues incurred during the period, which include sales
commissions and professional services, increased by $1 million, or 4.0%, to $26
million for the nine months ended September 30, 2002 from $25 million for the
same period in 2001.
GROSS PROFIT
Our gross profit increased by $18 million, or 5.3%, to $360 million for
the nine months ended September 30, 2002 from $342 million for the same period
in 2001 as a result of increased revenues without a corresponding increase in
cost of revenues. Gross margin increased to 69.8% for the nine months ended
September 30, 2002 from 68.7% for the same period in 2001.
54
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense, excluding depreciation and
amortization, increased by $1 million, or 2.4%, to $42 million for the nine
months ended September 30, 2002 from $41 million for the same period in 2001.
The increase was generally due to increases in services from affiliates and bad
debt expense, which were partially offset by reductions in advertising expense.
Bad debt expense increased by $2 million, or 16.7%, to $14 million for the
nine months ended September 30, 2002 from $12 million for the same period in
2001. Bad debt expense as a percent of total revenues was 2.7% for the nine
months ended September 30, 2002 compared to 2.4% for the same period in 2001.
This increase was due to a change in general economic conditions.
Services from affiliates increased by $4 million, or 17.4%, to $27 million
for the nine months ended September 30, 2002 from $23 million for the same
period in 2001. The increase was generally due to an increase in pension
expenses, benefits expenses and one-time charges related to the transactions
related to the acquisition of Dex Media East. Services from affiliates included
$16 million and $12 million in the nine months ended September 30, 2002 and
2001, respectively, that were paid based on billings from affiliates.
All other general and administrative expense, which includes employee
expense and advertising, decreased by $5 million, or 83.3%, to $1 million for
the nine months ended September 30, 2002 from $6 million for the same period in
2001.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
(DOLLARS IN MILLIONS) 2001 2000 $ CHANGE % CHANGE
- --------------------------------------------- ---------- ---------- ---------- ------------
Revenues .................................... $ 666 $ 638 $ 28 4.4%
Cost of revenues ............................ $ 209 $ 238 $(29) (12.2)%
------- ------- ---- -----
Gross profit ............................... $ 457 $ 400 $ 57 14.3%
Gross margin ............................... 68.6% 62.7% n/a n/a
------- ------- ---- -----
General and administrative expense .......... $ 48 $ 49 $ (1) ( 2.0)%
------- ------- ------ -----
REVENUES
Revenues increased by $28 million, or 4.4%, to $666 million in 2001 from
$638 million in 2000. Included in total revenues for 2001 were $647 million in
directory services revenues and $19 million from directory services revenues,
affiliates and all other products.
Total directory services revenues, which consist of local and national
directory services revenues, increased by $28 million, or 4.5%, to $647 million
in 2001 from $619 million in 2000. Local directory services revenues increased
by $22 million, or 4.3%, to $539 million in 2001 from $517 million in 2000.
Local directory services revenues accounted for 80.9% of revenues in 2001 as
compared to 81.0% in 2000. While the number of local advertisers declined by
2.5% in 2001, the average annual revenues per local advertiser increased 7.0%,
to $2,622 in 2001 from $2,450 in 2000. Growth in the average revenues per local
advertiser in 2001 resulted from price increases and additional revenues from
premium products, such as color advertisements and awareness products. Sales to
national advertisers increased by $2 million, or 2.0%, to $101 million in 2001
from $99 million in 2000. Sales to national advertisers in 2001 accounted for
15.2% of revenues in 2001 as compared to 15.5% in 2000. Other directory
services revenues increased by $4 million.
COST OF REVENUES
Cost of revenues recognized decreased $29 million, or 12.2%, to $209
million in 2001 from $238 million in 2000. Cost of revenues represented 31.4%
of revenues in 2001, compared to 37.3% of revenues in 2000.
In 2001 and 2000, we incurred employee costs, direct costs of publishing,
commissions, services from affiliates and other costs of $207 million and $238
million, respectively. Under the deferral and amortization method, costs of
revenues recognized in 2001 exceeded costs incurred by $2 million, while costs
recognized approximately equaled costs incurred in 2000.
55
Employee costs incurred during the period decreased by $10 million, or
11.2%, to $79 million in 2001 from $89 million in 2000. The decrease was
primarily a result of process improvements at Qwest Dex which decreased the
number of management and occupational employees associated with directory
manufacturing and sales by 470 people during 2000 and 2001. Such reductions
were implemented over the two-year period through a combination of employee
transfers within Qwest, unreplaced turnover and terminations.
Direct costs of publishing incurred during the period, which include
paper, printing and distribution, decreased $5 million, or 6.1%, to $77 million
in 2001 from $82 million in 2000. The cost of printing and paper decreased by
$4 million, or 5.9%, to $64 million in 2001 from $68 million in 2000. The
decrease was due in part to the use of a more efficient typesetting font, which
allowed our directories to be produced using fewer pages and in part to a
reduction in the number of copies printed. In addition, the implementation of
new technologies allowed us to supply digital pages to our printers, which
further reduced printing costs.
Services from affiliates incurred during the period decreased by $9
million, or 45.0%, to $11 million in 2001 from $20 million in 2000. For 2001,
$10 million of affiliate services were paid based on billings presented by
affiliates and $1 million was paid directly by us through payroll and benefit
processes. In 2000, all affiliate services were paid directly by us through
payroll and benefit processes. Such costs decreased primarily as a result of
cost reduction efforts at Qwest, which reduced service levels and related cost
allocations.
Other cost of revenues incurred during the period, which include sales
commissions and professional services, decreased by $7 million, or 14.9%, to
$40 million in 2001 from $47 million in 2000, primarily a result of cost
reduction measures at Qwest Dex.
GROSS PROFIT
Our gross profit increased by $57 million, or 14.3%, to $457 million in
2001 from $400 million in 2000 as a result of increased revenues and decreased
cost of revenues. Gross margin increased to 68.6% in 2001 from 62.7% in 2000.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense, excluding depreciation and
amortization, decreased by $1 million, or 2.0%, to $48 million in 2001 from $49
million in 2000. The decrease was generally due to reductions in the cost of
services supplied by affiliates, a reduction in advertising and promotion
expense and other cost reduction programs, which were partially offset by an
increase in bad debt expense.
Advertising and promotion expense decreased by $7 million, or 50%, to $7
million in 2001 from $14 million in 2000. The decrease related primarily to
reduced advertising production costs and media purchases.
Bad debt expense increased by $2 million, or 14.3%, to $16 million in 2001
from $14 million in 2000. Bad debt expense as a percentage of total revenues
was 2.4% in 2001 compared to 2.2% in 2000. The increase in expense related
primarily to a decline in economic conditions.
Services from affiliates decreased by $5 million, or 15.2%, to $28 million
in 2001 from $33 million in 2000. The reduction was primarily the result of
cost containment measures by Qwest. Services from affiliates included $18
million in 2001 and $21 million in 2000 that was paid based on billings from
affiliates.
All other general and administrative expense, which includes employee
expense, increased by $9 million, to $(3) million in 2001 from $(12) million in
2000. Other general and administrative expense includes pension and employee
benefit credits of $11 million in 2001 and $13 million in 2000.
56
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
(DOLLARS IN MILLIONS) 2000 1999 $ CHANGE % CHANGE
- --------------------------------------------- ---------- ---------- ---------- ------------
Revenues .................................... $ 638 $ 601 $ 37 6.2%
Cost of revenues ............................ $ 238 $ 232 $ 6 2.6%
------- ------- ----- -----
Gross profit ............................... $ 400 $ 369 $ 31 8.4%
Gross margin ............................... 62.7% 61.4% n/a n/a
------- ------- ----- -----
General and administrative expense .......... $ 49 $ 87 $ (38) (43.7)%
------- ------- ----- -----
REVENUES
Revenues increased by $37 million, or 6.2%, to $638 million in 2000 from
$601 million in 1999. Included in total revenues in 2000 was $619 million in
directory services revenues and $19 million from directory services revenues,
affiliates and all other products.
Total directory services revenues, which consist of local and national
directory services revenues, increased by $32 million, or 5.5%, to $619 million
in 2000 from $587 million in 1999. Local directory services revenues increased
by $23 million, or 4.7%, to $517 million in 2000 from $494 million in 1999.
Local directory services revenues accounted for 81.0% of revenues in 2000 as
compared to 82.2% in 1999. While the number of local advertisers declined by
2.0% in 2000, the average annual revenues per local advertiser increased 6.8%,
to $2,450 in 2000 from $2,293 in 1999. Growth in the average revenues per local
advertiser resulted from various price increases and an increase in the sale of
premium advertising products relative to other advertising products. Sales to
national advertisers in 2000 increased by $9 million, or 10.0%, to $99 million
in 2000 from $90 million in 1999. Sales to national advertisers in 2000
accounted for 15.5% of revenues in 2000 as compared to 15.0% in 1999.
COST OF REVENUES
Cost of revenues recognized increased $6 million, or 2.6%, to $238 million
in 2000 from $232 million in 1999. Cost of revenues represented 37.3% of
revenues in 2000, compared to 38.6% of revenues in 1999.
In both 2000 and 1999, we incurred employee costs, direct costs of
publishing, commissions, services from affiliates and other costs of $238
million. Under the deferral and amortization method, cost of revenues
recognized equaled costs incurred in 2000 and cost of revenues incurred
exceeded costs recognized by $6 million in 1999.
Employee costs incurred during the period decreased by $1 million, or
1.1%, to $89 million in 2000 from $90 million in 1999.
Direct costs of publishing incurred during the period, which include
paper, printing and distribution, decreased by $4 million, or 4.7% to $82
million in 2000 compared to $86 million in 1999. Total cost of printing and
paper decreased by $3 million, or 4.2%, to $68 million in 2000 from $71 million
in 1999. Paper cost decreased due in part to more efficient directory
pagination and an improved typesetting font used in the production of white
pages directories and in part to a reduction in the number of copies printed.
Printing costs were reduced as a result of supplying digital pages to the
printers and copy count reductions attributable to CD-ROM distribution to
medium and large businesses.
Services from affiliates incurred during the period increased $2 million,
or 11.1%, to $20 million in 2000 from $18 million in 1999. The increase related
primarily to maintenance and upgrades to our production systems. In 2000 and
1999, all affiliate services were paid directly by us through payroll and
benefit processes.
Other cost of revenues incurred during the period, including sales
commissions and professional services, increased by $3 million, or 6.8%, to $47
million in 2000 from $44 million in 1999. The increase primarily related to an
increase in the commissions paid to CMRs, resulting from a 10% increase in
national directory sales and an increase in the average commission rate.
57
GROSS PROFIT
Our gross profit increased by $31 million, or 8.4%, to $400 million in
2000 from $369 million in 1999. Gross margin increased to 62.7% in 2000 from
61.4% in 1999. The change in gross margin resulted from the changes in revenues
and cost of revenues described above.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense, excluding depreciation and
amortization, decreased by $38 million, or 43.7%, to $49 million in 2000 from
$87 million in 1999. The decrease was generally due to reductions in the cost
staff functions and services supplied by affiliates, a reduction in advertising
and promotion expense, and other cost reduction programs, and was partially
offset by an increase in bad debt expense.
Advertising and promotion expense decreased by $4 million, or 22.2%, to
$14 million in 2000 from $18 million in 1999. The decrease was related to cost
containment efforts and reductions in payments to internet businesses for
directing traffic to our internet-based directory.
Bad debt expense increased by $3 million, or 27.3%, to $14 million in 2000
from $11 million in 1999. Bad debt expense as a percent of revenues was 2.2% in
2000 compared to 1.8% in 1999. The increase in bad debt expense was related
primarily to increased revenues and a change in economic conditions during the
second half of 2000.
Services from affiliates decreased by $11 million, or 25.0%, to $33
million in 2000 from $44 million in 1999. The reduction was primarily the
result of cost containment measures by Qwest. Services from affiliates included
$21 million in 2000 and $15 million in 1999 that was paid based on billings
from affiliates.
All other general and administrative expenses, which includes employee
expenses, decreased by $26 million to $(12) million in 2000 from $14 million in
1999. The decrease includes an $11 million decrease in employee expense and a
$15 million decrease in all other general and administrative expenses. Employee
expense includes pension and employee benefit credits of $13 million in 2000
and $4 million in 1999. The decrease was due primarily to the completion of
system enhancement projects in 1999 for which there were no comparable costs in
2000.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL
Historically, our principal source of liquidity was cash flow generated
from operations. Prior to the consummation of the transactions related to the
acquisition of Dex Media East, our primary liquidity requirements were for debt
service on that portion of a Qwest Dex line of credit borrowing arrangement
with an affiliate of Qwest which was apportioned to us, dividends to Qwest, tax
payments to Qwest to reflect the estimated taxes of Qwest Dex as well as
capital expenditures and working capital. We have historically generated
sufficient cash flow to fund our operations and investments and to make
payments to Qwest.
Net cash provided by operations was $134 million and $225 million for the
nine months ended September 30, 2002 and 2001, respectively. Adjustments to net
income of $8 million to reconcile to the net cash from operations for the nine
months ended September 30, 2002 included depreciation and amortization expense
of $8 million, deferred tax benefit of $24 million and provision for bad debts
of $14 million, as well as changes in working capital. Adjustments to net
income of $104 million to reconcile to the net cash from operations for the
nine months ended September 30, 2001 included depreciation and amortization
expense of $10 million, deferred tax provision of $6 million and provision for
bad debts of $12 million, as well as changes in working capital. Changes in
working capital relate primarily to changes in accounts receivable and accounts
payable. Net accounts receivable decreased by $24 million, or 31.6%, to $52
million at September 30, 2002 from $76 million at December 31, 2001. Accounts
payable decreased by $1 million, or 7.1%, to $13 million at September 30, 2002
from $14 million at December 31, 2001. Net
58
cash provided by operations was $192 million for the fiscal year ended December
31, 2001. Adjustments to net income of $31 million to reconcile to the net cash
from operations included depreciation and amortization expense of $12 million,
writedown of impaired investments of $7 million, asset impairment charges of $7
million, deferred tax provision of $8 million and provision for bad debts of
$16 million, as well as changes in working capital. Changes in working capital
relate primarily to changes in accounts receivable and accounts payable. Net
accounts receivable decreased by $1 million, or 1.3%, to $76 million in 2001
from $77 million in 2000. Accounts payable decreased by $8 million, or 36.4%,
to $14 million in 2001 from $22 million in 2000.
Net cash used for investing activities was $13 million and $6 million for
the nine months ended September 30, 2002 and 2001, respectively. The principal
use of cash for investing activities was expenditures for property, plant and
equipment, primarily associated with the purchase of our headquarters building
and capitalized software development costs. Net cash used for investing
activities was $7 million in 2001. The principal use of cash for investing
activities was software development costs.
Net cash used for financing activities was $114 million and $71 million
for the nine months ended September 30, 2002 and 2001, respectively. The
principal use of cash for financing activities was to pay $542 million and $143
million to Qwest relating to short-term borrowings from affiliates during the
nine months ended September 30, 2002 and 2001, respectively. Such payments were
partially made with the $329 million of allocated proceeds from the issuance of
a $750 million note by Qwest Dex in September 2002. Financing activities also
include contributions received from Qwest in lieu of income taxes of $121
million and $76 million for the nine months ended September 30, 2002 and 2001,
respectively. Qwest Dex has historically been included in Qwest's consolidated
federal income tax returns and combined state income tax returns and Qwest Dex
and Dex East have historically provided income taxes as if they were separate
taxpayers, although neither Qwest Dex nor Dex East have a formal tax-sharing
arrangement with Qwest. Consequently, for financial reporting purposes, we have
reflected contributions and distributions in our combined statements of changes
in owner's deficit in lieu of recording receivables and payables for income
taxes. Net cash used for financing activities was $130 million in 2001. The
principal use of cash for financing activities was to pay $212 million to the
Qwest Group relating to short-term borrowings from affiliates. Financing
activities also include contributions received from Qwest in lieu of income
taxes of $88 million in 2001.
POST-TRANSACTIONS
Following the transactions related to the acquisition of Dex Media East,
our primary source of liquidity continues to be cash flow generated from
operations. We also have availability under our new revolving credit facility,
subject to certain conditions. We expect that our primary liquidity
requirements will be for debt service on our new credit facilities and the
notes, capital expenditures and working capital.
In connection with the transactions related to the acquisition of Dex
Media East, we entered into a billing and collection services agreement with
Qwest Corporation, the local exchange carrier subsidiary of Qwest, which we
refer to as Qwest LEC, pursuant to which Qwest LEC will continue to bill and
collect, on our behalf, amounts owed by customers in connection with our
directory services. In 2001, Qwest LEC billed 54% of our revenues on our
behalf, and we billed the remaining 46% directly. Qwest LEC bills the customer
on the same billing statement on which it bills the customer for local
telephone service. Qwest LEC has completed the preparation of its billing and
collection system so that we will be able to transition from the Qwest LEC
billing and collection system to our own billing and collection system within
approximately two weeks should we choose to do so. However, if Qwest LEC were
involved in a bankruptcy proceeding, it could have a material adverse effect on
our ability to collect unpaid receivables or receivables billed by Qwest after
the commencement of such proceedings. See "Risk Factors--The loss of any of our
key agreements with Qwest LEC could have a material adverse affect on our
business."
In connection with the transactions, we incurred $1,280 million of
borrowings under our new credit facilities and $975 million of indebtedness
with the issuance of the outstanding notes. In addition, in the event that the
acquisition of Dex Media West is consummated, we will incur
59
additional loans in a total principal amount of up to $160 million under the
tranche A term loan facility, subject to certain conditions. If the acquisition
of Dex Media West is not consummated, we will be obligated to pay up to $17
million in fees to various financial institutions that have made financing
commitments relating to the acquisition of Dex Media West.
We are significantly leveraged. On a pro forma basis, as of September 30,
2002, we would have had outstanding $2,255 million in aggregate indebtedness,
excluding unused commitments, with approximately $50 million of additional
borrowing capacity available under our new credit facilities. As a result, our
liquidity requirements will be significantly increased, primarily due to
increased debt service obligations. For the year ended December 31, 2001 and
the nine months ended September 30, 2002, on a pro forma basis after giving
effect to the transactions related to the acquisition of Dex Media East, our
interest expense would have been $211 million and $158 million, respectively.
Our new credit facilities consist of a revolving credit facility and term
loan facilities. Our new revolving credit facility comprises loans in a total
principal amount of up to $100 million of which we borrowed $50 million to fund
the acquisition of Dex Media East with the remainder available for general
corporate purposes, subject to certain conditions. Upon consummation of the
transactions related to the acquisition of Dex Media East, we had approximately
$50 million available under our new revolving credit facility. The term loan
facilities consist of a tranche A term loan facility in a total principal
amount of $530 million and a tranche B term loan facility in a total principal
amount of $700 million. Except as described in the following sentence, the
tranche A and tranche B term loan facilities are available only to fund the
transactions related to the acquisition of Dex Media East. In addition, in the
event that the acquisition of Dex Media West is consummated, additional loans
in a total principal amount of up to $160 million may be borrowed under the
tranche A term loan facility, subject to certain conditions. See "Our New
Credit Facilities."
Our new credit facilities bear interest, at our option, at either:
o a base rate used by JPMorgan Chase Bank, plus an applicable margin; or
o 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.
The applicable margin on loans under our new revolving credit facility and
the tranche A term loan facility is subject to change depending on our leverage
ratio.
In addition to paying interest on outstanding principal amounts under our
new credit facilities, we are required to pay a commitment fee to the lenders
for the unused commitments under our new revolving credit facility, which will
be payable quarterly in arrears. The commitment fee will be subject to change
depending on our leverage ratio.
Our new revolving credit facility and the tranche A term loan facility
will mature in November 2008 and the tranche B term loan facility will mature
in May 2009.
Our new credit facilities contain negative and affirmative covenants and
requirements affecting us and domestic subsidiaries that we create or acquire,
with certain exceptions set forth in our credit agreement. Our new 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, capital
expenditures, amendments to charter, by-laws and other material documents,
hedging agreements and intercompany indebtedness. Our new credit facilities
also require us, and will require our existing and future subsidiaries, with
certain exceptions set forth in our credit agreement, to meet certain financial
covenants and ratios, particularly a leverage ratio, an interest coverage ratio
and a fixed charges coverage ratio. Although we have summarized the material
provisions of our credit agreement filed as an exhibit to the registration
statement, we encourage you to read the credit agreement contained in the
exhibits for a more complete understanding and description of such agreement.
60
The following table sets forth, as of the date of the transactions related
to the acquisition of Dex Media East, debt, lease and employment agreement
obligations for the next several years:
2007 AND
(DOLLARS IN MILLIONS) 2002 2003 2004 2005 2006 THEREAFTER TOTAL
- -------------------------------------- ------ ------ ------ -------- -------- ------------ ---------
Debt/Lease Obligations:
Long-Term Debt(1) .................... $ 0 $ 41 $ 89 $ 108 $ 134 $1,933 $2,305
Operating Leases ..................... 1 5 4 3 3 4 20
Employment Agreements(2) ............. -- 3 3 3 -- -- 9
--- ---- ---- ----- ----- ------ ------
Total Debt, Lease and Employment
Agreement Obligations ............... $ 1 $ 49 $ 96 $ 114 $ 137 $1,937 $2,334
=== ==== ==== ===== ===== ====== ======
- ----------------
(1) Assumes that our new revolving credit facility, which matures in May 2009
and has $100 million of availability, is fully drawn. Excludes the $160
million under the delayed draw portion of the tranche A term loan facility
that we expect to borrow if the acquisition of Dex Media West is
consummated. In connection with the acquisition of Dex Media East, we did
not assume any of the liabilities relating to the remaining balance of the
$750 million, two-year note issued by Qwest Dex in September 2002.
(2) The amounts set forth above represent the amount of base salary payable to
the executives during the initial term of employment assuming that all
such executives remain employed by us until the end of the initial term.
The costs of base salary for certain such executives are currently split
pro rata between us, on one hand, and Qwest and Qwest Dex on the other
hand. See "Management--Joint Management Agreement." For additional
information regarding the employment agreements of certain of our senior
executive officers, please see "Management--Employment Agreements."
We expect to incur approximately $15 million in capital expenditures in
2003. We are also considering upgrading our existing software system to enhance
its functionality. This upgrade could require significant capital expenditures
over the next several years.
Pursuant to the purchase agreement, Qwest is obligated to pay the cost of
obtaining the right for us to use, on an interim basis, the material software,
databases and web content currently licensed to Qwest by third parties, which we
refer to as the material intellectual property products, without material
interruption following the consummation of the transactions. Under the purchase
agreement, any obligation on our part to pay the cost of obtaining the permanent
right for us to use the material intellectual property products, together with
our obligation to pay certain separation costs in the event that the acquistion
of Dex Media West is not consummated, will be limited to $40 million. We paid
approximately $2.1 million of such costs upon the closing of the acquisition of
Dex Media East, and believe that any remaining obligation will be paid during
the next year. The consummation of the acquisition of Dex Media West is subject
to a number of conditions described in "The Transactions." There can be no
assurances that the acquisition of Dex Media West will be consummated. See "The
Transactions--Agreements between Us, Qwest LEC and/or Qwest--Intellectual
Property Contribution Agreement."
We may from time to time seek to retire our outstanding debt through cash
purchases and/or exchanges for equity securities, in open market purchases,
privately negotiated transactions or otherwise. Such repurchases or exchanges,
if any, will depend on prevailing market conditions, our liquidity
requirements, contractual restrictions and other factors. The amounts involved
may be material. In addition, we may issue additional debt if prevailing market
conditions are favorable to doing so.
Our ability to make payments on and to refinance our indebtedness and to
fund planned capital expenditures will depend on our ability to generate cash
in the future. This, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control. Based on our current level of operations, we believe our
cash flow from operations, available cash and available borrowings under our
new credit facilities will be adequate to meet our future liquidity needs for
at least the next 12 months.
We cannot assure you, however, that our business will generate sufficient
cash flow from operations or that future borrowings will be available to us
under our new revolving credit facility in an amount sufficient to enable us to
pay our indebtedness or to fund our other liquidity needs. If we consummate an
acquisition, our debt service requirements could increase. We may need to
refinance all or a portion of our indebtedness on or before maturity. We cannot
assure you that we will be able
61
to refinance any of our indebtedness on commercially reasonable terms or at
all. See "Risk Factors--To service our indebtedness, including the exchange
notes, we will require a significant amount of cash. Our ability to generate
cash depends on many factors beyond our control."
SENSITIVITY ANALYSIS RELATING TO EBITDA
While we have been a stand-alone company since the consummation of the
transactions on November 8, 2002, we have historically operated as the print
and internet directory businesses of Qwest Dex, Inc. in our region prior to the
acquisition of Dex Media East. The combined financial statements included in
this prospectus have been derived from the historical consolidated financial
statements of Qwest Dex Holdings, the parent company of Qwest Dex, Inc., and
include the assets, obligations and activities of Qwest Dex Holdings and Qwest
Dex for business conducted in our region prior to the acquisition of Dex Media
East. See "--Stand-Alone Company." We expect our cost structure to change
because our relationship with Qwest Dex Holdings and Qwest Dex as well as Qwest
and its other affiliates has changed as a result of the acquisition of Dex
Media East. Therefore, our historical results of operations, financial position
and cash flows are not indicative of what they would have been had we operated
as a stand-alone company, without the shared resources of Qwest and its
affiliates. Given our expectation that our cost structure, cash flows and
financial position will be different after the acquisition of Dex Media East
compared to prior to the acquisition of Dex Media East, we believe it would be
helpful to provide a sensitivity analysis that describes our ability to satisfy
our debt service, capital expenditures and working capital requirements in
terms of EBITDA (earnings before interest, taxes, depreciation and
amortization) and Adjusted EBITDA (EBITDA adjusted for the stand-alone costs
described below as well as other (income) expense, Merger-related expenses,
impairment charges and the cumulative effect of various estimated items
associated with the transactions). Not only do we believe these non-GAAP
measures can assist investors in understanding what we expect our cost
structure, cash flows and financial position to be after the acquisition of Dex
Media East, but financial covenants and ratios in our new credit facilities and
the indentures, such as restrictions on payments and indebtedness and ratios
relating to leverage, interest coverage and fixed charge coverage, are also
tied to measures that are calculated by adjusting EBITDA as described below.
The Adjusted EBITDA presented below is the same as that set forth in footnote
(e) under "Summary Historical and Pro Forma Financial Data" in our offering
memorandum relating to the issuance of the outstanding notes dated October 30,
2002, which is referred to in the definition of Consolidated Leverage Ratio
under "Description of Senior Exchange Notes--Certain Definitions" and
"Description of Senior Subordinated Exchange Notes--Certain Definitions." While
we believe that EBITDA is typically a sufficient measure to assist investors in
understanding a company's business, we believe it is necessary to adjust EBITDA
to enable investors to see how we view our business given the significant
changes we expect in our cost structure, cash flows and financial position as a
result of the acquisition of Dex Media East. Under our sensitivity analysis,
the adjustments we have made to EBITDA for the changes we expect to our cost
structure result in lowering EBITDA on an adjusted basis.
Of course, neither EBITDA nor Adjusted EBITDA are calculated under GAAP
and neither should be considered in isolation or as a substitute for net
income, cash flows or other income or cash flow data prepared in accordance
with GAAP or as a measure of our profitability or liquidity. While EBITDA and
Adjusted EBITDA and similar variations thereof are frequently used as a measure
of operations and the ability to meet debt service requirements, these terms
are not necessarily comparable to other similarly titled captions of other
companies due to the potential inconsistencies in the method of calculation.
See "Unaudited Pro Forma Financial Information," "The Transactions" and our
combined financial statements and related notes thereto, included elsewhere in
this prospectus.
The adjustments to EBITDA set forth in the table below include:
adjustments relating to expenses and charges that we believe are not likely to
recur; and adjustments that represent our estimates of the effect that the
transactions related to the acquisition of Dex Media East would have had on our
historical results of operations had the transactions occurred at an earlier
date. Specifically, we have made adjustments to EBITDA that reflect the
incremental costs that we estimate we will incur as a stand-alone company. We
have identified two broad categories of incremental stand-alone operating
costs:
62
o Operating costs associated with operating Qwest Dex as a separate entity
from Qwest. Qwest and Qwest LEC will continue to provide certain services
that they have historically provided to us, including support services
relating to information technology, real estate, human resources and
legal matters, pursuant to the transition services agreement for a
maximum of 18 months following the consummation of the transactions
related to the acquisition of Dex Media East on November 8, 2002. We
estimate that we will replace, or be able to replace, the services
provided by Qwest and Qwest LEC prior to the termination of the
transition services agreement with services provided internally or
through arrangements with third parties at the costs that are assumed in
the adjustments to EBITDA below. However, there can be no assurances that
we will be able to replace the services at the costs that are assumed in
the adjustments to EBITDA below.
o Costs that we estimate we will incur if the acquisition of Dex Media West
is not consummated. These include those costs that will result from
operating Dex Media East as a separate entity from Qwest Dex.
We have adjusted EBITDA in the table below to reflect the stand-alone
costs described above, as well as other (income) expense, Merger-related
expenses, impairment charges and the cumulative effect of various estimated
items associated with the transactions related to the acquisition of Dex Media
East. Although these adjustments are not permitted as adjustments in preparing
pro forma financial statements in accordance with Regulation S-X, management
believes that the presentation of EBITDA, as so adjusted, provides useful
information in analyzing the effects of the transactions because of the changes
we expect to our cost structure due to our changed relationship with Qwest Dex
Holdings and Qwest Dex as well as Qwest and its other affiliates as a result of
the acquisition of Dex Media East.
EBITDA, as so adjusted, is a forward-looking statement relating to our
future cost structure, cash flows and financial performance. Because we have
only operated as a stand-alone company since November 8, 2002, our estimates
relating to increased costs and the cumulative effect of various items
associated with the transactions related to the acquisition of Dex Media East
are necessarily based on assumptions that may not be realized. We cannot assure
you that the assumptions used in the preparation of Adjusted EBITDA will prove
to be correct. See "Risk Factors," "--Stand-Alone Company" and our combined
financial statements (including the accompanying notes thereto).
The following table presents data relating to EBITDA and Adjusted EBITDA
for the periods indicated:
DEX EAST HISTORICAL
----------------------------------------------
(DOLLARS IN MILLIONS) YEAR ENDED DECEMBER 31,
- ------------------------------------ ----------------------------------------------
1997 1998 1999 2000 2001
------ ------ ---------- ---------- ----------
Net income (loss) .................. $128 $145 $ 86 $130 $161
Adjustments to net income:
Income taxes ..................... 90 102 58 91 108
Interest expense, net ............ 1 1 124 123 110
Depreciation and
amortization expense ............ 16 14 14 15 12
EBITDA(1) .......................... $235 $262 $282 $359 $391
Adjustments to EBITDA:
Other (income) expense(2) ......... -- (14) 7
Merger-related expenses ........... -- 6 4
Impairment charges ................ -- -- 7
Qwest related stand-alone
costs(3) ......................... (2) (2) (8)
Additional pension and
benefit costs(4) ................. (12) (19) (19)
DEX
MEDIA DEX MEDIA
EAST LLC DEX EAST EAST LLC PRO
PRO FORMA HISTORICAL FORMA
------------ ----------------- -------------
YEAR NINE MONTHS
ENDED ENDED NINE MONTHS
(DOLLARS IN MILLIONS) DECEMBER 31, SEPTEMBER 30, ENDED
- ------------------------------------ ------------ ----------------- SEPTEMBER 30,
2001 2001 2002 2002
------------ ------ ------- -------------
Net income (loss) .................. $(35) $121 $142 $(12)
Adjustments to net income:
Income taxes ..................... (23) 82 96 (6)
Interest expense, net ............ 211 84 72 158
Depreciation and
amortization expense ............ 236 10 8 176
EBITDA(1) .......................... $389 $297 $318 $316
Adjustments to EBITDA:
Other (income) expense(2) ......... 7 -- -- --
Merger-related expenses ........... 4 4 -- --
Impairment charges ................ 7 -- -- --
Qwest related stand-alone
costs(3) ......................... (8) (4) (4) (4)
Additional pension and
benefit costs(4) ................. (19) (13) (9) (9)
63
DEX
MEDIA DEX MEDIA
EAST LLC DEX EAST EAST LLC PRO
PRO FORMA HISTORICAL FORMA
-------------- ------------------- --------------
DEX EAST HISTORICAL YEAR NINE MONTHS NINE MONTHS
------------------------------------------ ENDED ENDED ENDED
(DOLLARS IN MILLIONS) YEAR ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
- ------------------------------------ ------------------------------------------ -------------- ------------------- --------------
1997 1998 1999 2000 2001 2001 2001 2002 2002
------ ------ -------- --------- --------- -------------- --------- --------- --------------
Change in publication
cycle(5) ......................... -- -- (3) (3) (2) (3) (3)
Unsustainable cost
savings(6) ....................... -- (1) (1) (1) (1) (1) (1)
Incremental EBITDA from
advertising agreement(7) ......... 13 13 12 12 9 8 8
Incremental Dex Media East
stand-alone costs(8) ............. (24) (32) (39) (39) (29) (29) (29)
Management fees(9) ................. (2) (2) (2) (2) (2)
Adjusted EBITDA(1) ................ $ 255 $308 $349 $349 $259 $278 $278
- ----------------
(1) EBITDA and Adjusted EBITDA for the historical periods do not reflect the
pro forma adjustment for the annual fee expected to be paid to the
Sponsors under the management agreement. See "Certain Relationships and
Related Transactions--Management Consulting Agreements. Had this pro forma
adjustment been applied to the historical periods, both EBITDA and
Adjusted EBITDA would have been $2 million lower for each of the years
ended December 31, 1999, 2000 and 2001 and $1.5 million lower for each of
the nine months ended September 30, 2001 and 2002.
(2) In 2000, other (income) expense represents a gain on sale of investment of
$16 million netted with losses on asset sales. In 2001, other (income)
expense represents a permanent decline in the value of investments.
(3) Represents preliminary estimates of ongoing incremental stand-alone costs
for services that were performed by Qwest prior to the transactions
related to the acquisition of Dex Media East. The costs are generally
comprised of personnel and information technology costs. The additional
personnel costs replace Qwest services primarily in the executive
management, information systems, finance, tax, human resources and legal
areas. The information technology costs reflect external service and
support costs relating to our enterprise resource planning system and
other information technology functions.
(4) Represents preliminary estimate of incremental benefit costs incurred as a
stand-alone entity. The estimate includes costs primarily related to
post-retirement pension and other post-employment medical benefits, and
also includes estimates of employee medical, property and casualty and
workers' compensation insurance.
(5) In 2000 and 2001, Qwest Dex changed the publication cycle of certain
directories from 12 months to either 13 or 11 months. Under the deferral
method of accounting, costs related to the publication of directories are
amortized over the life of the directory. The amount adjusts costs that
were amortized over 13 months or 11 months to a 12 month basis because
management intends to publish directories on a 12 month cycle in the
future.
(6) Represents costs for additional headcount and advertising which were
reduced by Qwest as part of its cost-cutting efforts, but which management
believes are necessary to effectively operate the business. Additional
headcount relates primarily to local sales, operations and public
relations/strategy functions.
(7) Represents the estimated impact on EBITDA from the advertising agreement
with Qwest, assuming the acquisition of Dex Media West is not consummated.
Under the terms of the advertising agreement, Qwest and Qwest LEC agreed
to purchase $20 million in the aggregate of annual advertising in our
directories. However, if the acquisition of Dex Media West is consummated,
Qwest and Qwest LEC may satisfy this minimum amount by purchasing an
aggregate of $20 million of advertising per year from us, Dex Media West,
or a combination of Dex Media West and us. Therefore, if the acquisition
of Dex Media West is consummated, Qwest and Qwest LEC may purchase more
advertising from Dex Media West than us or may not purchase any
advertising from us at all. See "The Transactions--Agreements between Us,
Qwest LEC and/or Qwest--Advertising and Telecommunications Commitments
Agreement."
(8) We will no longer benefit from certain economies of scale attained by
operating as a single entity with Qwest Dex prior to the consummation of
the transactions related to the acquisition of Dex Media East. These items
relate to information technology, operations, human resources and legal
matters. If the acquisition of Dex Media West is consummated, we do not
expect to incur a portion of these costs and expect to be reimbursed by
Dex Media West for the remainder of these costs.
(9) Represents a $2 million annual fee expected to be paid to the Sponsors under
the management agreement.
64
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
As of September 30, 2002, on a pro forma basis after giving effect to the
transactions related to the acquisition of Dex Media East, we would have had
approximately $50 million of debt outstanding under our new revolving credit
facility, $530 million of debt outstanding under our tranche A term
loan facility and $700 million of debt outstanding under our tranche B term
loan facility. Our new revolving credit facility and each of our term loan
facilities are subject to variable rates. Accordingly, our earnings and cash
flow are affected by changes in interest rates. Assuming the pro forma level of
borrowings at variable rates and assuming a one percentage point increase in
the average interest rate under these borrowings, we estimate that our interest
expense for the nine months ended September 30, 2002 would have increased by
approximately $10 million. As required by the terms of our new credit
facilities, we have hedged a portion of our interest rate risk. We will not
engage in hedging for speculative purposes. Due to the uncertainty of the
actions that would be taken and their possible effect, this analysis assumes no
such action.
FOREIGN CURRENCY EXCHANGE RISK
As of September 30, 2002, on a pro forma basis after giving effect to the
transactions related to the acquisition of Dex Media East, we would have had
approximately -40 million outstanding under the Euro-denominated portion of our
tranche B term loan facility. As of September 30, 2002, on a pro forma basis
after giving effect to the transactions, a 10% strengthening of the U.S. dollar
versus the Euro would result in a $3 million decrease in our tranche B term
loan liability, while a 10% weakening of the U.S. dollar versus the Euro would
result in a $5 million increase in our tranche B term loan liability. We have
entered into a forward exchange contract with a major financial institution as
an economic hedge against the Euro-denominated portion of our tranche B term
loan facility which is intended to reduce any significant impact of a weakening
of the U.S. dollar versus the Euro on earnings or cash flows.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
BASIS OF ALLOCATION
To prepare our combined financial statements, management of Qwest Dex
Holdings and Qwest Dex either specifically identified, assigned or apportioned
all assets, liabilities, revenues and expenses of Qwest Dex Holdings and Qwest
Dex to either Dex East or Dex West. We believe that such specific
identifications, assignments and apportionments are reasonable; however, the
resulting amounts could differ from amounts that would be determined if Dex
East and Dex West operated on a stand-alone basis. Because of Dex East's and
Dex West's relationship with Qwest Dex Holdings and Qwest Dex, as well as Qwest
and its other affiliates, the assets, liabilities, revenues and expenses are
not necessarily indicative of what they would be had Dex East and Dex West
operated without the shared resources of Qwest and its affiliates. Accordingly,
our combined financial statements are not necessarily indicative of future
financial position or results of operations.
In order to divide the Qwest Dex Holdings consolidated financial
statements between Dex East and Dex West, it was necessary for management to
make certain assignments and apportionments. Wherever possible, account
balances and specific amounts that directly related to Dex East or Dex West
were assigned directly to Dex East or Dex West, as appropriate. A substantial
portion of our revenues and cost of revenues have been directly assigned on a
directory-by-directory basis. When no direct assignment was feasible, account
balances were apportioned using a variety of factors based on cost
relationships to the account balance being apportioned. Expense accounts
subject to apportionment primarily consisted of overhead costs and related
items that have historically been shared with Qwest Dex. For a more detailed
description of the primary bases for these assignments and apportionments, see
Note 2 to our combined financial statements included in this prospectus.
65
REVENUE RECOGNITION
The sale of advertising in telephone directories published by us is our
primary source of revenue. We recognize revenues ratably over the life of each
directory using the deferral and amortization method, with revenue recognition
commencing in the month of delivery.
Revenues from internet advertisements are recognized ratably over the
twelve-month period we commit to carry the advertisement.
COST OF REVENUES
Direct costs related to the sales and production of directories are
recognized ratably over the life of each directory under the deferral and
amortization method, with cost recognition commencing in the month of delivery.
Direct costs include sales commissions, graphics costs and the costs of
printing, publishing and distribution.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND BAD DEBT EXPENSE
We periodically make judgments regarding the collectibility of outstanding
receivables and provide appropriate allowances when collectibility becomes
doubtful. Provisions relating to receivables billed and collected by Qwest LEC
on our behalf are determined based upon our historical bad debt experience over
the previous twelve month period. Provisions relating to receivables billed and
collected by us are determined based upon historical experience taking into
account the age of receivables and general economic trends. Bad debt expense as
a percentage of revenue increased from 1.8% in 1999 to 2.4% in 2001, and was
2.7% of revenue for the nine months ended September 30, 2002.
RECENT ACCOUNTING PRONOUNCEMENTS
In June of 2001, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 142, "Goodwill and Other Intangible Assets." This statement addresses
financial accounting and reporting for intangible assets (excluding goodwill)
acquired individually or with a group of other assets at the time of their
acquisition. It also addresses financial accounting and reporting for goodwill
and other intangible assets subsequent to their acquisition. Intangible assets
(excluding goodwill) acquired outside of a business combination will be
initially recorded at their estimated fair value. If the intangible asset has a
finite useful life, it will be amortized over that life. Intangible assets with
an indefinite life are not amortized. Both types of intangible assets will be
reviewed annually for impairment and a loss recorded when the asset's carrying
value exceeds its estimated fair value. The impairment test for intangible
assets consists of comparing the fair value of the intangible asset to its
carrying value. Fair value for goodwill and intangible assets is determined
based upon discounted cash flows and appraised values. If the carrying value of
the intangible asset exceeds its fair value, an impairment loss is recognized.
Goodwill will be treated similar to an intangible asset with an indefinite
life. SFAS No. 142 is effective for fiscal years beginning after December 15,
2001. Adoption of this pronouncement had no impact on our combined financial
statements.
In June of 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement deals with the costs of closing
facilities and removing assets. SFAS No. 143 requires entities to record the
fair value of a legal liability for an asset retirement obligation in the
period it is incurred. This cost is initially capitalized and amortized over
the remaining life of the underlying asset. Once the obligation is ultimately
settled, any difference between the final cost and the recorded liability is
recognized as a gain or loss on disposition. SFAS No. 143 is effective for
years beginning after June 15, 2002. We are currently evaluating the impact
this pronouncement will have on our future financial results.
In August of 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This pronouncement addresses how
to account for and report impairments or disposals of long-lived assets. Under
SFAS No. 144, an impairment loss is to be recorded on long-lived assets being
held or used when the carrying amount of the asset is not recoverable from its
expected future undiscounted cash flows. The impairment loss is equal to the
difference between the
66
asset's carrying amount and estimated fair value. Long-lived assets to be
disposed of by other than a sale for cash are to be accounted for and reported
like assets being held and used except the impairment loss is recognized at the
time of the disposition. Long-lived assets to be disposed of by sale are to be
recorded at the lower of their carrying amount or estimated fair value (less
costs to sell) at the time the plan of disposition has been approved and
committed to by the appropriate company management. In addition, depreciation is
to cease at the same time. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. Adoption of this pronouncement had no impact on our
combined financial statements.
In June of 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This pronouncement addresses the
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Under SFAS No. 146, liabilities for costs associated with an
exit or disposal activity are to be recognized when the liability is incurred.
Under EITF Issue No 94-3, liabilities related to exit or disposal activities
were recognized when an entity committed to an exit plan. In addition, SFAS No.
146 establishes that the objective for the initial measurement of the liability
is fair value. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002. We are evaluating the impact this
pronouncement will have on our future results, but do not currently believe
that it will be material.
67
BUSINESS
THE BUSINESS
We are the largest print directory publisher in the Dex East States and
the sixth largest print directory publisher in the United States. We are the
exclusive official directory publisher in our region for Qwest LEC, which is
the primary local exchange carrier in most service areas within the Dex East
States. We, or our predecessors, have been publishing print directories for
over 100 years. In 2001, we had an aggregate 87% market share in our top 10
geographic markets, which accounted for approximately 72% of our revenues in
that year. In 2001, we published 150 directories and distributed approximately
19 million copies of these directories to business and residential consumers in
our region. As of December 31, 2001, we had a total of approximately 206,000
local advertising customers consisting primarily of small and medium-sized
businesses and approximately 5,600 national advertisers. We also provide
related services, including an internet-based directory and direct marketing
services. For the nine months ended September 30, 2002, after giving pro forma
effect to the transactions related to the acquisition of Dex Media East, we
generated $516 million in revenues.
We believe that the U.S. directory advertising industry is attractive due
to its stable and consistent revenue growth. Industry revenues have increased
each year since 1985, growing from approximately $5.8 billion in 1985 to
approximately $14.4 billion in 2001, with a compounded annual growth rate of
approximately 5.8% over that same period. In addition, during the last two
recessions in 1991 and 2001, the U.S. directory advertising industry
experienced positive growth, while other major advertising media, including
radio, television and newspaper, experienced revenue declines. We believe that
this is driven in large part by the fact that print directories are, in many
cases, the primary form of paid advertising used by small and medium-sized
businesses. In addition, we believe that the once-yearly publication cycle and
the priority placement given to renewal advertisements result in a high
customer renewal rate even during weak economic times.
COMPETITIVE STRENGTHS
INCUMBENT POSITION PROVIDES SIGNIFICANT COMPETITIVE ADVANTAGE. As the
exclusive official publisher for Qwest LEC in our region, we believe that we
derive a substantial competitive advantage over independent directory
advertising providers. Our incumbent position drives strong brand recognition
as the "official" yellow pages, which increases usage by consumers. The
combination of our high usage rates, broad distribution and established market
position has allowed us to build long-term relationships with our advertisers,
allowing us to attain high levels of advertiser penetration and retention.
GREATER VALUE PROPOSITION FOR OUR TARGET ADVERTISERS. We believe that
directory advertising provides our target advertisers, which are primarily
small and medium-sized businesses, with a greater value proposition than most
other major media. Our directory advertisements allow our advertisers to reach
a broad target audience, providing a permanent reference source to search for
particular products and services. We believe that the "directional" nature of
directory advertising is valuable to our advertisers, as directory
advertisements reach consumers at a time when they are actively seeking
information and are prepared to make a purchase. Furthermore, directory
advertising generates a higher return on investment for our target advertisers
than most other major media, including newspaper, internet, television and
radio. Industry sources estimate that in 2001, directory advertising for the
top 135 directory headings generated a median return on investment of $53 for
every $1 spent, as compared to a median return on investment of $30 for
newspapers, $9 for television and $7 for radio. We believe that our value
proposition to our target advertisers is reflected in the 6.6% compound annual
growth rate in our revenue per local advertiser from 1999 to 2001.
INDUSTRY LEADING SALES FORCE. We believe that we have one of the most
experienced sales forces in the U.S. directory advertising industry. As of
September 30, 2002, we had approximately 429 sales representatives in 24 local
offices who average nine years of employment with us. We believe this
experience has enabled our sales representatives to develop long-term
relationships with our advertisers, which we believe promotes a high level of
renewal among our customers. In addition, we believe that in 2001 our
experienced sales force has allowed us to achieve a customer renewal rate of
68
93%, local market penetration of 43%, printed revenues per sales representative
(local) of approximately $1.3 million and printed revenue per advertiser
(local) of approximately $2,600, each in excess of the industry average.
STRONG FINANCIAL PROFILE WITH STABLE CASH FLOW. Our business benefits from
consistent revenues and cash flow, high margins and low capital expenditure
requirements. Our revenues have increased from $601 million in 1999 to $666
million in 2001, resulting in a compounded annual growth rate of 5.3%. Our
capital expenditure requirements over the last three years averaged $13 million
per year, or 2.1% of average total revenues over the last three years. The
pre-sold nature of directory advertising provides significant revenue and cash
flow visibility as advertisers typically enter into one-year contracts and pay
on a monthly basis. Our high renewal rate also lends predictability to revenues
and cash flow. We believe that the stability and visibility of our cash flow
will be a substantial advantage to us in servicing our debt going forward.
DIVERSIFIED CUSTOMER BASE. We have a large diversified customer base. We
believe that the diversity of our customer base helps mitigate the effect of a
downturn in any particular sector of the economy or geographic area within our
states of operation. A significant portion of our revenues are derived from
small and medium-sized businesses, which, in many cases, use yellow pages
directories as their primary form of advertising. As of December 31, 2001, we
had a total of approximately 206,000 local advertising customers, consisting
primarily of small and medium-sized businesses, and approximately 5,600
national advertisers across a wide range of markets, from small rural markets
to large metropolitan markets. In 2001, no single customer accounted for more
than 1.0% of our total revenues, with our top 10 customers representing less
than 2.0% of total revenues. In addition, no single directory heading
contributed more than 3.0% of total revenues in 2001, with the top 10 directory
headings accounting for approximately 13.0% of total revenues.
EXPERIENCED MANAGEMENT TEAM. We have assembled a strong and experienced
senior management team with an average of 19 years of experience in their
respective areas of expertise. We believe that our experienced management team
has contributed to our growth in revenues, cash flows and margins over the past
three years.
STRONG SPONSORSHIP. Our sponsors, The Carlyle Group and Welsh, Carson,
Anderson & Stowe, are both leading equity investor firms and are among the
largest private equity groups in the world. The firms have extensive investment
experience in the media, communications and business services industries and
have each committed to provide $750 million, for an aggregate of $1.5 billion,
in equity contributions for the acquisition of Qwest Dex's print and internet
directory businesses in the Dex East and Dex West States, of which $655 million
was used to fund the acquisition of Dex Media East. In both cases, this equity
commitment represents the largest single equity commitment ever provided by
either firm.
BUSINESS STRATEGY
We intend to leverage our leading market position to further grow our core
directory business and identify opportunities to enhance the value proposition
that we offer our advertisers. In executing this strategy, we will rely on the
core strengths of our business, including our industry-leading sales force,
long-term relationships with our customers and the significant brand awareness
that we enjoy as the result of our incumbent status. The principal elements of
our business strategy will continue to include:
o introducing and selling new products that provide enhanced options to
businesses and consumers, focusing on white pages and awareness products;
o increasing sales of our existing products by improving sales
productivity; and
o increasing the retention rate of existing customers and acquiring new
customers with more sophisticated pricing approaches.
INDUSTRY OVERVIEW AND OUTLOOK
Directory advertising competes with all other forms of media advertising,
including television, radio, newspapers, the internet, billboards and direct
mail. The entire U.S. advertising market was $172.1 billion in 2001, with
directory advertising capturing an 8.4% share of the advertising market.
69
Unlike other advertising, directory advertising is characterized as primarily
"directional" advertising, or advertising targeted at consumers who are
actively seeking information and are prepared to purchase a product or service.
Historically, the U.S. directory advertising industry has been dominated by the
large publishing businesses of regional bell operating companies, or RBOCs, and
other incumbent local telephone companies. Over the past few years, RBOC
mergers have reduced the number of RBOC-affiliated publishers to four: SBC
Directory Operations, Verizon Information Services, BellSouth Advertising &
Publishing Corp. and Qwest Dex.
DIRECTORY ADVERTISING MARKET SIZE
The U.S. directory advertising industry generated sales of approximately
$14.4 billion in 2001, with a total circulation of approximately 431 million
directories. The industry is characterized by steady and consistent growth with
revenue increasing at a 6.2%, 5.0% and 5.0% compound annual growth rate over
the last five, 10 and 15 years, respectively. The following chart depicts the
estimated size and growth of the U.S. directory advertising industry since
1985:
U.S. DIRECTORY ADVERTISING REVENUE: 1985-2001
(DOLLARS IN BILLIONS)
[GRAPHIC OMITTED]
LOCAL VERSUS NATIONAL ADVERTISING
While directory advertising is sold on both a local and national basis,
local advertising from small and medium-sized businesses constitutes the
majority of directory advertising revenue. As shown in the table below, over
the last five years local directory advertising constituted approximately 84.0%
of total revenue for the U.S. directory advertising industry. This is
consistent with our experience, where in 2001, local advertising made up 83.3%
of our directory advertising revenue.
LOCAL VERSUS NATIONAL U.S. DIRECTORY ADVERTISING: 1996-2001
(DOLLARS IN BILLIONS)
- ---------------------
% OF % OF % OF
1996 TOTAL 1997 TOTAL 1998 TOTAL
---------- ---------- ---------- ---------- ----------- ----------
Local ............ $ 9.2 85.7% $ 9.7 85.0% $ 10.2 84.4%
% growth
yearly ......... NA 5.0% 5.6%
National ......... 1.5 14.3% 1.7 15.0% 1.9 15.6%
% growth
yearly ......... NA 10.9% 10.6%
------- ----- ------- ----- -------- -----
Total ............ $ 10.7 100.0% $ 11.4 100.0% $ 12.1 100.0%
------- ----- ------- ----- -------- -----
% growth
yearly ......... NA 5.8% 6.3%
% OF % OF % OF CAGR
1999 TOTAL 2000 TOTAL 2001 TOTAL '96 -'01
----------- ---------- ----------- ---------- ---------- ---------- ---------
Local ............ $ 10.8 84.3% $ 11.5 84.2% $ 12.1 84.1% 5.7%
% growth
yearly ......... 6.3% 6.5% 5.2%
National ......... 2.0 15.7% 2.2 15.8% 2.3 15.9% 8.4%
% growth
yearly ......... 7.1% 7.3% 6.0%
-------- ----- -------- ----- ------- ----- ---
Total ............ $ 12.9 100.0% $ 13.7 100.0% $ 14.4 100.0% 6.1%
-------- ----- -------- ----- ------- ----- ---
% growth
yearly ......... 6.4% 6.6% 5.3%
COMPETITION WITHIN THE INDUSTRY
Presently, the industry can be divided into two major groups of directory
advertising publishers: Incumbent Publishers, which includes the directory
businesses of RBOCs and other incumbent local
70
telephone companies, and Independents, such as TransWestern Publishing Company
LLC, the U.S. business of Yell Group Ltd. and McLeodUSA Media Group Inc. (which
has been acquired by Yell Group Ltd.). Fueled by the Telecommunications Act of
1996, which assured access to telephone subscriber listings at nominal rates,
and significant private equity investment, Independents have begun to
consolidate and increase their market share. As shown in the table below, the
Independents' revenues have increased over the last five years, yet the
Incumbent Publishers remain the dominant players, with an estimated 89.3% share
of total 2001 revenue for the U.S. directory advertising industry.
U.S. DIRECTORY MARKET SHARE: 1996-2001
(DOLLARS IN BILLIONS)
- ---------------------
% OF % OF
1996 TOTAL 1997 TOTAL 1998
---------- ---------- ---------- ---------- ----------
Incumbent
Publishers(1) ......... $ 10.1 93.8% $ 10.6 93.6% $ 11.2
% growth
yearly ............... NA 5.6% 5.3%
Independent
publishers ............ 0.7 6.2% 0.7 6.4% 0.9
% growth
yearly ............... NA 8.7% 20.7%
------- ----- ------- ----- -------
Total .................. $ 10.7 100.0% $ 11.4 100.0% $ 12.1
------- ----- ------- ----- -------
% growth
yearly ............... NA 5.8% 6.3%
% OF % OF % OF % OF
TOTAL 1999 TOTAL 2000 TOTAL 2001 TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ----------
Incumbent
Publishers(1) ......... 92.8% $ 11.8 91.4% $ 12.3 90.0% $ 12.9 89.3%
% growth
yearly ............... 4.9% 4.9% 4.6%
Independent
publishers ............ 7.2% 1.1 8.6% 1.4 10.0% 1.5 10.7%
% growth
yearly ............... 26.0% 25.2% 12.0%
----- ------- ----- ------- ----- ------- -----
Total .................. 100.0% $ 12.9 100.0% $ 13.7 100.0% $ 14.4 100.0%
----- ------- ----- ------- ----- ------- -----
% growth
yearly ............... 6.4% 6.6% 5.3%
- ----------------
(1) Includes the directory businesses of RBOCs and other incumbent local
telephone companies.
As the table below illustrates, the U.S. directory advertising industry
remains highly concentrated with the RBOC-affiliated publishers, Qwest Dex,
SBC, Verizon and BellSouth, cumulatively generating approximately $11.8 billion
or 81.9% of total U.S. directory advertising revenue in 2001. The Independents
segment is highly fragmented and comprised only 10.7% of total
directory-related advertising revenue in 2001. The limited number of
Independent directory publishers reflects the high start-up costs associated
with producing a new directory and the substantial infrastructure, including a
local sales force, required to maintain a directory.
U.S. DIRECTORY ADVERTISING PUBLISHERS: 2001
(DOLLARS IN MILLIONS)
- -----------------------
COMPANY 2001 REVENUE(1) MARKET SHARE
- ----------------------- ----------------- -------------
SBC ................... $ 4,468 31.0%
Verizon ............... 3,900 27.0%
BellSouth ............. 1,900 13.2%
Qwest Dex(2) .......... 1,546 10.7%
Yell Group(3) ......... 823 5.7%
Sprint ................ 537 3.7%
TransWestern .......... 242 1.7%
Others ................ 1,014 7.0%
------- -----
Total ................. $14,430 100.0%
======= =====
- ----------------
(1) Presented in accordance with generally accepted accounting principles. Our
competitors generally utilize the point of publication accounting method
of recognizing revenues and expenses whereas we utilize the deferral and
amortization accounting method.
(2) Assuming Dex Media East was a stand-alone company in 2001, it would have
been the sixth largest U.S. directory advertising publisher with 2001
revenues of $666.
(3) Represents the U.S. business of the Yell Group, Ltd., including the
revenues of McLeod USA Media Group Inc., which Yell Group, Ltd. acquired
in early 2002.
We believe that Incumbent Publishers maintain higher margins than their
Independent competitors due to their affiliation with the incumbent local
telephone service provider, highly recognized brand names, established consumer
usage, broader distribution, wider geographic coverage
71
and long-term advertiser relationships. Given these advantages, Independents
are forced primarily to compete on price, with advertising rates significantly
lower than the rates for equivalent products listed by Incumbent Publishers. As
a result, Independents typically have substantially lower margins than
incumbent publishers.
COMPETITION WITH OTHER MEDIA
One of the most compelling aspects of directories is their ability to
weather economic downturns more favorably than other forms of advertising. For
example, in the last two recessions, in 1991 and 2001, directory advertising
was one of the only media segments to show revenue growth. As the table below
highlights, U.S. directory advertising industry revenues increased 2.9% and
5.3% in 1991 and 2001, respectively, while other major media segments declined.
ADVERTISING SPENDING BY MEDIA CATEGORY: 1990-2001
(DOLLARS IN BILLIONS)
- ---------------------
U.S. REVENUE REVENUE REVENUE REVENUE
YEAR DIRECTORIES GROWTH TELEVISION GROWTH RADIO GROWTH NEWSPAPER GROWTH
- ----------------------- ------------- --------- ------------ ----------- ---------- ----------- ----------- -----------
1990 .................. $ 8.9 n/a $ 29.2 n/a $ 8.7 n/a $ 35.6 n/a
1991 .................. 9.2 2.9% 28.3 (2.8%) 8.5 (2.9%) 33.6 (5.7%)
1992 .................. 9.3 1.5% 30.5 7.8% 8.7 2.1% 33.9 1.0%
1993 .................. 9.5 2.1% 31.9 4.6% 9.5 9.3% 35.4 4.4%
1994 .................. 9.8 3.2% 35.9 12.2% 10.5 11.3% 38.1 7.7%
1995 .................. 10.2 4.2% 38.4 7.1% 11.3 7.7% 40.3 5.9%
1996 .................. 10.7 4.8% 40.7 6.0% 12.3 8.2% 42.6 5.7%
1997 .................. 11.4 5.8% 42.8 5.0% 13.5 10.0% 46.3 8.6%
1998 .................. 12.1 6.3% 46.4 8.6% 15.1 11.7% 49.3 6.5%
1999 .................. 12.9 6.4% 49.4 6.3% 16.9 12.3% 52.2 5.8%
2000 .................. 13.7 6.6% 56.1 13.6% 19.1 12.6% 55.0 5.3%
2001 .................. 14.4 5.3% 53.9 (3.9%) 17.9 (6.2%) 50.7 (7.7%)
---- ----- ----- -----
'96-'01 CAGR .......... 6.1% 5.8% 7.8% 3.5%
---- ----- ----- -----
We believe directory advertising is the preferred form of advertising for
many small and medium-sized businesses due to its relatively low cost, broad
demographic and geographic distribution, enduring presence and high customer
usage rates. We believe that yellow pages advertising is attractive to our
customers because consumers may view yellow pages directories as a free,
comprehensive single source of information. While overall advertising tends to
track an economy's business cycle, directory advertising tends to be more
stable and does not fluctuate widely with economic cycles due to its frequent
use by small to medium-sized businesses, often as their principal or only form
of advertising. Directory advertising is also recession-resistant because
failure to advertise in a given directory cannot be remedied until the
replacement directory is published, usually one year later. 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, so as not to lose their priority placement within the directory.
Long-term growth rates for the U.S. directory advertising industry also
compare favorably to the other major media categories with a compound annual
growth rate of 6.1% from 1996 to 2001 versus a 5.7% average compounded annual
growth rate for other media. Industry sources estimate that in 2001, directory
advertising for the top 135 directory customer categories generated a median
return on investment of $53 for every $1 spent, as compared to a median return
on investment of $30 for newspapers, $9 for television and $7 for radio.
THE INTERNET
Most major directory publishers, including us, operate an internet-based
directory business, or IYP. The U.S. internet yellow pages market represented
only a small portion of the total U.S. directory advertising market in 2001,
with revenue of approximately $355 million, an increase of
72
approximately 19% over 2000. The internet directories that have succeeded in
generating advertising revenue have generally been captive ventures of
incumbent print directory publishers. Industry sources estimate that 70% of
2001 IYP revenues were generated by affiliates of print publishers. Publishers
have increasingly bundled online advertising with their traditional print
offerings while applying some notional value to the online product. We expect
IYP usage to continue to steadily grow in support of overall directory usage.
MARKETS
In 2001, we published 150 directories, including white pages, yellow pages
and other specialty directories, and distributed approximately 19 million
copies of these directories to business and residential consumers in
metropolitan areas and local communities in the states of Colorado, Iowa,
Minnesota, Nebraska, New Mexico, North Dakota and South Dakota and in El Paso,
Texas. Our directories are generally well-established in their communities and
cover contiguous geographic areas to create a strong local market presence and
to achieve selling efficiencies. The following table shows 2001 directory
services revenues and other data for our directories in each state in which we
operate:
(DOLLARS IN THOUSANDS) PERCENTAGE OF
- ------------------------ DIRECTORY SERVICES DIRECTORY SERVICES PUBLISHED
STATE REVENUES(1) REVENUES(1) DIRECTORIES TOTAL CIRCULATION
- ------------------------ -------------------- -------------------- ------------- ------------------
Colorado ............... $250,935 38.8% 38 6,000,000
Minnesota .............. 188,999 29.2% 40 6,000,000
New Mexico(2) .......... 72,803 11.3% 18 2,100,000
Iowa ................... 64,543 10.0% 29 2,300,000
Nebraska ............... 39,102 6.0% 10 1,400,000
South Dakota ........... 16,899 2.6% 7 700,000
North Dakota ........... 13,480 2.1% 8 500,000
-------- ----- -- ---------
Total .................. $646,761 100.0% 150 19,000,000
======== ===== === ==========
- ----------------
(1) Excludes non-print related directory services revenues and includes
revenues from affiliates.
(2) Includes the greater metropolitan El Paso, Texas area.
We derive a significant portion of our printed revenues from the sale of
directory advertising to businesses in large metropolitan areas. The following
table shows our directory services revenues from the sale of printed directory
advertising and other data in our 10 largest geographic markets in 2001:
(DOLLARS IN THOUSANDS) PERCENTAGE OF
- ------------------------------------ DIRECTORY SERVICES DIRECTORY SERVICES PUBLISHED
MARKET REVENUES(1) REVENUES(1) DIRECTORIES TOTAL CIRCULATION
- ------------------------------------ -------------------- -------------------- ------------- ------------------
Minneapolis/St. Paul,
Minnesota ......................... $155,487 24.0% 12 4,200,000
Denver, Colorado ................... 138,670 21.4% 9 3,900,000
Albuquerque, New Mexico ............ 45,125 7.0% 3 1,200,000
Colorado Springs, Colorado ......... 32,561 5.0% 1 400,000
Omaha, Nebraska .................... 31,997 4.9% 3 1,000,000
Des Moines, Iowa ................... 21,655 3.3% 2 500,000
Boulder, Colorado .................. 13,426 2.1% 1 200,000
Ft. Collins, Colorado .............. 11,803 1.8% 1 200,000
Santa Fe, New Mexico ............... 9,133 1.4% 1 100,000
Quad Cities, Iowa .................. 6,898 1.1% 1 200,000
-------- ---- -- ---------
Total .............................. $466,755 72.2% 34 11,900,000
======== ==== == ==========
- ----------------
(1) Excludes non-print related directory services revenues and includes
revenues from affiliates.
PRODUCTS
Our main product is printed directories, which generated approximately 98%
of our total revenues in 2001. We also operate an internet-based directory and
provide direct and database marketing services.
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PRINTED DIRECTORIES
In 2001, we published 150 printed directories, consisting of:
o 141 directories that contained both white and yellow pages;
o Four directories that contained only yellow pages, containing a listing
of businesses by various directory headings as well as display and other
paid advertisements;
o Four directories that contained only white pages, listing the names,
addresses and phone numbers of residences and businesses in the area
served, as well as display and other paid advertisements; and
o One specialty "On the Go" directory, which is a yellow pages directory
edition that is designed for use in the car.
Whenever practicable, we combine the white and yellow pages sections into
one directory.
Our directories are designed to meet the advertising needs of local and
national businesses and the informational needs of consumers. The diversity of
our advertising options enables us to create customized advertising programs
that are responsive to specific customer needs and financial resources. Our
yellow pages and white pages directories are also efficient sources of
information for consumers, featuring a comprehensive list of businesses in the
local market that are conveniently organized under approximately 4,300
directory headings.
Yellow pages directories. 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. We maintain a database of
these listings, which are derived from data purchased from Qwest, other
telephone companies and other sources. This database is supplemented with
additional information from our sales representatives and customer service
employees.
In 2001, we derived approximately 96% of our printed revenues from the
sale of advertising in our yellow pages directories. A range of paid
advertising options is available in our yellow pages directories, as set forth
below:
o Listing options. An advertiser may enhance its complimentary listing in
several ways. It may pay to have its listing highlighted or printed in
bold or superbold text, which increases the visibility of the listing. An
advertiser may also purchase extra lines of text to convey information
such as hours of operation or a more detailed description of its
business.
o In-column advertising options. For greater prominence on a page, an
advertiser may expand its 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 and graphics.
o 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
advertisement purchased. 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 to advertisers to renew their advertising purchases from year
to year and to increase the size of their advertisements to ensure that
their advertisements receive priority placement. Display advertisements
range in size from a quarter column to as large as two pages (a "double
truck" advertisement) and three pages (a "triple truck" advertisement).
o Awareness products. Our line of "awareness products" allows 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. Our awareness products include:
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o Cover. Premium location advertisements are available on the front cover,
inside front and back cover and the inside and outside back cover of a
directory.
o Spine. Premium location advertisements are available on the spine of
yellow and white pages directories.
o Tabs. A full-page, double-sided, hardstock, full-color insert that is
bound inside and that separates key sections of the directory. These
inserts enable advertisers to achieve prominence and increase the amount
of information displayed to directory users.
o Tip-On. Removable paper or magnet coupon placed in front of the
directory.
o Banners. A banner ad sold at the bottom of any page in the Community or
Government sections of the print directory.
o Delivery Bag. Used in the delivery of all print directories. Up to two
advertisers per bag.
o White pages directories. State public utilities commissions require Qwest
LEC, as the local exchange carrier in its local service area, to have
white pages directories published to serve the local service areas. Qwest
LEC has contracted with us to publish these directories. By virtue of
this agreement, 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 the residence or business in question unless they have
requested to be a non-published or non-listed customer.
In 2001, we derived approximately 4% of our printed revenues from the sale
of advertising in our white pages directories. Advertising options include
bolding and highlighting for added visibility, extra lines for the inclusion of
supplemental information and in-column and display advertisements. We believe
that other directory publishers have had more success selling white pages
advertising, and we intend to focus additional efforts on selling advertising
in our white pages directories in 2002, including offering display advertising
options in our white pages for the first time.
INTERNET-BASED DIRECTORY AND ELECTRONIC PRODUCTS
Although we remain primarily focused on our printed directories, we also
market an internet-based directory service, qwestdex.com, to our advertisers.
We believe that qwestdex.com is the leading online directory in our region and
we believe that we have approximately 50% of the internet-based directory
market share in our region. In 2001, our internet-based directory services
generated $9 million in revenues, accounted for approximately 1.4% of our total
revenues and had an average of approximately 5.8 million first successful
searches per month. All of the listings in our printed directories also appear
in our internet-based directory, which is available in real time to users and
at no additional charge to our advertisers. The proprietary content we create
for our printed directories, which we also post on qwestdex.com, makes us
competitive on the internet since it cannot be replicated by other
internet-based directories. As in our printed directories, businesses may pay
to enhance their listings on qwestdex.com and for other premium advertising
products. Approximately 7% of the advertisers in our printed directories pay a
fee to place an enhanced advertisement in our internet-based directory. Options
that are available on qwestdex.com include extra lines, replica advertisements,
website and email link products, pop-up windows and banners. We view our
internet-based directory as a complement to our print product rather than as a
stand-alone business. We believe that increased usage of internet-based
directories, such as qwestdex.com, will continue to support overall usage and
advertising rates in the U.S. directory advertising industry and provide us
with advertisement growth. To promote future usage of our internet-based
directories, we plan to bundle our internet product with our print advertising
products, driving our usage rates and increasing the customer value proposition
while supporting rate increases. We also deliver our yellow pages content
electronically, including through CD-ROMs and wireless platforms, and will
continue to explore new means to deliver our content to consumers.
DIRECT AND DATABASE MARKETING SERVICES
We provide database lists, direct mail services and other database
services to businesses through our direct marketing group. We sell continually
updated lists of residents and businesses that have recently moved into or out
of an area, a service that allows our customers to maintain up-to-date
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databases and customer lists. We are also able to overlay demographic and
behavioral data that is purchased through third-party providers so that our
customers can identify, for example, who in the area is newly retired, newly
married or a new home owner. This constitutes valuable information for direct
mail and other targeted advertising.
We also help businesses develop and refine their customer databases. In
addition to list cleaning, the process of removing obsolete data from a data
list, we are able to fill in missing names, addresses and telephone numbers
when only partial information is available, and add demographic data (e.g.,
single-family or multi-family dwelling, home ownership or renter, male or
female). We provide data analysis that ranks consumers by likelihood of a
response to direct marketing contact.
While we provide customer names, addresses and telephone numbers to
outside companies, this information does not include any private, non-published
or non-listed information. See "The Transactions--Agreements between Us, Qwest
LEC and/or Qwest--List License Agreements."
SALES AND MARKETING
The marketing of directory advertisements is primarily a direct sales
business that requires both maintaining existing customers and developing new
customers. Renewing customers comprise our core advertiser base, and a large
number of these customers have advertised in our directories for many years. In
2001, we retained approximately 93% of our local advertisers from the previous
year. This high renewal rate reflects the importance of our directories to our
local customers, for whom yellow pages directory advertising is, in many cases,
the primary form of advertising. Larger national companies also use advertising
in our directories as an integral part of their national advertising strategy.
We believe that we have one of the most experienced sales forces in the
U.S. directory advertising industry. We believe this experience has enabled our
sales representatives to develop long-term relationships with our advertisers,
which we believe promotes a high level of renewal among our customers. In
addition, we believe that in 2001 our experienced sales force has allowed us to
achieve local market penetration of 43%, printed revenues per sales
representative (local) of approximately $1.3 million and printed revenue per
advertiser (local) of approximately $2,600, each in excess of the industry
average.
LOCAL SALES FORCE
As of September 30, 2002, our locally-based sales force was comprised of
approximately 429 quota-bearing sales representatives who average approximately
nine years of employment with us. The sales force is divided into three
principal groups:
o Premise sales representatives. Our 178 premise sales representatives
generally focus on high revenue customers. A premise sales representative
typically interacts with customers on a face-to-face basis at the
customer's place of business.
o Telephone sales representatives. Our 182 telephone sales representatives
generally focus on medium-sized customers. A telephone sales
representative typically interacts with customers over the telephone.
Telephone sales represent our principal source of new advertisers.
o Centralized sales representatives. Our 69 centralized sales
representatives include both centralized account representatives, who
generally focus on the smallest accounts, and prospector sales
representatives, who generally focus on customer win-back.
We assign our customers among premise representatives and telephone
representatives based on a careful assessment of a customer's expected
advertising expenditures. This practice allows us to deploy our sales force in
an effective manner. Our sales force is decentralized and locally based,
operating from approximately 24 locations. We believe that our locally based
sales force facilitates the establishment of personal, long-term relationships
with local advertisers necessary to maintain a high rate of customer renewal.
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We believe that formal training is important to maintaining a highly
productive sales force. Our sales force undergoes ongoing training, with new
sales representatives receiving approximately eight weeks of training in their
first year, including classroom training on sales techniques, our product
portfolio, customer care and administration and standards and ethics. Following
classroom training, they are accompanied on sales calls by experienced sales
personnel for further training. Ongoing training and our commitment to
developing the best sales practices are intended to ensure that sales
representatives are able to give advertisers high-quality service and advice on
appropriate advertising products and services.
We have well-established practices and procedures to manage the
productivity and effectiveness of our sales force. Each sales representative
has a specified customer assignment consisting of both new business leads and
renewing advertisers and is accountable for meeting sales goals on a regular
basis. Our sales representatives are compensated in the form of base salary and
commissions. Approximately two-thirds of the total compensation paid to our
sales force is in the form of commissions and other incentive-based
compensation, making sales force compensation largely tied to sales
performance. Our sales force employees are represented by labor unions covered
by collective bargaining agreements, which we believe significantly reduce the
rate of employee turnover. In 2001, we experienced only 14% turnover among our
sales representatives.
For purposes of managing our sales force, we divide the local service area
into six territories. In each territory, between nine and 12 sales managers
supervise the performance of the sales representatives who are assigned to that
territory. Every sales manager within a territory reports to the sales director
for the territory, and the six sales directors report to the Senior Vice
President of Sales for the relevant territory.
Beginning in 2002, we began compensating our sales managers and directors
pursuant to an incentive-based compensation plan that ties their compensation
to their success in meeting specific sales targets. Historically, bonuses for
our sales managers and directors were determined by reference to Qwest's
overall financial performance. Under our new, incentive-based plan, our sales
managers and directors will be eligible to receive a bonus of up to 20% of
their base salary, 80% of which will be determined based on attainment of
specific revenue goals, with the remaining 20% determined by management's
evaluation of other factors.
NATIONAL SALES FORCE
In addition to our locally based sales personnel, we have a separate sales
channel to serve our national advertisers. National advertisers are typically
national or large regional chains, such as rental car companies, insurance
companies and pizza delivery businesses, that purchase advertisements in many
yellow pages directories in multiple geographical regions. In order to sell to
national advertisers, we retain the services of third party certified marketing
representatives, or CMRs. CMRs design and create advertisements for national
companies and place those advertisements in 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 have contracts with approximately 170 CMRs and employ seven
national sales managers to manage our selling efforts to national customers.
CUSTOMERS
In 2001, approximately 206,000 local businesses purchased advertising in
our directories. Approximately 81% of our revenues in 2001 were generated by
the sale of our advertising to local businesses, which are generally small and
medium-sized enterprises. Approximately 15% of our revenues were generated by
sales to national advertisers.
We do not depend to any significant extent on the sale of advertising to a
particular industry or to a particular advertiser. In 2001, no single directory
heading accounted for more than 3.0% of our total revenues, no single customer
accounted for more than 1% of our total revenues, the top 10
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customers accounted for less than 2% of our total revenues and the top 10
directory headings accounted for approximately 13% of total revenues. The
diversity of our customer base reduces exposure to adverse economic conditions
that may affect particular geographic regions or particular industries and
provides additional stability in operating results. The table below, which sets
forth 2001 information relating to our largest directory headings demonstrates
this diversity (dollars in thousands):
PERCENTAGE OF NUMBER OF
DIRECTORY HEADING TOTAL REVENUES ADVERTISERS
- ------------------------------------------- ---------------- ------------
Attorneys ................................. 3% 6,000
Dentists .................................. 2% 4,196
Plumbing Contractors ...................... 1% 4,176
Insurance ................................. 1% 2,197
Roofing Contractors ....................... 1% 4,281
Auto Repair & Service ..................... 1% 1,164
Restaurants ............................... 1% 1,774
Physicians & Surgeons ..................... 1% 3,161
Glass-Auto, Plate, Window, Etc. ........... 1% 5,331
Carpet, Rug & Upholstery Cleaners ......... 1% 1,474
-- ------
Total ..................................... 13% 33,754
== ======
We enjoy high customer renewal rates. From 1996 to 2001, our annual
renewal rate has remained stable at approximately 93%, which we believe
compares favorably with the renewal rates of our competitors. In 2001, we
retained approximately 93% of our local advertisers from the previous year
(which excludes the loss of advertisers as a result of business failures, which
equaled approximately 4% in 2001). This attrition was offset by the addition of
new customers equal to approximately 8% of our initial local customer base. As
a result, the overall size of our local customer base fell by approximately 3%
in 2001. Increases in total advertising spending and average dollars spent per
advertisement also offset the net loss of advertisers.
We believe that this low level of turnover reflects a high level of
satisfaction among our customers. The training that we provide to our sales
representatives emphasizes the fostering of long-term relationships between
sales representatives and their customers, and our incentive-based compensation
structure rewards sales consultants who retain a high percentage of their
accounts. In addition, our customers often do not reduce or eliminate directory
spending during difficult economic periods because the failure to advertise
cannot be remedied until the replacement directory is published, usually one
year later. Moreover, most directory publishers, including us, give priority
placement within a directory classification to long-time advertisers. As a
result, businesses have a strong incentive to renew their directory advertising
purchases from year to year, even during difficult economic times, so as not to
lose their placement within the directory.
PUBLISHING AND PRODUCTION
We generally publish our directories on a 12-month cycle. The publishing
cycles for our directories are staggered throughout the year, which allows us
to efficiently use our infrastructure and sales capabilities and the resources
of our third-party vendors. The following are the major steps of the
publication and distribution process:
o Selling. The sales cycle of a directory varies based on the size of the
revenue base and can range from a few weeks to six months. In the months
prior to publication, the sales force approaches potential new
advertisers in an effort to expand our customer base. Potential new
advertisers include businesses that have operated in the area for some
time but that did not purchase advertising in the most recent edition of
our directory, as well as newly-formed businesses and businesses that
have only recently moved into the area. At the same time, the sales force
contacts existing advertisers and encourages them to renew and increase
the size
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and prominence of their advertisements and to purchase other products in
our portfolio. Advertisers generally agree to our standard advertising
terms and conditions at the time that they place their order.
o Generation of advertisements. Upon entering into an agreement with a
customer, we collaborate with the customer to generate its advertisement.
We use our proprietary technology and a team of in-house graphic artists
for this purpose.
o Pre-press activities. The selling of advertisements typically ceases one
month prior to publication, at which time we do not accept additional
customers. Once a directory has closed, pre-press activities commence.
Pre-press activities include finalizing artwork, proofing and paginating
the directories. When the composition of the directory is finalized, we
deliver the directory pages to a third-party printer.
o Printing. We use two outside contractors, R.R. Donnelley & Sons Company
and Quebecor World Directory Sales Corporation, for the printing of our
directories. In addition, we have purchase contracts with two paper
suppliers, Daishowa America Co., Ltd. and Norske Skog Canada (USA), Inc.,
for the paper needed for the pages of our directories and one paper
supplier, Spruce Falls, Inc., for the paper needed for the covers of our
directories. The time required to print a directory depends on its size
and may be as long as one month.
o Transportation. We use Matson Intermodal System, Inc. to transport our
printed directories from our printers to our distributor.
o Distribution. We aim to deliver our directories to all of the residences
and businesses in the geographical areas for which we produce
directories. We use Product Development Corporation, or PDC, for the
distribution of our directories. Distribution begins as soon as the first
completed directories are produced and takes an average of six weeks.
PAPER, PRINTING AND DISTRIBUTION
Paper is our principal raw material. Substantially all of the paper that
we use (other than for covers) is supplied by two companies: Daishowa America
Co., Ltd. and Norske Skog Canada (USA), Inc. Pursuant to our agreements with
them, Daishowa and Norske are required to provide up to 60% and 40% of our
annual paper supply, respectively. Prices under the two agreements are
negotiated each year based on prevailing market rates. For the year ended
December 31, 2001, paper costs were 4.4% of revenues and 13.9% of our cost of
revenues. If, in a particular year, the parties to one of the agreements are
unable to agree on repricing, either party may terminate the agreement. Both
agreements expire on December 31, 2003. In addition, we purchase paper used for
the covers of our directories from Spruce Falls, Inc. Pursuant to our
agreement, Spruce Falls is required to provide 100% of our annual cover stock
paper supply. Prices under this agreement are negotiated each year, and Spruce
Falls may not propose a change that varies more than 5% from the then existing
price. If, in a particular year, Spruce Falls and we are unable to agree on
repricing, either party may terminate this agreement. Although this agreement
expired on December 31, 2002, the parties are currently negotiating to extend
this agreement until December 31, 2003. We are currently operating under the
terms of the prior agreement.
All of our directories are printed by R.R. Donnelley & Sons Company and
Quebecor World Directory Sales Corporation. In general, Donnelley prints our
larger, higher-circulation directories and Quebecor prints those directories
that are smaller and have a more limited circulation. We do not guarantee any
minimum volume in our agreements with Donnelley and Quebecor. Prices are
adjusted annually based on changes to the consumer price index. Our agreements
with Donnelley and Quebecor expire on December 31, 2006 and July 30, 2008,
respectively.
Nearly all copies of our directories are distributed by Product
Development Corporation, or PDC. Although prices under our agreement with PDC
are fixed, they may be renegotiated under some circumstances, including volume
changes of greater than five percent. Our agreement with PDC expires on
December 31, 2003 and either party may terminate at any time upon 180 days'
written notice.
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We rely on Matson Intermodal System, Inc. to transport our printed
directories from our printers' locations to PDC. This agreement expires on
December 31, 2003, but we have an option to renew the agreement through
December 31, 2004.
We believe that each of these agreements is on terms that are currently
available in the market.
BILLING AND CREDIT CONTROL
Historically, we have generally billed our customers monthly for
advertising fees, either directly by us or by Qwest LEC as part of the
customer's monthly bill for telecommunications services, for which we have paid
Qwest LEC a fee. In 2001, Qwest LEC billed approximately 54% of our revenues on
our behalf. In connection with the transactions related to the acquisition of
Dex Media East, Qwest LEC and we entered into a billing and collection services
agreement pursuant to which Qwest LEC will continue to bill and collect, on our
behalf, amounts owed by customers in connection with our directory services.
The term of this agreement is limited to two years, although Qwest LEC will
provide transition billing services for billing transactions in the billing
system as of the date of termination or expiration of this agreement for an
interim period not to exceed 12 months. Any future billing and collection
services provided by Qwest LEC would be subject to Qwest LEC's standard terms
and conditions for billing and collecting on behalf of providers of services
other than local telephone service. Qwest LEC prepares settlement statements 10
times per month for each state in our region summarizing the amounts due to us,
and purchases our accounts receivable to facilitate billing and collection. See
"The Transactions--Agreements between Us, Qwest LEC and/or Qwest--Billing and
Collection Services Agreement." Qwest LEC has completed its preparation of its
billing and collection system so that we will be able to transition from the
Qwest LEC billing and collection system to our own billing and collection
system within approximately two weeks should we choose to do so before the
expiration of the two-year term of the billing and collection services
agreement.
Because most directories are published on 12-month cycles and we bill most
of our customers over the course of that 12-month period, we often effectively
extend credit to our customers, many of which are small or medium-sized
businesses with default rates that usually exceed those of larger businesses.
Fees for national advertisers are typically paid in advance by CMRs, after
deduction of commissions. Because we do not usually enter into contracts with
our national advertisers, we are subject to the credit risk of CMRs on sales to
those advertisers, to the extent we do not receive fees in advance. In 2001,
bad debt expense for our customers amounted to approximately 2.4% of our
revenues.
We attempt to improve collection of accounts receivable by conducting
initial credit checks of new advertisers under certain circumstances, reducing
the time taken to resolve billing inquiries and, where appropriate, requiring
personal guarantees from business owners. We automatically check all new orders
from existing advertisers for payments that are past due to us prior to
confirmation of the new order. We use both internal and external data to decide
whether to extend credit to an advertiser. In some cases, where appropriate, we
may also require the advertiser to prepay part or all of the amount of its
order. Beyond efforts under certain circumstances to assess credit risk prior
to extending credit to customers, we employ well-developed collection
strategies utilizing an integrated system of internal, external and automated
means to engage with customers concerning payment obligations.
COMPETITION
The U.S. directory advertising industry is competitive. We compete with
many different advertising and other media, including newspapers, radio,
television, the internet, billboards, direct mail and other yellow pages
directory publishers. The other directory publishers we compete with are
principally Independents, such as TransWestern Publishing Company LLC, the U.S.
business of Yell Group Ltd. and McLeodUSA (which has been acquired by Yell
Group Ltd.). There are over 24 Independents operating in competition with the
directory businesses of RBOCs, other telephone
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service providers and national yellow pages sales agents. We compete with these
publishers on value, quality, features and distribution. Generally, we do not
compete extensively with the other RBOC-affiliated publishing businesses, such
as Verizon Communications, SBC Communications and BellSouth Corporation.
In connection with the transactions related to the acquisition of Dex
Media East, we entered into a publishing agreement and a non-competition
agreement with Qwest LEC. Under the publishing agreement, we are the exclusive
official publisher of directories for Qwest LEC, the local exchange carrier
subsidiary of Qwest, in our region. The publishing agreement has an initial
term of 50 years and will automatically be renewed for additional one-year
periods unless either party terminates the contract upon 12 months' written
notice. See "The Transactions--Agreements between Us, Qwest LEC and/or
Qwest--Publishing Agreement." Acting as the exclusive official publisher of
directories for the incumbent telephone company provides us with an advantage
over our Independent competitors due to our differentiated product, recognition
of our brands, broader distribution, higher usage of our directories by end
users and our long-term relationships with our customers. Under the
non-competition and non-solicitation agreement, which will remain in effect for
40 years, Qwest LEC has agreed not to compete with us in the directory
publication business in the areas in which we operate. See "The
Transactions--Agreements between Us, Qwest LEC and/or Qwest--Non-Competition
and Non-Solicitation Agreement."
The internet has emerged as a new medium for advertisers. Although
advertising on the internet still represents only a small part of the total
advertising market, as the internet grows, it may become increasingly important
as an advertising medium. Most major yellow pages publishers operate an
internet-based directory business. We compete through our internet site,
qwestdex.com, with these publishers, with other internet sites providing
classified directory information, such as Overture.com, Citysearch.com,
Zagats.com and Moviefone.com, and with search engines such as Yahoo!, Alta
Vista and Excite, some of which have entered into affiliate agreements with
other major directory publishers.
INTELLECTUAL PROPERTY
We own and license a number of patents, copyrights and trademarks in the
United States. The only trademark we consider material to our operations is the
DEX trademark, which we acquired in connection with the acquisition of Dex
Media East. We do not consider any individual patent or other trademark to be
material to our operations. We believe that the phrase "yellow pages" and the
walking fingers logo are in the public domain in the United States.
PROPERTIES
Our headquarters are located at 198 Inverness Drive West, Englewood,
Colorado. We lease our headquarters from Qwest. The lease covering our
headquarters will expire October 31, 2008, and we have the option to renew it
for one additional term for a period of five years. We also have significant
operations at our facility located at 3190 South Vaughn Way, Aurora, Colorado,
which we lease from a third party. The lease covering this facility expires
October 31, 2008, and we have the option to renew it for two additional terms,
each for a period of five years. We operate from approximately 25 other
facilities and, in the aggregate, utilize over 650,000 square feet. We lease
all of our facilities.
EMPLOYEES
As of September 30, 2002, we employed approximately 1,300 employees. Most
of our employees are represented by labor unions covered by two collective
bargaining agreements. Our collective bargaining agreement with the
International Brotherhood of Electrical Workers expires in May 2006 and our
collective bargaining agreement with the Communications Workers of America
expires in October 2003. We consider relations with our employees to be good.
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LEGAL PROCEEDINGS
From time to time, we are a party to litigation matters arising in
connection with the normal course of our business. In many of these matters,
plaintiffs allege that they have suffered damages from errors or omissions or
improper listings contained in directories published by us. Although we have
not had notice of any such claims that we believe to be material, any pending
or future claim could have a material adverse effect on our business.
In addition, we are exposed to defamation and breach of privacy claims
arising from our publication of directories and our methods of collecting,
processing and using personal data. The subjects of our data and users of data
that we collect and publish could have claims against us if such data were
found to be inaccurate, or if personal data stored by us was improperly
accessed and disseminated by unauthorized persons. Although we have not had
notice of any material claims relating to defamation or breach of privacy
claims to date, we may be party to litigation matters that could have a
material adverse effect on our business.
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THE TRANSACTIONS
The outstanding notes were issued in connection with the transactions
described below, pursuant to which we became a stand-alone company and acquired
Dex Media International, the subsidiary guarantor. While an understanding of the
transactions described below is important to your understanding of our future
cost structure, results of operations, financial position and cash flows, the
transactions do not directly impact either the exchange offer or your decision
as to whether or not to participate in the exchange offer. In addition, we do
not believe that the transactions described below will affect our future
corporate structure or the future corporate structure of Dex Media
International.
GENERAL
On August 19, 2002, Dex Holdings, the parent of Dex Media, Inc., entered
into two purchase agreements with Qwest to acquire the print and internet
directory businesses of Qwest Dex, the directory services subsidiary of Qwest,
for an aggregate consideration of $7.05 billion (excluding fees and expenses
and subject to adjustments relating to working capital levels). Dex Holdings is
a special purpose entity formed by The Carlyle Group, Welsh, Carson, Anderson &
Stowe and their affiliates to effect the acquisition of Dex Media East. Dex
Holdings assigned its right to purchase the print and internet directory
businesses in our region to Dex Media East.
The acquisition will be executed in two phases to accommodate the
regulatory requirements in the applicable states. In the first phase,
consummated on November 8, 2002, Qwest Dex contributed substantially all of its
assets and liabilities relating to its print and internet directory businesses
in our region to SGN LLC, a newly-formed limited liability company, and,
following that contribution, Dex Media East purchased all of the interests in
SGN LLC. Immediately following such purchase, Dex Media East merged with SGN
LLC. We operate the acquired print and internet directory businesses in our
region and are a co-issuer of the exchange notes offered hereby and the
borrower under our new credit facilities. The total amount of consideration
paid for Qwest Dex's print and internet directory businesses in our region was
$2.75 billion (excluding fees and expenses and subject to adjustments relating
to adjusted EBITDA and working capital levels). For federal income tax
purposes, the acquisition of Dex Media East will be treated as an asset
purchase and, immediately after the consummation of the acquisition, Dex Media
East, Inc. had a tax basis in the acquired assets equal to the purchase price.
As a result, for tax purposes, following the consummation of the acquisition of
Dex Media East, Dex Media East, Inc. should generally be able to depreciate or
amortize the acquired assets, primarily intangibles, based on a higher tax
basis.
In the second phase, which we expect will be consummated by the second
half of 2003, Qwest Dex will contribute its remaining assets and liabilities
relating to its print and internet directory businesses to another newly-formed
limited liability company, or Dex Media West, and, following that contribution,
Dex Media, Inc. will purchase all of the interests in Dex Media West for $4.3
billion (excluding fees and expenses and subject to adjustments relating to
adjusted EBITDA and working capital levels), of which we will provide $210
million to Dex Media, Inc. to be paid to Qwest, as further described below. Dex
Media West will be an indirect, wholly-owned subsidiary of Dex Media, Inc. and
we will not own any of the interests in Dex Media West. Dex Media West will
operate the acquired print and internet directory businesses in the Dex West
States and will be the borrower and issuer of the debt necessary to consummate
the second phase of the acquisition, or the acquisition of Dex Media West,
other than the $210 million which we will provide. The $210 million will be
paid to Dex Media, Inc. in the form of a dividend to the extent of Dex Media
East retained earnings, with any remaining balance paid as a return of capital,
immediately prior to the consummation of the acquisition of Dex Media West. Dex
Media, Inc. will use the funds to pay a portion of the purchase price for Dex
Media West to Qwest. The acquisition of Dex Media West is expected to close by
the second half of 2003. To ensure that Dex Media, Inc. has an adequate remedy
for any breach by Qwest of its obligations pursuant to either of the purchase
agreements, Qwest granted Dex Media, Inc. a security interest in some of Qwest
Dex's assets located in the Dex West States to secure up to $100 million of any
losses that Dex Media, Inc. may incur as a result of any breach. Dex Media,
Inc.'s security interest in these assets will be subordinated to holders of
Qwest's senior secured obligations.
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In 2001, Qwest Dex's business in the Dex West States published 119 directories
and distributed approximately 26 million copies of these directories in
metropolitan areas and local communities in the Dex West States. As of December
31, 2001, Qwest Dex's businesses in the Dex West States had a total of 232,000
local advertising customers consisting primarily of small and medium-sized
businesses.
In connection with the acquisition of Dex Media East, we and Qwest LEC
and/or Qwest entered into the agreements described below. In addition, upon
consummation of the acquisition of Dex Media West, we and Dex Media West and/or
Dex Media, Inc. will enter into the agreements described below.
AGREEMENTS BETWEEN US, QWEST LEC AND/OR QWEST
PUBLISHING AGREEMENT
Pursuant to a publishing agreement, Qwest LEC granted us the right to be
the exclusive official directory publisher of listings and classified
advertisements of its telephone customers in the geographic areas in the Dex
East States in which Qwest LEC provided local telephone service, which we refer
to as Qwest LEC's service areas. Pursuant to state public utilities commission
requirements, Qwest LEC is required to publish and deliver white pages
directories of certain residences and businesses that order or receive local
telephone service from Qwest LEC. In addition, pursuant to tariffs and
agreements with telephone companies and resellers of local telephone service,
Qwest LEC is required to publish and deliver certain white pages directories
and yellow pages directories. Pursuant to this agreement, we are obligated to
fulfill Qwest LEC's legal and contractual obligations to publish and deliver
white pages and yellow pages directories in each of Qwest LEC's service areas
and, subject to limitations, will be obligated to fulfill Qwest LEC's
publishing obligations in the areas in our region into which Qwest LEC provides
local telephone service in the future. In fulfilling these obligations, we must
comply with all regulatory requirements related to the publishing and delivery
of such directories. We agree to cause any successor acquiring our business and
Qwest LEC agrees to cause any successor acquiring its business to agree in
writing to assume the terms of this agreement.
Qwest LEC granted us the right to identify ourselves (including on our web
sites) as its exclusive official directory publisher for its legally required
directories as well as other directories in Qwest LEC's service areas in our
region. Our use of the name of the local exchange carrier must be in accordance
with Qwest LEC's trademark and branding requirements. We granted Qwest LEC the
limited right to use specific service marks, trade names and trademarks,
including DEX- (which we refer to as the Dex East trademarks), solely in
connection with the advertising and marketing of our directories in our region
and in connection with the use of DEX- in the Dex West States. The licenses
relating to the Dex East trademarks are only effective in the areas in which
Qwest LEC is prohibited from competing with us under the non-competition and
non-solicitation agreement described below.
Pursuant to the list license agreement for the use of directory publisher
and directory delivery lists discussed below, Qwest LEC is required to provide
us with information about subscribers, such as names, addresses and telephone
numbers for the purpose of publishing and delivering directories. Generally, if
federal law no longer requires Qwest LEC to provide subscriber information
under nondiscriminatory and reasonable terms, Qwest LEC is required by the
terms of this agreement to continue to license the information to us on terms
and conditions at least as favorable as those then being offered to any person
doing business in the Dex East States. If such a change in federal law occurs
within the first seven years following the consummation of the transactions
related to the acquisition of Dex Media East, Qwest LEC will charge us the
prices then in effect under the list license agreement for the use of directory
publisher lists and directory delivery lists until the end of this seven-year
period, subject to increases for inflation. After this seven-year period,
regardless of when the change in federal law occurred, Qwest LEC will charge us
prices equal to or less than the lowest prices it then charges to any other
person doing business in the Dex East States. However, if Qwest LEC is not
licensing this information to at least two other purchasers in the Dex East
States, it will charge us prices equal to the average price that other
similarly sized incumbent local telephone companies charge for such
information.
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For the first seven years after the consummation of the transactions
related to the acquisition of Dex Media East, Qwest LEC will reimburse us for
one half of any material net increase in our costs of publishing directories
that satisfy Qwest LEC's publishing obligations (less the amount of any
previous reimbursements) resulting from new governmental legal requirements.
This agreement will remain in effect for 50 years after the consummation
of the transactions related to the acquisition of Dex Media East and will
automatically renew for additional one year terms unless either Qwest LEC or we
provide 12 months' notice of termination. Qwest LEC may terminate the entire
agreement if we materially breach this agreement in a manner that has the
effect of abrogating our performance and Qwest LEC's enjoyment of the benefits
of this agreement, or if we fail to discharge Qwest LEC's publishing obligation
with respect to twenty percent of Qwest LEC's subscribers. Generally, if we
breach our obligation with respect to a particular directory in a manner that
results in a material and continuing failure to discharge the publishing
obligation with respect to that directory, Qwest LEC may terminate this
agreement with respect to the affected service area. In addition, if we or any
of our subsidiaries engage in or act as a sales agent with regard to the
marketing, sale or distribution of any telecommunication services or enter into
a joint venture, strategic alliance, product bundling, revenue sharing or
similar arrangement with any person pursuant to which such person's
telecommunication services are offered, marketed, sold or priced in connection
with our directory products, in each case in any of Qwest LEC's service areas
in our region, Qwest LEC may terminate this agreement with respect to the
affected service area. However, if our owner or an affiliate of ours is a
provider of telecommunication services and the activity referred to in the
previous sentence is not occurring in connection with our directory products,
Qwest may not terminate this agreement with respect to the affected service
area.
We may terminate this entire agreement if Qwest LEC materially breaches
this agreement in a manner that has the effect of abrogating its performance
and our enjoyment of the benefits of this agreement. In addition, we may
terminate this entire agreement after the first seven years following the
consummation of the transactions related to the acquisition of Dex Media East
if new legal requirements imposed by government regulatory entities result in a
net increase of more than 25% in our costs of publishing directories that
satisfy Qwest LEC's publishing obligations (excluding cost increases that
generally apply to incumbent local exchange carriers) and Qwest LEC
acknowledges that this has occurred or such increase is confirmed in a binding
arbitration. Generally, if Qwest LEC materially breaches its obligation with
respect to a certain service area in a manner that has the effect of abrogating
its performance and our enjoyment of the benefits of this agreement with
respect to the affected service area, we may terminate this agreement with
respect to such service area.
If Qwest LEC formally repudiates or rejects this agreement (other than
pursuant to the termination provisions described above) or we terminate this
agreement due to a material breach of this agreement by Qwest LEC, we will be
entitled to receive liquidated damages from Qwest LEC in the following amount:
(1) prior to the consummation of the acquisition of Dex Media West or following
the termination of the Dex Media West purchase agreement, thirty percent of the
purchase price for the acquisition of Dex Media East, less any liquidated
damages previously paid by Qwest LEC for a material breach with respect to a
specific service area; or (2) following the consummation of the acquisition of
Dex Media West, thirty percent of the sum of the aggregate purchase price for
the acquisition of Dex Media East and the acquisition of Dex Media West, less
any liquidated damages previously paid by Qwest LEC for a material breach with
respect to a specific service area. In the event that Qwest LEC materially
breaches its obligations with respect to a specific service area and we
terminate this agreement with respect to the affected service area, we will be
entitled to liquidated damages generally calculated on a similar basis as that
described above, pro rata for the affected service area.
If we formally repudiate or reject this agreement (other than pursuant to
the termination provisions described above) or Qwest LEC terminates this
agreement with respect to a specific service area because we have materially
failed to discharge Qwest LEC's publishing obligation with respect to the
service area, Qwest LEC will be entitled to receive from us liquidated damages
in an amount equal to one hundred twenty-five percent of the net present value
of the anticipated costs to
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Qwest LEC through the remaining term of the publishing agreement to perform, or
cause another person to perform, Qwest LEC's publishing obligation.
The liquidated damages provided for in this agreement are in lieu of any
other type of damages and are the sole remedy of either party in the event of a
material breach or formal repudiation or rejection of this agreement by the
other party. We may exercise our right to claims for liquidated damages
provided for in this agreement only in lieu of, and not in addition to, our
right to claims for liquidated damages provided for in the non-competition and
non-solicitation agreement discussed below.
Dex Media, Inc. and we will, jointly and severally, indemnify Qwest LEC
for losses resulting from (1) our failure to perform our obligations under this
agreement, (2) any third-party claims resulting from errors in listings and
advertisements of Qwest LEC's customers in our directories or omissions of
listings and advertisements of Qwest LEC's customers in our directories, in
each case caused by us, and (3) any claims that our directories or the rights
we will grant to Qwest LEC relating to the Dex East trademarks violate or
infringe the intellectual property rights, or require the consent, of any third
party. Qwest LEC will indemnify us for losses resulting from (1) its failure to
perform its obligations under this agreement, (2) any third party claims
resulting from errors in listings and advertisements of its customers in our
directories or omissions of listings and advertisements of its customers in our
directories, in each case caused by Qwest LEC and (3) any claims that the
rights to identify ourselves as Qwest LEC's exclusive official directory
publisher and to use Qwest LEC's branding on the directories violate or
infringe the intellectual property rights, or require the consent, of any third
party.
NON-COMPETITION AND NON-SOLICITATION AGREEMENT
Pursuant to a non-competition and non-solicitation agreement, Qwest and
Qwest LEC agree, for a period of 40 years after the consummation of the
acquisition of Dex Media East, not to sell directory products consisting
principally of listings and classified advertisements for subscribers in the
geographic areas in our region in which Qwest LEC provides local telephone
service directed primarily at customers in those geographic areas. In addition,
we agree, until the consummation of the acquisition of Dex Media West or, if
the acquisition of Dex Media West is not consummated, for a period of 40 years
after the consummation of the acquisition of Dex Media East, not to sell
directory products consisting principally of listings and classified
advertisements using the QWEST-, QWEST DEX- or DEX- brands that are directed
primarily at customers in the Dex West States in which Qwest LEC provides local
telephone service. We agree to cause any successor acquiring our business and
Qwest and Qwest LEC agree to cause any successors acquiring their businesses
(subject to limited exceptions) to agree in writing to assume the terms of this
agreement.
For a period of two years after the consummation of the transactions
related to the acquisition of Dex Media East, we, on one hand, and Qwest and
Qwest LEC, on the other hand, agree not to solicit any of the other's employees
or to induce one another's employees to terminate their relationship with the
other. In addition, Qwest and Qwest LEC agree not to solicit or hire any
members of our senior management team for the same two-year time period.
This agreement will remain in effect for a period of 40 years after the
consummation of the transactions related to the acquisition of Dex Media East.
However, if the publishing agreement terminates in accordance with its terms,
any party to this agreement may terminate it immediately. In addition, if we
directly or indirectly provide telecommunication services in our region or Dex
West States, Qwest and Qwest LEC may terminate this agreement and the
publishing agreement with respect to the affected service area. See
"--Publishing Agreement."
If Qwest LEC formally repudiates or rejects this agreement (other than
pursuant to the termination provisions described above) or either Qwest or
Qwest LEC materially breaches this agreement, we will be entitled to receive
liquidated damages from Qwest LEC, calculated according to the formula
described above with respect to the liquidated damages provisions of the
publishing agreement. If either Qwest or Qwest LEC materially breaches its
obligations with respect to a specific
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service area or Qwest LEC does not require a person acquiring its business in a
specific service area to agree in writing to assume this agreement to the
extent of the relevant service area, each of Qwest and Qwest LEC will be
jointly and severally liable for liquidated damages generally calculated on a
similar basis as in the publishing agreement, pro rata for the affected service
area.
The liquidated damages provided for in this agreement are in lieu of any
other type of damages and are our sole remedy in the event of a material breach
or formal repudiation or rejection of this agreement by Qwest and Qwest LEC. We
may exercise our right to claims for liquidated damages provided for in this
agreement only in lieu of, and not in addition to, the liquidated damages
provided for in the publishing agreement.
BILLING AND COLLECTION SERVICES AGREEMENT
Qwest LEC and we entered into a billing and collection services agreement
pursuant to which Qwest LEC continues to bill and collect, on our behalf,
amounts owed by certain of our customers. In 2001, Qwest LEC billed
approximately 54% of our revenues on our behalf. This service extends only to
those customers for whom Qwest LEC is the provider of local telephone service
and Qwest LEC bills the customer on the same billing statement on which it
bills the customer for local telephone service. Qwest LEC prepares settlement
statements 10 times per month for each state in our region summarizing the
amounts due to us and purchases our accounts receivable within approximately
nine business days following such settlement date representing such amounts
pursuant to a formula that takes into account factors such as an allowance for
bad debt reserves and realized uncollectible amounts. In addition, Qwest LEC
charges us a fee per bill issued. The term of this agreement is limited to two
years, although Qwest LEC will provide transition billing services for billing
transactions in the billing system as of the date of termination or expiration
of this agreement for an interim period not to exceed 12 months. Any future
billing and collection services provided by Qwest LEC would be subject to Qwest
LEC's standard terms and conditions for billing and collecting on behalf of
providers of services other than local telephone service. We may terminate this
agreement with 30 days' notice. However, if Qwest LEC willfully fails to pay us
for our accounts receivable it is required to purchase, we may terminate this
agreement immediately. Qwest LEC has completed its preparation of its billing
and collection system so that we will be able to transition from the Qwest LEC
billing and collection system to our own billing and collection system within
approximately two weeks should we choose to do so.
INTELLECTUAL PROPERTY CONTRIBUTION AGREEMENT
Pursuant to an intellectual property contribution agreement, Qwest
assigned, in certain cases, and licensed, in other cases, to us the Qwest
intellectual property used in the Qwest directory services business.
Specifically, Qwest assigned all of its right, title and interests in
registered copyrights for printed directories in the Qwest service areas in our
region, certain non-public data regarding advertising customers created by
Qwest Dex, certain Dex East trademarks, including DEX-, and specific internet
domain names. Qwest assigned a one-half ownership interest in specific patents
and other intellectual property of Qwest Dex owned by Qwest and used in the
directory services business in the year prior to the consummation of the
transactions related to the acquisition of Dex Media East. After the
consummation of the acquisition of Dex Media West, Qwest will assign the
remainder of its ownership interests to us. If the acquisition of Dex Media
West is not consummated, we will retain our one-half ownership interest and
Qwest will retain its one-half ownership interest.
Qwest licensed to us the "qwestdex.com" domain name until the earlier of
the expiration or termination of the trademark license agreement or, if the Dex
Media West purchase agreement is terminated, the date upon which the management
of the "qwestdex.com" website shifts from us to Qwest, which shall be no later
than six months after the Dex Media West purchase agreement is terminated. In
addition, Qwest licensed to us other intellectual property of Qwest used by
Qwest Dex in the directory business in the year prior to the consummation of
the transactions related to the acquisition of Dex Media East, including but
not limited to technology, research and development data and software not
assigned to us by Qwest.
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We will license back to Qwest the Dex East trademarks for a period of two
years following the consummation of the acquisition of Dex Media West for use
in connection with directory and ancillary products in the Dex West States. In
addition, we will license back to Qwest other intellectual property transferred
to us pursuant to the purchase agreement.
This agreement continues indefinitely (although many of the licenses are
of limited duration) unless terminated by Qwest or us because of a material
breach by the other. However, some of the licenses are perpetual and survive
any termination.
In addition, pursuant to the purchase agreement, Qwest and we have agreed
to explore arrangements with third parties with respect to material software,
content and databases that are licensed to Qwest under agreements with third
parties, which we refer to as the material intellectual property products.
Sufficient consents or other rights for our use of the material intellectual
property products that are essential to the continued operation of the business
were obtained as of the consummation of the acquisition of Dex Media East so
that we may conduct our business without material interruption in substantially
the same manner as conducted by Qwest. Qwest is obligated to pay the costs
associated with obtaining the right for us to use the material intellectual
property products, at least on an interim basis, following the first closing.
Dex Media, Inc. is obligated to pay the cost of obtaining the permanent right
for us to use the material intellectual property products for the continued
operation of our business without material interruption following the
elimination of transition services provided by Qwest and us, if a second
closing does not occur. Dex Media, Inc.'s obligation to pay such costs,
together with Dex Media, Inc.'s obligation to pay certain other separation
costs including, without limitation, costs relating to hardware and software
systems, proprietary data migration and website replication, is limited to $40
million. The consummation of the acquisition of Dex Media West is subject to a
number of conditions described in "The Transactions." There can be no
assurances that the acquisition of Dex Media West will be consummated.
TRADEMARK LICENSE AGREEMENT
Pursuant to a trademark license agreement, Qwest licensed to us the right
to use the QWEST DEX- and QWEST DEX ADVANTAGE- marks for a term of five years
in connection with directory products and related marketing materials in our
region. Qwest also licensed to us the right to use these marks in connection
with our directory web site. Each of these licenses is exclusive with respect
to the sale of directory products consisting principally of listings and
classified advertisements directed primarily at customers in the geographic
areas in the Dex East States in which Qwest LEC provides local telephone
service.
We may terminate this agreement upon 30 days' notice and Qwest may
terminate this agreement only in the event of an uncured material breach by us.
In addition, this agreement will terminate if the publishing agreement
terminates before the expiration of the five-year term of this agreement.
LIST LICENSE AGREEMENTS
Pursuant to a license agreement for the use of directory publisher lists
and directory delivery lists, Qwest LEC 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 at prices set forth in the agreement. We may use the listing
information solely for publishing directories and the delivery information
solely for delivering directories. The term of this agreement is three years
after the consummation of the transactions related to the acquisition of Dex
Media East, subject to automatic renewal for additional 18-month terms until
either Qwest LEC or we terminate this agreement by providing 18 months' notice.
The publishing agreement, however, requires Qwest LEC to continue to license
the listing and delivery information to us for as long as the publishing
agreement is in effect.
Pursuant to a license agreement for expanded use of subscriber lists,
Qwest LEC granted to us a non-exclusive, non-transferable restricted license of
listing information for persons and businesses that order and /or receive local
exchange telephone services at prices set forth in the agreement. We may
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use this information for the sole purpose of reselling the information to third
party entities solely for direct marketing activities, database marketing,
telemarketing, market analysis purposes and internal marketing purposes, and
for our use in direct marketing activities undertaken on behalf of third
parties. The term of this agreement is five years after the consummation of the
transactions related to the acquisition of Dex Media East, subject to automatic
renewal for additional one-year terms until either Qwest LEC or we terminate
this agreement by providing six months' notice.
TRANSITION SERVICES AGREEMENT
Qwest and we entered into a transition services agreement pursuant to
which we purchased from Qwest certain corporate services, including services
relating to real estate, finance and accounting, procurement, treasury, human
resources, legal matters and information technology. This agreement sets forth
a monthly fee for each of these services, with the exception of the information
technology services, for which we pay an actual cost allocated to us. This
agreement also provides us with access to certain types of customer data, such
as customer names, addresses, phone numbers and payment histories. The term of
this agreement is 18 months with no renewal rights. Generally, we may terminate
each category of services with 30 days' notice. Qwest may terminate this
agreement if we fail to pay amounts owed, materially breach this agreement, are
subject to certain types of bankruptcy events or if Qwest terminates the
publishing agreement in accordance with its terms.
ADVERTISING AND TELECOMMUNICATIONS COMMITMENTS AGREEMENT
Qwest, Qwest LEC and we entered into an advertising and telecommunications
commitments agreement pursuant to which Qwest and Qwest LEC agreed to purchase
from us at least $20 million of advertising per year for 15 years following the
consummation of the transactions related to the acquisition of Dex Media East.
However, if the acquisition of Dex Media West is consummated, Qwest and Qwest
LEC may satisfy this minimum amount by purchasing an aggregate of $20 million
of advertising per year from us, Dex Media West, or a combination of Dex Media
West and us. Therefore, if the acquisition of Dex Media West is consummated,
Qwest and Qwest LEC may purchase more advertising from Dex Media West than us
or may not purchase any advertising from us at all. In the event that Qwest and
Qwest LEC purchase more than $20 million of advertising from us and/or Dex
Media West in any one year, up to $5 million of the excess will be carried over
to the subsequent year's minimum advertising purchase requirement. The pricing
will be on terms at least as favorable as those offered to similar large
customers. We (and, if the acquisition of Dex Media West is consummated, Dex
Media West) agree to purchase from Qwest, Qwest LEC and their affiliates on an
exclusive basis those voice and data telecommunications, internet connectivity,
wireless communications or other comparable or successor voice or data products
or services that we use from time to time. The obligations under this agreement
extend for 15 years following the consummation of the transactions. The pricing
of these services will be on terms at least as favorable as those offered to
buyers of similar quantities of similar services from Qwest and Qwest LEC.
Either we, on the one hand, or Qwest and Qwest LEC, on the other hand, may
terminate this agreement with 90 days' notice if the other party (1) fails to
pay an invoice and has not cured the failure within the time period set forth
in such invoice, (2) breaches other material covenants or obligations and fails
to cure the breach within 30 days of notice of the breach, or (3) is subject to
certain types of bankruptcy events. In the case of clauses (1) and (2), the
party may terminate the agreement only with respect to the section of the
agreement pursuant to which the breach occurred.
OTHER AGREEMENTS
Qwest LEC and/or Qwest Dex and we entered into various cooperation
agreements to facilitate the operation of our directory services business in
our region and Qwest's directory services business in the Dex West States.
We entered into a joint management agreement relating to the simultaneous
employment of certain executives by Qwest Dex and us. Prior to the acquisition
of Dex Media West and until the earlier of the consummation of the acquisition
of Dex Media West or up to 120 days after the
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termination of the Dex Media West purchase agreement, we and Qwest Dex will
simultaneously employ the following executives on a full-time basis pursuant to
a joint management agreement: George Burnett, Maggie Le Beau, Linda Martin,
Bradley Richards, Robert Houston and Anthony Basile. Effective as of January 2,
2003, Linda Martin replaced Kristine Shaw under the joint management agreement.
After the consummation of the acquisition of Dex Media West, these executives
will be employed solely by us and/or Dex Media, Inc., but will provide their
services to both us and Dex Media West, on substantially the same basis. See
"Management--Executive Compensation--Joint Management Agreement."
We also entered into a professional services agreement pursuant to which
we provide to Qwest Dex certain centralized operation services, such as
services relating to information technology, website management, operations and
production, and vendor relationship management. We may agree to provide other
services upon Qwest Dex's request. Under the agreement, we are required to use
our commercially reasonable best efforts in providing these services to Qwest
Dex; provided, that, we are not required to hire additional employees, purchase
additional assets or provide services in volume or quantities substantially
greater than the agreed upon levels. Qwest Dex pays us for these services in an
amount equal to our actual costs for providing these services. This agreement
will terminate on the earlier of the consummation of the acquisition of Dex
Media West or one year after the termination of the Dex Media West purchase
agreement.
We have also entered into other agreements, including a joint defense and
common interest agreement, a public pay stations and a separation agreement.
The joint defense and common interest agreement relates to any future
administrative proceedings or review of the agreements relating to the
transactions related to the acquisition of Dex Media East by regulatory or
governmental entities. The public pay stations agreement governs our exclusive
right and obligation to place directories in all of Qwest LEC's phone booths in
specific regions in the Dex East States. The separation agreement controls the
manner in which we will use certain shared assets and resources with Qwest Dex
prior to the consummation of the acquisition of Dex Media West. The separation
agreement also controls the separation of our operations and management from
those of Qwest in the event that the acquisition of Dex Media West is not
consummated such that we will each function as completely independent companies
within a reasonable time period.
AGREEMENTS BETWEEN US AND DEX MEDIA WEST AND/OR DEX MEDIA, INC.
The following are agreements or arrangements we expect to enter into upon
the consummation of the acquisition of Dex Media West, which are intended to
replicate the agreements (including provisions relating to fees and expenses)
we will enter into with Qwest Dex upon the consummation of the transactions
related to the acquisition of Dex Media East. It is currently contemplated that
we will enter into these agreements, other similar agreements or similar
arrangements directly with Dex Media West. However, it is possible that certain
of the services described below will be provided by Dex Media, Inc., in which
case we and Dex Media West would enter into substantially identical agreements
or arrangements with Dex Media, Inc. to obtain these services. The consummation
of the acquisition of Dex Media West is subject to a number of conditions
described in "The Transactions." There can be no assurances that the
acquisition of Dex Media West will be consummated.
BILLING AND COLLECTION SERVICES AGREEMENT
Dex Media West and we will enter into a billing and collection services
agreement pursuant to which we will provide to Dex Media West billing and
collection services for those of Dex Media West's customers that are not billed
by Qwest LEC. Upon the consummation of the acquisition of Dex Media West, we
anticipate that we will bill a portion of Dex Media West's revenue on its
behalf. Dex Media West will pay us for these services in an amount equal to our
actual cost of providing these services to Dex Media West. This agreement will
continue indefinitely unless terminated by Dex Media West or us because of a
material breach by the other.
SHARED SERVICES AGREEMENT
Dex Media West and we will enter into a shared services agreement pursuant
to which we will provide to Dex Media West certain corporate services,
including services relating to real estate,
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finance and accounting, procurement, treasury, human resources, legal matters
and information technology. Dex Media West will pay us for these services in an
amount equal to our actual cost of providing these services to Dex Media West.
This agreement will continue indefinitely unless terminated by Dex Media West
or us because of a material breach by the other.
JOINT MANAGEMENT AGREEMENT
Dex Media West and we will enter into a joint management agreement, under
which the following executives, whom we collectively refer to as the management
team, will be employed solely by us and/or Dex Media, Inc., but will provide
their services to both us and Dex Media West: George Burnett, Maggie Le Beau,
Linda Martin, Bradley Richards, Robert Houston and Anthony Basile. We will have
exclusive control of each member of the management team with respect to the
management and operation of our business, and Dex Media West will have
exclusive control of each member of the management team with respect to the
management and operation of the Dex Media West business. If one party
terminates the employment of a member of the management team with respect to
its business, the other party will not be required to terminate the employment
of such member with respect to its business. The members of the management team
will generally be entitled to exercise broad discretion and authority in
managing our business and Dex Media West's directory business in accordance
with past practices. Members of the management team will be subject to certain
confidentiality requirements and fiduciary obligations. We and Dex Media West
will set up a committee to provide guidance to members of the management team
in the event that we, Dex Media West or any member of the management team
believes that his or her fiduciary obligations with respect to us and Dex Media
West may be in conflict. Salary and benefits costs for the members of the
management team will be split pro-rata between us and Dex Media West, with Dex
Media West initially bearing 57% of the cost and initially us bearing 43% of
the cost. This agreement will continue until the date upon which the last
member of the management team (or any successor that is simultaneously employed
by Dex Media West and us) is no longer employed by Dex Media West and us,
unless it is terminated earlier by Dex Media West or us because of a material
breach by the other.
PROFESSIONAL SERVICES AGREEMENT
Dex Media West and we will also enter into a professional services
agreement pursuant to which we will provide to Dex Media West certain
centralized operation services, such as services relating to information
technology, website management, directory publishing operations and production
and vendor relationship management. We may agree to provide other services upon
Dex Media West's request. Dex Media West will pay us for these services in an
amount equal to our actual cost of providing these services to Dex Media West.
This agreement will continue indefinitely unless terminated by Dex Media West
or us because of a material breach by the other.
SYNERGIES WITH DEX MEDIA WEST
On November 8, 2002, the date of the consummation of the transactions
related to the acquisition of Dex Media East, we became a stand-alone company
and we will incur incremental costs associated with operating as a stand-alone
company. We have identified two broad categories of incremental stand-alone
operating costs. The first category of operating costs consists of those costs
associated with operating Qwest Dex as a separate entity from Qwest. The second
category of costs consists of those costs we estimate we will incur if the
acquisition of Dex Media West is not consummated. These second category costs
are those that will result from operating Dex Media East as a separate entity
from Qwest Dex. If the acquisition of Dex Media West is consummated, Dex Media
West will reimburse us for a portion of these costs and we will not incur other
costs because we will benefit from certain economies of scale as a result of
sharing services relating to information technology, operations, real estate,
human resources and legal matters with Dex Media West. Therefore, we believe
that we will benefit from net synergies if the acquisition of Dex Media West is
consummated.
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We will fund $210 million of the purchase price for Dex Media West to be
paid by Dex Media, Inc. to Qwest in connection with the acquisition of Dex
Media West which, we believe, represents the fair value of the ongoing benefit
of the synergies to be realized by us in connection with that acquisition. Dex
Media West will be an indirect, wholly-owned subsidiary of Dex Media, Inc. and
we will not own any of the interests in Dex Media West. The $210 million will
be paid to Dex Media, Inc. in the form of a dividend to the extent of Dex Media
East retained earnings, with any remaining balance paid as a return of capital,
immediately prior to the consummation of the acquisition of Dex Media West. Dex
Media, Inc. will use the funds to pay a portion of the purchase price for Dex
Media West to Qwest. We expect to fund that portion of the Dex Media West
purchase price through borrowings of $160 million pursuant to the delayed draw
portion of the tranche A term loan facility and an additional $50 million cash
equity contribution to us from the Sponsors and their assignees. The commitment
under the delayed draw portion of the tranche A term loan facility terminates
if the acquisition of Dex Media West is not consummated.
Qwest is a defendant in a consolidated putative securities class action,
In re Qwest Communications International Inc. Sec. Litig. (01-RB-1451), now
pending in the United States District Court for the District of Colorado, which
we refer to as the Securities Litigation. Plaintiffs in the Securities
Litigation filed a Fourth Consolidated Amended Class Action Complaint on or
about August 21, 2002. That complaint is purportedly brought on behalf of
purchasers of Qwest publicly traded securities between May 24, 1999 and
February 14, 2002, and alleges violations of the Securities Exchange Act of
1934 and the Securities Act of 1933. On September 20, 2002, Qwest and the
individual defendants in the Securities Litigation filed motions to dismiss the
Fourth Consolidated Complaint. Those motions are currently pending before the
court. On November 4, 2002, lead plaintiffs in the Securities Action filed a
motion for a temporary restraining order and preliminary injunction seeking to
enjoin the sale of the QwestDex assets or, in the alternative, to place the
proceeds of such sale in a constructive trust for the benefit of the
plaintiffs. On November 7, 2002, the court denied plaintiffs' motion for a
temporary restraining order. On December 16, 2002, the court granted
plaintiffs' request for a hearing on their motion for a preliminary injunction.
On February 6, 2003, the court denied the plaintiffs' motion for a preliminary
injunction. The Securities Litigation is scheduled for trial on June 7, 2004.
The consummation of the acquisition of Dex Media West is subject to a
number of conditions in addition to customary closing conditions (such as the
accuracy of the representations and warranties on the closing date, the
performance of all covenants and obligations and the delivery of legal
opinions). For example, various approvals and permits from governmental
entities, including state public utility commission or similar state regulatory
agencies or bodies that regulate Qwest Corporation's business in the states of
Arizona, Idaho, Montana, Oregon, Utah, Washington and Wyoming, must be obtained
prior to the consummation of the acquisition. In addition, as a condition to Dex
Holdings obligation to consummate the acquisition, none of Qwest, Qwest Dex,
Qwest Services Corporation or Qwest Corporation may be insolvent, either
immediately before and after consummation of the acquisition. Furthermore, Dex
Holdings is not required to consummate the acquisition if Qwest has not obtained
various third party consents, including consents relating to material
intellectual property products. Accordingly, there can be no assurances that the
acquisition of Dex Media West will be consummated or that the anticipated
synergies discussed above will be realized.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors:
NAME AGE POSITION
- ---- --- --------
George Burnett ..................... 47 President, Chief Executive Officer and Director
Robert M. Neumeister, Jr. .......... 53 Executive Vice President and Chief Financial Officer
Marilyn B. Neal .................... 54 Executive Vice President and Chief Operating Officer
Maggie Le Beau ..................... 43 Senior Vice President, Marketing
Linda Martin ....................... 49 Senior Vice President, Sales
Kristine Shaw ...................... 38 Senior Vice President, Sales
Bradley Richards ................... 43 Senior Vice President, Operations
Francis B. Barker .................. 40 Senior Vice President, Strategy and Corporate
Development
George Culberston .................. 57 Senior Vice President, Human Resources
Robert Houston ..................... 53 Vice President, Financial Planning and Analysis
Scott Pomeroy ...................... 41 Vice President, Finance and Secretary
John W. Meyer ...................... 47 Vice President, Finance and Controller
Anthony Basile ..................... 32 Vice President, Services
James A. Attwood, Jr. .............. 44 Co-Chairman of the Board
Anthony J. de Nicola ............... 38 Co-Chairman of the Board
John Almeida, Jr. .................. 32 Director
William E. Kennard ................. 46 Director
Bruce E. Rosenblum ................. 49 Director
Sanjay Swani ....................... 36 Director
GEORGE BURNETT became our President, Chief Executive Officer and a
Director on November 8, 2002. He has served as President and Chief Executive
Officer of Qwest Dex since February 2001 and currently serves as a Director of
the Yellow Pages Integrated Media Association, YPIMA. He joined Qwest as Chief
Marketing Officer in August 2000. In 2000, he served as President and CEO of
the Mass Market Retail Group of American Electric Power. Prior to holding that
position, he spent six years at AT&T as President of Local Services, General
Manager of two market segments and General Manager of Card and Operator
Services. In addition, he worked for 14 years at D'Arcy Masius Benton and
Bowles, a worldwide advertising agency. Mr. Burnett received an A.B. from
Dartmouth College and an M.B.A. from Dartmouth's Amos Tuck School.
ROBERT M. NEUMEISTER, JR. became our Executive Vice President and Chief
Financial Officer January 2, 2003. From October 2001 until December 2002, Mr.
Neumeister served as chief financial officer for Myriad Proteomics, Inc. From
January 2000 until June 2001, he served as chief financial officer of Aerie
Networks, Inc. From December 1998 to December 1999, he served as vice president
and director of finance of Intel Corporation. Prior to joining Intel, he served
as chief financial officer of Sprint PCS LLC from September 1995 to November
1998. He is a member of the boards of directors of Symmetricom, Inc. and VA
Software Corporation. Mr. Neumeister holds a B.A. from Vanderbilt University
and an M.B.A. from the University of Virginia.
MARILYN B. NEAL became our Executive Vice President and Chief Operating
Officer on November 8, 2002. From 2000 until November 2002, Ms. Neal served as
Regional President, Transcoastal & National for Verizon Information Services
with responsibilities for Verizon's yellow pages business in the Western and
Northeastern states. From 1974 to 2000, she held several positions with GTE
Information Services, formerly GTE Directories, including Senior Vice
President, Vice President of International, Vice President of Business
Development and various other sales positions. In addition, she was a member of
the board of directors of Chesapeake Directory Sales Corporation and the
Association of Directory Marketing and was an active participant in the
National Yellow Pages Association.
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MAGGIE LE BEAU became our Senior Vice President of Marketing on November
8, 2002. She has served as Vice President of Marketing & Growth Ventures of
Qwest Dex since November 1999. From 1994 until 1999, she served in other
capacities within Qwest Dex, including as Director of Product Management and
Pricing. Prior to joining Qwest Dex, Ms. Le Beau was a Senior Director in the
marketing department at the American Express Company. Ms. Le Beau received a
B.A. from Northwestern University and an M.B.A. from Harvard Business School.
LINDA MARTIN became Senior Vice President of Sales on January 2, 2003. She
joined QwestDex as Senior Vice President of Sales in December of 2002. From
1977 until her retirement from Verizon in 2002, Ms. Martin served in a variety
of sales and leadership positions with GTE/Verizon including Publishing, Sales
and Operations. From 2001 until 2002, Ms. Martin was Vice President of the
Transcoastal Region, where she was instrumental in the GTE/Verizon merger
process, particularly with the integration of the former R.H. Donnelley
organization into Verizon Information Services. In the 1990s, she held the
positions of Area Vice President, Vice President of Publishing, Operations,
Sales and Quality, Vice President/General Manager of the California Region and
Regional Vice President of New York.
KRISTINE SHAW became Senior Vice President of Sales on November 8, 2002.
She has served as Vice President of Sales of Qwest Dex since 2001. From 1996
until 2001, she served in other capacities, including as Vice President of the
Internet Group and New Ventures, with Qwest Dex. Prior to joining Qwest Dex,
she worked for 10 years in the sales and marketing departments of TransWestern
Publishing. Ms. Shaw earned an M.B.A. from the University of Denver.
BRADLEY RICHARDS became our Senior Vice President of Operations on
November 8, 2002. He has served as Vice President of Operations of Qwest Dex
since August of 2001. From 1999 until 2001, he served as Director of Operations
for Gateway, Inc. Prior to holding that position, he worked for five years in a
variety of strategic and operational positions at Worldcom, Inc. Mr. Richards
received a B.A. and an M.P.A. from the University of Rhode Island and an M.A.
from the University of Kentucky.
FRANCIS B. BARKER became our Senior Vice President for Strategy and
Corporate Development on January 2, 2003. Mr. Barker participated in leading
investment activities in the media sector at The Carlyle Group for four years
prior to joining us. Prior to joining Carlyle, Mr. Barker spent 10 years at
Morgan Stanley providing investment banking services to media companies in
various sectors. He is a Director of Entertainment Publications, Inc., a
Carlyle portfolio company that is under definitive contract to be sold to USA
Interactive (announced November, 2002). Mr. Barker is a magna cum laude
graduate of Amherst College and holds an MBA degree from The Wharton School,
University of Pennsylvania.
GEORGE CULBERTSON became our Senior Vice President of Human Resources in
December 2002. Prior to holding this position, Mr. Culbertson was responsible
for human resources support for Qwest Dex. He has 35 years experience in the
telecommunications industry with a broad functional background in sales and
operations.
ROBERT HOUSTON became our Vice President of Financial Planning and
Analysis on November 8, 2002. He has served as Senior Director of Financial
Planning and Analysis of Qwest Dex since 2000. From 1993 until 2000, he served
as Director of Finance of Qwest Dex. Prior to holding that position, he worked
for 12 years at Marketing Resources Group as Director of Finance and Planning
(a predecessor to Qwest Dex). In addition, he held several other positions in
the finance department of Qwest Dex since joining U S WEST in 1970. Mr. Houston
received a B.A. from Utah State University.
SCOTT POMEROY became our Vice President of Finance and Secretary on
November 8, 2002. He has served as a consultant to Qwest since May 2002. From
2000 to 2002, he served as Chief Financial Officer for Eotec Capital, LLC. He
served as an "interim" Chief Financial Officer for clients of CFO Consulting
Services from 1999 to 2000. Additionally, he held the positions of Chief
Financial Officer and President and Chief Operating Officer of Lewis Foods
Group from 1996 to 1999. He served as
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Chief Financial Officer for JELTEX Holdings from 1993 to 1996, and was senior
manager for KPMG Peat Marwick from 1984 to 1992. Mr. Pomeroy received a B.B.A.
in Accounting from the University of New Mexico and is a Certified Public
Accountant, inactive.
JOHN W. MEYER became our Vice President of Finance and Controller on
January 20, 2003. Before joining us, he served as vice president and controller
of Sprint PCS from its start-up until joining Aerie Networks as senior vice
president and controller in 2000. Prior to that, Mr. Meyer held various
positions in finance at Nortel Networks and Motorola Nortel. Mr. Meyer holds a
B.S. in accountancy from the University of Illinois, College of Business
Administration.
ANTHONY BASILE became our Vice President of Services on November 8, 2002.
He served as Senior Director of Central Services of Qwest Dex from August 2001
until the consummation of the Acquisition. From 1999 until 2001, he served as
Director of Customer Service, Credit and Collections and as Director of Methods
and Procedures of Qwest Dex. Prior to holding those positions, he worked for
six years in a variety of positions at U S WEST Dex. Mr. Basile received a B.A.
from the University of Denver and a J.D. from the University of Denver College
of Law.
JAMES A. ATTWOOD, JR. became Co-Chairman of the Board on November 8, 2002.
He has been a managing director of The Carlyle Group since November 2000. Prior
to joining Carlyle, he served as Executive Vice President--Strategy,
Development and Planning for Verizon Communications. He served as Executive
Vice President--Strategic Development and Planning at GTE Corporation prior to
that. Mr. Attwood joined GTE Corporation in 1996 as Vice President--Corporate
Planning and Development after more than ten years in the investment banking
division of Goldman, Sachs & Co. He received a BA and MA from Yale University
in 1980 and an MBA and JD from Harvard University in 1985. Mr. Attwood was
designated by affiliates of The Carlyle Group and elected as Co-Chairman of the
Board pursuant to the equityholders agreement described under "Certain
Relationships and Related Transactions."
ANTHONY J. DE NICOLA became Co-Chairman of the Board on November 8, 2002.
He has been a general partner of WCAS since April 1994 and is a managing member
or general partner of the respective sole general partners of Welsh, Carson,
Anderson & Stowe VIII, L.P. and other associated investment partnerships.
Previously, he worked for William Blair & Company for four years in the
merchant banking area. Mr. de Nicola holds a B.A. degree from DePauw University
and an M.B.A. from Harvard Business School. He is a also a member of the boards
of directors of Centennial Communications Corp., Valor Telecommunications, LLC,
Alliance Data Systems Corporation and several private companies. Mr. de Nicola
was designated by affiliates of WCAS and elected as Co-Chairman of the Board
pursuant to the equityholders agreement.
JOHN ALMEIDA, JR. became a Director on November 8, 2002. Mr. Almeida
joined WCAS in March 1999 and is a Principal. Prior to joining WCAS, Mr.
Almeida worked in the investment banking department of Lehman Brothers Inc. and
previously worked at the private equity firm Westbury Capital Partners. Mr.
Almeida holds a B.A. degree from Yale College. He is also a director of BTI
Telecom Corp. Mr. Almeida was designated by affiliates of WCAS and elected as a
Director pursuant to the equityholders agreement.
WILLIAM E. KENNARD became a Director on November 8, 2002. He has been a
managing director of The Carlyle Group since May 2001. Prior to joining
Carlyle, Mr. Kennard served as Chairman of the U.S. Federal Communications
Commission from November 1997 to January 2001. He was the FCC's general counsel
from December 1993 to November 1997. Before serving in government, Mr. Kennard
was a partner and member of the board of directors of the law firm of Verner,
Liipfert, Bernhard, McPherson and Hand in Washington, DC. He is a member of the
boards of directors of Nextel Communications, The New York Times Company and
Handspring, Inc. Mr. Kennard graduated from Stanford University and received
his law degree from Yale Law School. Mr. Kennard was designated by affiliates
of The Carlyle Group and elected as a Director pursuant to the equityholders
agreement.
BRUCE E. ROSENBLUM became a Director shortly after November 8, 2002. He
has been a managing director of The Carlyle Group since May 2000. Prior to
joining Carlyle, Mr. Rosenblum was a partner and Executive Committee member at
the law firm of Latham & Watkins, where he
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practiced for 18 years, specializing in mergers and acquisitions and corporate
finance. His experience includes major transactions in the telecommunications,
media, aerospace, defense, information services and other industries. Mr.
Rosenblum is a graduate of Yale University and received his J.D. from Columbia
Law School. He is a member of the boards of directors of The Relizon Company,
Rexnord Corporation and Videotron Telecom Ltee. Mr. Rosenblum currently serves
as Chairman of Washington Performing Arts Society (WPAS). Mr. Rosenblum was
designated by affiliates of The Carlyle Group and elected as a Director
pursuant to the equityholders agreement.
SANJAY SWANI became a Director on November 8, 2002. Mr. Swani has been a
general partner of WCAS since October 2001. Prior to joining WCAS, Mr. Swani
was a principal at Fox Paine & Company (a San Francisco-based buyout firm) from
June 1998 to June 1999 and prior to that worked in the mergers and acquisitions
department of Morgan Stanley & Co. (a global financial services firm) from
August 1994 to June 1998. Mr. Swani holds an A.B. degree from Princeton
University, a J.D. from Harvard Law School, and an M.S. from the MIT Sloan
School of Management. He is also a director of Banctec Inc, BTI Telecom Corp.,
Global Knowledge Networks, Inc., Valor Telecommunications, LLC and several
private companies. Mr. Swani was designated by affiliates of WCAS and elected
as a Director pursuant to the equityholders agreement.
OFFICE OF THE CHAIRMAN
The Office of the Chairman is currently comprised of James A. Attwood,
Jr., Anthony J. de Nicola, George Burnett, Robert M. Neumeister, Jr. and
Marilyn Neal. The Office of the Chairman has general supervision over our
affairs and such other duties as the Board of Directors assigns to it from time
to time.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors has an audit committee and a compensation
committee.
AUDIT COMMITTEE
The audit committee is comprised of James A. Attwood, Jr., William E.
Kennard, Sanjay Swani and John Almeida, Jr. The audit committee reviews our
various accounting, financial reporting and internal control functions and
makes recommendations to the Board of Directors for the selection of
independent public accountants. In addition, the committee monitors the
independence of our independent accountants.
COMPENSATION COMMITTEE
The compensation committee is comprised of James A. Attwood, Jr. and
Anthony J. de Nicola. The compensation committee is responsible for approving
all grants of stock options and other equity awards to employees, changes to
compensation of officers, all annual bonuses granted to officers and all other
employee benefits granted to officers.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to compensation
for services in all capacities beginning on November 8, 2002 for the year ended
December 31, 2002 paid to our President and Chief Executive Officer and our
four other most highly compensated executive officers serving as executive
officers of Qwest Dex, Inc. on December 31, 2002, whom we refer to as the Named
Executive Officers.
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LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- -------------
SECURITIES
OTHER ANNUAL UNDER-LYING
COMPENSATION OPTIONS/ SARS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)(1) (#)(2) COMPENSATION ($)
- --------------------------- ---- ---------- --------- ------------ ------------- ----------------
George Burnett,
President and Chief
Executive Officer(3) ............. 2002 $ 51,923 $ 56,250 -- 58,648 --
Marilyn Neal, Chief
Operating Officer ................ 2002 52,500 -- -- 35,189 --
Kristine Shaw, Senior
Vice President, Sales(4) ......... 2002 25,962 18,750 -- 11,730 --
Maggie Le Beau, Senior
Vice President,
Marketing(5) ..................... 2002 25,962 18,750 -- 11,730 --
Bradley Richards,
Senior Vice President,
Operations(6) .................... 2002 23,077 16,667 -- 10,264 --
- ----------------
(1) Does not include perquisites and other personal benefits because the value
of these items did not exceed the lesser of $50,000 or 10% of reported
salary and bonus for any of the Named Executive Officers.
(2) Does not include options to purchase common stock of Qwest Communications
International Inc. granted to certain of the Named Executive Officers
prior to November 8, 2002. Such options generally expired 90 days after
the termination of the applicable Named Executive Officer's employment
with Qwest in accordance with the Qwest Communications International Inc.
Equity Incentive Plan and the related option agreements.
(3) Pursuant to the joint management agreement, a portion of Mr. Burnett's
compensation was paid by Qwest Dex and a portion was paid by us.
Accordingly, Qwest Dex paid $19,994 and $33,750 of Mr. Burnett's total
salary and bonus, respectively. See "--Joint Management Agreement."
(4) Pursuant to the joint management agreement, a portion of Ms. Shaw's
compensation was paid by Qwest Dex and a portion was paid by us.
Accordingly, Qwest Dex paid $12,877 and $15,375 of Ms. Shaw's total salary
and bonus, respectively. See "--Joint Management Agreement."
(5) Pursuant to the joint management agreement, a portion of Ms. Le Beau's
compensation was paid by Qwest Dex and a portion was paid by us.
Accordingly, Qwest Dex paid $12,948 and $11,625 of Ms. Le Beau's total
salary and bonus, respectively. See "--Joint Management Agreement."
(6) Pursuant to the joint management agreement, a portion of Mr. Richard's
compensation was paid by Qwest Dex and a portion was paid by us.
Accordingly, Qwest Dex paid $11,267 and $11,167 of Mr. Richard's total
salary and bonus, respectively. See "--Joint Management Agreement."
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table summarized pertinent information concerning individual
grants of stock options to the Named Executive Officers during fiscal year 2002
to purchase shares of common stock of Dex Media, Inc., including a theoretical
grant date present value for each such grant. None of the Named Executive
Officers exercised any option to purchase shares of Common Stock of Dex Media,
Inc. during fiscal year 2002.
INDIVIDUAL GRANTS(1)
-------------------------------------------------------
NUMBER OF PERCENT OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS/SARS EXERCISE OF ASSUMED ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO PRICE PRICE APPRECIATION FOR OPTION TERM(2)
OPTION/SARS EMPLOYEES IN PER SHARE EXPIRATION -------------------------------------
NAME AND PRINCIPAL POSITION GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---------------------------- ----------- ---------------- ----------- ---------- ---------------- -----------------
George Burnett,
President and Chief
Executive Officer .......... 58,648 27.9% $ 100 11/8/2012 $ 3,694,824 $ 9,325,032
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INDIVIDUAL GRANTS(1)
-------------------------------------------------------
NUMBER OF PERCENT OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS/SARS EXERCISE OF ASSUMED ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO PRICE PRICE APPRECIATION FOR OPTION TERM(2)
OPTION/SARS EMPLOYEES IN PER SHARE EXPIRATION -------------------------------------
NAME AND PRINCIPAL POSITION GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---------------------------- ----------- ---------------- ----------- ---------- ---------------- -----------------
Marilyn Neal, Chief
Operating Officer .......... 35,189 16.7% $ 100 11/8/2012 $ 2,216,907 5,595,051
Kristine Shaw,
Senior Vice President,
Sales ...................... 11,730 5.6% $ 100 11/8/2012 $ 738,990 1,865,070
Maggie Le Beau,
Senior Vice President,
Marketing .................. 11,730 5.6% $ 100 11/8/2012 $ 738,990 1,865,070
Bradley Richards,
Senior Vice President,
Operations ................. 10,264 4.9% $ 100 11/8/2012 $ 646,632 1,631,976
- ----------------
(1) Does not include options to purchase common stock of Qwest Communications
International Inc. granted to certain of the Named Executive Officers
prior to November 8, 2002. Such options generally expired 90 days after
the termination of the applicable Named Executive Officer's employment
with Qwest in accordance with the Qwest Communications International Inc.
Equity Incentive Plan and the related option agreements.
(2) Potential realizable values are net of exercise price, but before deduction
of taxes associated with exercise. A zero percent gain in stock price will
result in zero dollars for the optionee. The dollar amounts indicated in
these colums are the result of calculations assuming growth rates required
by the rules of the SEC. These growth rates are not intended to forecast
future appreciation, if any, of the price of Dex Media, Inc. common stock.
EMPLOYMENT AGREEMENTS
Dex Media and 13 senior executives (including each of the Named Executive
Officers) have entered into written term sheets governing the terms and
conditions of such senior executive's employment with us. Dex Media expects to
enter into formal employment agreements with each of the senior executives.
Each employment agreement will contain terms and conditions consistent with
those set forth in the term sheets. With respect to the Named Executive
Officers, each term sheet provides:
o The initial term of employment is three years, which will automatically
be extended for additional one-year periods unless either party notifies
the other of non-extension at least 90 days prior to the end of a term.
o The annual base salary for each of the Named Executive Officers is as
follows:
George Burnett .................. $450,000
Marilyn Neal .................... $325,000
Kristine Shaw ................... $225,000
Maggie Le Beau .................. $225,000
Bradley Richards ................ $200,000
o Each Named Executive Officer will be eligible to receive an annual
performance-based cash bonus. Each year, the amount of such bonus, if
any, will be determined based upon our performance relative to certain
pre-established EBITDA targets. The maximum amount of George Burnett's
and Marilyn Neal's annual bonus is 100% of annual base salary. The
maximum amount of each of the other Named Executive Officers' annual
bonus is 65% of annual base salary.
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o Each Named Executive Officer will be prohibited from competing with us or
soliciting our employees or customers during the term of his or her
employment and for a specified period thereafter (18 months for George
Burnett; 12 months for Marilyn Neal; and six months for each of the other
Named Executive Officers).
o In the event that a Named Executive Officer's employment is terminated by
us without "cause" or by the executive for "good reason" then the executive
will be entitled to continue to participate in our health and welfare
benefit plans and to continue to be paid his or her base salary for a
specified period following termination (18 months for George Burnett; 12
months for Marilyn Neal; and six months for each of the other Named
Executive Officers). Notwithstanding the foregoing, in no event will any
Named Executive Officer be entitled to receive any such payment or benefits
after he or she violates any non-compete or other restrictive covenant.
o Each of the Named Executive Officers, other than Marilyn Neal and Kristine
Shaw, is subject to the joint management agreement. See "--Joint Management
Agreement."
George Burnett's term sheet contains certain provisions that differ from
the terms contained in the other management term sheets, including a provision
that provides that if Dex Media does not renew the term of his employment, then
he will be entitled to continue to participate in our health and welfare
benefit plans and to continue to be paid his base salary for 18 months
following his termination of employment (but not after he violates any
non-compete or other restrictive covenant).
With respect to the senior executives other than the Named Executive
Officers, each term sheet generally provides:
o The initial term of the employment is three years, subject to possible
year-to-year extensions.
o In the event that a senior executive's employment is terminated by us
without "cause" or by the executive for "good reason" then the executive
may be eligible to continue to be paid his or her base salary (and to
participate in certain of our health and welfare benefit plans) for a
specified period (generally six months) following termination.
o The executives may be eligible to receive annual performance based bonuses
to the extent that we meet certain pre-established financial targets.
STOCK OPTION PLAN OF DEX MEDIA, INC.
Dex Media adopted a stock option plan as of November 8, 2002. The stock
option plan provides that options to purchase common stock of Dex Media may be
granted to, among others, our employees, including the Named Executive
Officers. The plan provides for the grant of both non-qualified stock options
and "incentive stock options" within the meaning of Section 422 of the Code.
The compensation committee of the Board of Directors Dex Media Inc. generally
has the authority to administer the stock option plan, to designate individuals
to whom options will be granted and to establish the terms of such options.
Each individual to whom options are granted will be required to enter into a
written Stockholders Agreement with Dex Media, Inc. and Dex Holdings LLC that
will contain certain transfer restrictions that will apply to any shares of Dex
Media common stock that are purchased upon the exercise of any options granted
under the stock option plan.
JOINT MANAGEMENT AGREEMENT
We entered into a joint management agreement with Qwest and Qwest Dex,
which provides that Qwest Dex and we simultaneously employ six of our senior
executive employees, whom we collectively refer to as the management team.
Prior to January 2, 2003, the management team consisted of George Burnett,
Maggie Le Beau, Kristine Shaw, Bradley Richards, Robert Houston and Anthony
Basile. Effective as of January 2, 2003, Linda Martin replaced Kristine Shaw
under the joint management agreement. This simultaneous employment arrangement
began upon the consummation of the acquisition of Dex Media East and will
generally end as of the consummation of the
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acquisition of Dex Media West. If the Dex Media West purchase agreement is
terminated, each member of the management team will continue to be
simultaneously employed for a period not to exceed 120 days and thereafter will
be solely employed by us.
We have exclusive control of each member of the management team with
respect to the management and operation of our business, and Qwest and Qwest
Dex have exclusive control of each member of the management team with respect
to the management and operation of the Qwest Dex directory business. We may
terminate the employment of any member of the management team with respect to
our business, and Qwest and Qwest Dex may terminate the employment of any
member of the management team with respect to the Qwest Dex directory business.
If one party terminates the employment of a member of the management team with
respect to its business, the other party will not be required to terminate the
employment of such member with respect to its business. The members of the
management team are generally entitled to exercise broad discretion and
authority in managing our business and the Qwest Dex directory business in
accordance with past practices, although the members of the management team are
directed to operate the Qwest Dex directory business in accordance with the
terms of Qwest Dex's business plan.
Members of the management team are subject to certain confidentiality
requirements and fiduciary obligations. We, Qwest and Qwest Dex will set up a
committee to provide guidance to members of the management team in the event
that we, Qwest, Qwest Dex or any member of the management team believes that
his or her fiduciary obligations with respect to us, on one hand, and Qwest and
Qwest Dex, on the other hand, may be in conflict. Salary and benefits costs for
the members of the management team are split pro-rata between us, on one hand,
and Qwest and Qwest Dex, on the other hand, with Qwest and Qwest Dex initially
bearing 57% of the cost and us initially bearing 43% of the cost.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of our limited liability company interests are held by Dex Media East,
Inc. All of Dex Media East, Inc.'s outstanding common stock is held by Dex
Media, Inc. All of the outstanding Common Stock and Series A Preferred Stock of
Dex Media, Inc. is owned by Dex Holdings LLC, an entity controlled by funds
affiliated with The Carlyle Group and Welsh, Carson, Anderson & Stowe. The
Carlyle Group and its affiliates and designees and Welsh, Carson, Anderson &
Stowe and its affiliates and designees each own 50% of the beneficial interests
in Dex Holdings LLC.
The following table sets forth information with respect to the beneficial
ownership of the Common Stock and Series A Preferred Stock of Dex Media, Inc.
as of December 15, 2002 by:
o each person known to own beneficially more than 5% of the Common Stock
and/or the Series A Preferred Stock;
o each of our directors;
o each of the executive officers named in the summary compensation table; and
o all of our directors and executive officers as a group.
The amounts and percentages of shares beneficially owned are reported on
the basis of SEC regulations governing the determination of beneficial
ownership of securities. Under SEC rules, a person is deemed to be a
"beneficial" owner of a security if that person has or shares voting power 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 of which that person has a right to acquire beneficial
ownership within 60 days. Securities that can be so acquired are deemed to be
outstanding for purposes of computing any other person's percentage. Under
these rules, more than one person may be deemed to be a beneficial owner of the
same securities and a person may be deemed to be a beneficial owner of
securities as to which such person has no economic interest. There are
significant agreements relating to voting and transfers of capital stock in the
equityholders agreement described under "Certain Relationships and Related
Transactions."
We granted options relating to Common Stock to management upon
consummation of the acquisition of Dex Media East under the Stock Option Plan
of Dex Media, Inc., and management may also acquire additional shares. Except
as otherwise indicated in these footnotes, each of the beneficial owners listed
has, to our knowledge, sole voting and investment power with respect to the
shares of Common Stock and Series A Preferred Stock shown below.
BENEFICIAL OWNERSHIP OF
DEX MEDIA, INC.
------------------------------------------------------
NUMBER OF PERCENTAGE OF
NUMBER OF PERCENTAGE OF SHARES OF OUTSTANDING
SHARES OF OUTSTANDING SERIES A SERIES A
COMMON COMMON PREFERRED PREFERRED
NAME OF BENEFICIAL OWNER STOCK STOCK STOCK(1) STOCK(1)
- ------------------------ ---------- -------------- ----------- --------------
TCG Holdings, L.L.C.(2)(3) .................... 2,620,000 50% 65,500 50%
WCAS IX Associates, LLC(4)(5) ................. 2,620,000 50% 65,500 50%
George Burnett(6) ............................. -- -- -- --
Marilyn Neal(6) ............................... -- -- -- --
Kristine Shaw ................................. -- -- -- --
Maggie Le Beau ................................ -- -- -- --
Bradley Richards .............................. -- -- -- --
James A. Attwood, Jr. ......................... -- -- -- --
Anthony J. de Nicola .......................... -- -- -- --
John Almeida, Jr. ............................. -- -- -- --
William E. Kennard ............................ -- -- -- --
Bruce E. Rosenblum ............................ -- -- -- --
Sanjay Swani .................................. -- -- -- --
All executive officers and directors as a group
(15 persons) ................................. -- -- -- --
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- ----------------
(1) Holders of the Series A Preferred Stock are entitled to vote together with
the holders of Common Stock as a single class on all matters submitted to
a vote of the holders of Common Stock. For purposes of voting, each share
of Series A Preferred Stock shall be entitled to the amount of votes it
would otherwise have if it were converted into shares of Common Stock
based on the P/S Ratio on the record date for voting on such matter. P/S
Ratio is defined to mean the ratio of (A) (i) the liquidation preference
of $1000 per share (subject to appropriate adjustments in the event of any
stock dividend, stock split, combination or other similar recapitalization
affecting such shares), plus (ii) all accumulated and unpaid dividends,
plus (iii) any accrued dividends for the relevant bi-annual period during
which dividends accrued, to (B) $100 (such amount ot reflect the initial
cost of a share of Common Stock upon the consummation of the transactions
related to the acquisition of Dex Media East), subject to appropriate
adjustments in the event of any stock dividend, stock split, combination
or other similar recapitalization affecting such shares.
(2) Carlyle Partners III, L.P., CP III Coinvestment, L.P., Carlyle-Dex Partners
L.P., Carlyle-Dex Partners II L.P. , which we collectively refer to as the
Carlyle Funds, and Carlyle High Yield Partners, L.P. collectively
indirectly hold 50% of the outstanding Common Stock and 50% of the
outstanding Series A Preferred Stock of Dex Media, Inc. TC Group, L.L.C.
exercises investment discretion and control over the shares indirectly
held by each of the Carlyle Funds through its indirect subsidiary TC Group
III, L.P., which is the sole general partner of each the Carlyle Funds. TC
Group, L.L.C. exercises investment discretion and control over the shares
indirectly held by Carlyle High Yield Partners, L.P. through its indirect
subsidiary TCG High Yield L.L.C., which is the sole general partner of
Carlyle High Yield Partners, L.P. TCG Holdings, L.L.C. is the sole
managing member of TC Group, L.L.C. TC Group L.L.C. is the sole managing
member of each of TC Group III, L.L.C. and TCG High Yield Holdings L.L.C.
TC Group III, L.L.C. is the sole general partner of TC Group III, L.P. and
TCG High Yield Holdings L.L.C is the managing member of TCG High Yield
L.L.C.
(3) Each of Carlyle Partners III, L.P., CP III Coinvestment, L.P., Carlyle-Dex
Partners L.P., Carlyle-Dex Partners II L.P. and Carlyle High Yield
Partners, L.P. has an address c/o The Carlyle Group, 520 Madison Avenue,
41st Floor, New York, New York 10022.
(4) Welsh, Carson, Anderson & Stowe IX, L.P., WD Investors LLC, WD GP
Associates LLC and A.S.F. Co-Investment Partners, L.P. collectively
indirectly hold 50% of the outstanding Common Stock and 50% of the
outstanding Series A Preferred Stock of Dex Media, Inc. WCAS IX
Associates, LLC exercises investment discretion and control over the
shares indirectly held by Welsh Carson, Anderson & Stowe IX, L.P., of
which it is the sole general partner, and the shares indirectly held by WD
Investors LLC, of which it is the sole managing member. WD GP Associates
was organized to coninvest with Welsh, Carson, Anderson & Stowe IX, L.P.
in Dex Holdings LLC on the same terms and at substantially the same time
as Welsh, Carson, Anderson & Stowe IX, L.P. The members of WD GP
Associates LLC are individuals who are managing members of WCAS IX
Associates, LLC. A.S.F. Co-Investment Partners, L.P. has given WCAS IX
Associates, LLC an irrevocable proxy to vote its membership interests in
Dex Holdings LLC and has an address c/o Portfolio Advisors LLC, 9 Old
Kings Highway South Darien, Connecticut 06820.
(5) Each of Welsh, Carson, Anderson & Stowe IX, L.P., WD GP Associates LLC and
WD Investors LLC has an address c/o Welsh, Carson, Anderson & Stowe, 320
Park Avenue, Suite 2500, New York, New York 10022. A.S.F. Co-Investment
Partners, L.P. has an address c/o Portfolio Advisors LLC, 9 Old Kings
Highway South Darien, Connecticut 06820.
(6) Does not include option grants relating to Common Stock under the Dex
Media, Inc. Stock Option Plan. Such options are subject to vesting
provisions and are not exercisable within 60 days. Vesting and
exercisability of options may accelerate under certain circumstances, such
as a change of control.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT AND EQUITYHOLDERS
AGREEMENT
In connection with the transactions related to the acquisition of Dex
Media East, the Sponsors and their assignees and designees entered into an
amended and restated limited liability company agreement and equityholders
agreement that define their rights with respect to voting, ownership and
transfer of their interests in Dex Holdings. The amended and restated limited
liability company agreement provides for the allocation of the membership
interests in Dex Holdings among the Sponsors and their assignees and designees.
Under the amended and restated limited liability company agreement, each of the
Sponsors and their assignees and designees will make capital contributions to
Holdings, of which the Sponsors and their assignees and designees will not be
entitled to the mandatory return of any part or to be paid interest on such
contributions.
The equityholders agreement provides that the Board of Directors for
Holdings (and for Dex Media and Dex Media East) will consist of nine to eleven
directors, three of whom shall be designated by Carlyle, three of whom shall be
designated by Welsh Carson, one of whom shall be the CEO of Dex Media East LLC,
and two of whom shall be independent designees, with Carlyle and Welsh Carson
each selecting one. To date, no independent director has been appointed to our
Board, but the Sponsors expect to designate independent directors prior to the
consummation of the acquisition of Dex Media West.
For a period equal to the lesser of four years from the date of the
equityholders agreement and the date on which Dex Holdings consummates an
initial public offering (the "Blockout Period"), the equityholders agreement
prohibits the Sponsors and their assignees and designees from transferring any
of their membership interests in Holdings, other than certain permitted
transfers to affiliates or their respective limited partners or members. The
equityholders agreement sets forth additional transfer provisions for the
Sponsors and their assignees and designees' membership interests in Dex
Holdings, including the following:
Right of First Refusal. After the Blockout Period, the Sponsors shall have
a right of first refusal to purchase all of the membership interests that a
Sponsor or its assignee or designee is proposing to sell to a third party at
the price and on the terms and conditions offered by such third party.
Drag-along Rights. If the Sponsors collectively propose to transfer
membership interests to a person in a bona fide arm's-length transaction or
series of transactions of an amount equal to 51% or more in the aggregate of
the then outstanding interests, the Sponsors may elect to require each of the
other Sponsors and their assignees and designees to transfer to such person a
proportionate number of its interests at the purchase price and upon the other
terms and subject to the conditions of the sale.
Tag-along Rights. If any Sponsor proposes to transfer membership interests
held by it, then such Sponsor shall give notice to each other Sponsor or its
assignee or designee, who shall each have the right to sell a number of
membership interests equal to its pro rata portion of interests to be sold in
the proposed transfer on the terms and conditions offered by the proposed
purchaser.
Exit Rights. Any time after the eighth anniversary of the date of the
equityholders agreement and prior to an initial public offering of Dex
Holdings, either of the Sponsors may elect to cause either the sale of all or
substantially all of Dex Holdings (including by way of an asset sale, stock
sale, tender offer, merger or other business combination transaction or
otherwise) or a public sale of the membership interests, subject to certain
limitations.
Registration Rights.
o Demand Rights. The Sponsors each have the right at any time following an
initial public offering of Dex Holdings to make a written request to Dex
Holdings for registration under the Securities Act of part or all of the
registrable equity interests held by such Sponsors.
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o Piggyback Rights. If Dex Holdings at any time proposes to register under
the Securities Act any equity interests on a form and in a manner which
would permit registration of the registrable equity interests held by a
Sponsor or its assignee or designee for sale to the public under the
Securities Act, Dex Holdings shall give written notice of the proposed
registration to each Sponsor or its assignee or designee, who shall then
have the right to request that any part of its registrable equity
interests be included in such registration.
o Holdback Agreements. Each Sponsor or its assignee or designee agrees that
it will not offer for public sale any equity interests during a period
not to exceed 60 days prior to and 180 days after the effective date of
any registration statement filed by Dex Holdings in connection with an
underwritten public offering (except as part of such underwritten
registration or as otherwise permitted by such underwriters), subject to
certain limitations.
In addition, the amended and restated limited liability company agreement
and equityholders agreement grant the Sponsors the right to designate all
members of our board of directors, other than the management designee, who
shall be the chief executive officer. Our board of directors has the full,
exclusive and complete discretion to manage and control the business and
affairs of Dex Holdings and to take all such actions as it deems necessary or
appropriate.
AGREEMENT AMONG MEMBERS
The agreement among members sets forth rights of the Sponsors in addition
to those granted in the equityholders agreement. As long as a Sponsor shall
have the right to elect at least one member to Dex Holdings' board of directors
(and each board of directors of Dex Holdings' subsidiaries), the other Sponsor
will vote to support the election of such board member. If such party no longer
has the right to elect a board member, such party shall have the right to
appoint a non-voting observer to Dex Holdings' board of directors (and each
board of directors of Dex Holdings' subsidiaries), such rights to be consistent
with similar rights Dex Holdings has granted to other persons, and have the
right to substantially participate in and substantially influence the conduct
of Dex Holdings' management and its business through such Sponsor's
representation on Dex Holdings' board of directors (and such other boards).
MANAGEMENT CONSULTING AGREEMENTS
We entered into a management consulting agreement with each of the
Sponsors. Each agreement allows us to avail ourselves of the Sponsors'
expertise in areas such as corporate management, financial transactions,
product strategy, investment, acquisitions and other matters that relate to our
business, administration and policies. Each of the Sponsors received a one-time
transaction fee for structuring the transactions related to the acquisition of
Dex Media East, a pro-rated amount of the annual advisory fee for the remainder
of the current year and will receive an aggregate per annum fee of $1 million
for advisory, consulting and other services. Such payment shall continue until
such time as the agreement is terminated. The Sponsors also have the right to
act as our financial advisor or investment banker in connection with any
merger, acquisition, disposition, finance or the like if we decide we need to
engage someone to fill such a role, in return for additional reasonable
compensation as agreed upon by the parties to the agreement and approved by a
majority of the members of our board of directors. Each management consulting
agreement shall continue until such time as the respective Sponsor or one or
more of its affiliates collectively control, in the aggregate, less than 10% of
our equity interests, or such earlier time as we and the respective Sponsor may
mutually agree.
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OUR NEW CREDIT FACILITIES
Although we have summarized the material provisions of our credit
agreement filed as an exhibit to the registration statement, we encourage you
to read the credit agreement contained in the exhibits for a more complete
understanding and description of such agreement.
GENERAL
In connection with the transactions related to the acquisition of Dex
Media East, we entered into our new credit facilities with JPMorgan Chase Bank,
as administrative agent and collateral agent, and Bank of America, N.A., Lehman
Commercial Paper Inc., Wachovia Bank, National Association and Deutsche Bank
Trust Company Americas, as co-syndication agents.
Our new credit facilities consist of a revolving credit facility and term
loan facilities. Our new revolving credit facility has a principal amount of up
to $100 million of which we borrowed $50 million to fund the acquisition of Dex
Media East and the remainder is available for general corporate purposes,
subject to certain conditions. The term loan facilities comprise a tranche A
term loan facility in a total principal amount of $530 million and a tranche B
term loan facility in a total principal amount of $700 million. Except as
described in the following sentence, the tranche A and tranche B term loan
facilities were available only to fund the transactions related to the
acquisition of Dex Media East. In addition, in the event that the acquisition
of Dex Media West is consummated on or before December 15, 2003, additional
loans in a total principal amount of up to $160 million may be borrowed under
the tranche A term loan facility, subject to certain conditions.
Our new revolving credit facility and the tranche A term loan facility
mature six years after closing and the tranche B term loan facility matures six
and one-half years after closing.
The obligations under our new credit facilities are secured and
unconditionally and irrevocably guaranteed jointly and severally by Dex Media
East, Inc. and each of our domestic restricted subsidiaries that we may create
or acquire, with certain exceptions as set forth in our credit agreement,
pursuant to the terms of a separate guarantee and collateral agreement.
SECURITY INTERESTS
Our borrowings under our new credit facilities, any future guarantees and
our obligations under related hedging agreements are secured by a perfected
first priority security interest in:
o all of our capital stock and all of the capital stock or other equity
interests held by us of each of our existing and future domestic restricted
subsidiaries; in the case of any foreign subsidiary, such pledge shall be
limited to 65% of the voting shares and 100% of the non-voting shares of
such capital stock or equity interests; and
o all of our tangible and intangible assets and the tangible and intangible
assets of each of our existing and future restricted subsidiaries that we
may create or acquire, with certain exceptions as set forth in our credit
agreement.
INTEREST RATES AND FEES
Borrowings under our new credit facilities bear interest, at our option,
at either:
o a base rate used by JPMorgan Chase Bank, plus an applicable margin for the
tranche A, tranche B and revolving facility, respectively; or
o 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
for the tranche A, tranche B and revolving facility, respectively.
The applicable margin on loans under our new revolving credit facility and
the tranche A term loan facility is subject to change depending on our leverage
ratio.
105
We will also pay the lenders a commitment fee on the unused commitments
under our new revolving credit facility and the additional $160 million
available under the tranche A term loan facility, which will be payable
quarterly in arrears. The commitment fee will be subject to change depending on
our leverage ratio.
MANDATORY AND OPTIONAL REPAYMENT
Subject to exceptions for reinvestment of proceeds and other exceptions
and materiality thresholds, we will be required to prepay outstanding loans
under our new credit facilities with the net proceeds of certain asset
dispositions, incurrences of certain debt, issuances of certain equity, certain
damages resulting from claims under the publishing agreement and the
non-competition agreement and excess cash flow.
We may voluntarily prepay loans or reduce commitments under our new credit
facilities, in whole or in part, subject to minimum amounts. If we prepay
eurodollar rate loans other than at the end of an applicable interest period,
we will be required to reimburse lenders for their redeployment costs.
COVENANTS
Our new credit facilities contain negative and affirmative covenants
affecting us and our existing and future restricted subsidiaries, with certain
exceptions set forth in our credit agreement. Our new 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 and intercompany indebtedness. Our new credit
facilities also require us, and require our existing and future restricted
subsidiaries, with certain exceptions set forth in our credit agreement, to
meet certain financial covenants and ratios, particularly a leverage ratio, an
interest coverage ratio and a fixed charges coverage ratio.
Our new 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
Our new credit facilities specify certain events of default, including,
among others: 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 guarantees or security documents
and material breach of, or loss of right under, agreements with Qwest that
result in a material adverse effect on us.
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DESCRIPTION OF SENIOR EXCHANGE NOTES
Definitions of certain terms used in this Description of the Senior
Exchange Notes may be found under the heading "Certain Definitions." For
purposes of this section, (1) the term "Company" refers only to Dex Media East
LLC and not to any of its Subsidiaries, (2) the term "Dex Media East Finance"
refers to Dex Media East Finance Co., a Wholly Owned Subsidiary of the Company
with nominal assets which conducts no operations, (3) the term "Issuers" refers
to the Company and Dex Media East Finance, (4) the term "Parent" refers to Dex
Media East, Inc., the parent of the Company, and not to any of its
Subsidiaries, (5) the term "Dex Media" refers to Dex Media, Inc., the parent of
Parent, and not to any of its Subsidiaries, (6) the term "Outstanding Senior
Notes" means the Senior Notes of the Issuers issued on November 8, 2002 and (7)
"Senior Notes" means the Senior Exchange Notes and the Outstanding Senior
Notes, in each case outstanding at any given time and issued under the
Indenture. Dex Media International, Inc., a Wholly Owned Subsidiary of the
Company with nominal assets which currently conducts no operations ("Dex Media
International"), and certain of the Company's Subsidiaries formed or acquired
in the future will guarantee the Senior Notes and therefore will be subject to
many of the provisions contained in this Description of the Senior Exchange
Notes. Each company which guarantees the Senior Notes is referred to in this
section as a "Senior Note Guarantor." Each such guarantee is termed a "Senior
Note Guarantee." The Senior Notes are obligations solely of the Company, Dex
Media East Finance and Dex Media International. The Senior Notes are not issued
or guaranteed by, and are not otherwise an obligation of, any of Qwest and/or
its affiliates (including Qwest LEC).
The Issuers issued the Outstanding Senior Notes to the initial purchasers
on November 8, 2002. The initial purchasers subsequently resold the Outstanding
Senior Notes to qualified institutional buyers pursuant to Rule 144A under the
Securities Act and to non-U.S. persons outside the United States in reliance on
Regulation S under the Securities Act. The Issuers issued the Outstanding
Senior Notes and will issue the Senior Exchange Notes under an Indenture, dated
as of November 8, 2002 (the "Senior Note Indenture"), among the Issuers, Dex
Media International and U.S. Bank National Association, as trustee, a copy of
which is available upon request to the Issuers. The terms of the Senior
Exchange Notes are identical in all material respects to the Outstanding Senior
Notes except that, upon completion of the exchange offer, the Senior Exchange
Notes will be:
o registered under the Securities Act, and
o free of any covenants regarding exchange registration rights.
In addition, the Senior Exchange Notes are new issues of securities and
will not be listed on any securities exchange or included in any automated
quotation system. The Senior Note Indenture contains provisions which define
your rights under the Senior Notes. In addition, the Senior Note Indenture
governs the obligations of the Issuers and of each Senior Note Guarantor under
the Senior Notes. The terms of the Senior Notes include those stated in the
Senior Note Indenture and those made part of the Senior Note Indenture by
reference to the TIA.
The following description is meant to be only a summary of certain
provisions of the Senior Note Indenture. It does not restate the terms of the
Senior Note Indenture in their entirety. We urge that you carefully read the
Senior Note Indenture as it, and not this description, governs your rights as
Holders. We have filed a copy of the Indenture as an exhibit to the
registration statement which includes this prospectus.
OVERVIEW OF THE SENIOR NOTES AND THE SENIOR NOTE GUARANTEES
The Senior Notes:
o are general unsecured obligations of the Issuers;
o rank equally in right of payment with all existing and future Senior
Indebtedness of the Issuers;
o are senior in right of payment to all existing and future Subordinated
Obligations of the Issuers;
107
o are effectively subordinated to any Secured Indebtedness of the Company,
Dex Media East Finance and any other Subsidiaries of the Company to the
extent of the value of the assets securing such Indebtedness; and
o are effectively subordinated to all liabilities (including Trade
Payables) and Preferred Stock of each Subsidiary of the Company (other
than Dex Media East Finance) that is not a Senior Note Guarantor.
Dex Media East Finance has no obligations other than the Senior Notes and
the Senior Subordinated Notes and its Guarantee in respect of Bank
Indebtedness.
THE SENIOR NOTE GUARANTEES
The Senior Notes are guaranteed by Dex Media International, which is
currently Dex Media East LLC's only subsidiary (other than Dex Media East
Finance, which is a co-issuer of the Senior Notes), and each future subsidiary
that Dex Media East LLC forms or acquires and does not subsequently designate as
an Unrestricted Subsidiary in accordance with the provisions set forth in the
Senior Note Indenture which Incurs or Guarantees any Bank Indebtedness.
The Senior Note Guarantee of each Senior Note Guarantor:
o are general unsecured obligations of such Senior Note Guarantor;
o rank equally in right of payment with all existing and future Senior
Indebtedness of such Senior Note Guarantor;
o are senior in right of payment to all existing and future Subordinated
Obligations of such Senior Note Guarantor; and
o are effectively subordinated to any Secured Indebtedness of such Senior
Note Guarantor and its Subsidiaries to the extent of the value of the
assets securing such Indebtedness.
PRINCIPAL, MATURITY AND INTEREST
We initially issued Senior Notes in an aggregate principal amount of
$450.0 million. The Senior Notes will mature on November 15, 2009. We issued
the Senior Notes in fully registered form, without coupons, in denominations of
$1,000 and any integral multiple of $1,000.
Each Senior Note bears interest at a rate of 9 7/8% per annum beginning on
November 8, 2002, or from the most recent date to which interest has been paid
or provided for. We will pay interest semiannually to Holders of record at the
close of business on the May 1 or November 1 immediately preceding the interest
payment date on May 15 and November 15 of each year. We will begin paying
interest to Holders on May 15, 2003.
INDENTURE MAY BE USED FOR FUTURE ISSUANCES
We may issue from time to time additional Senior Notes having identical
terms and conditions to the Outstanding Exchange Notes (the "Additional Senior
Notes"). We will only be permitted to issue such Additional Senior Notes if at
the time of such issuance we are in compliance with the covenants contained in
the Senior Note Indenture. Any Additional Senior Notes will be part of the same
issue as the Senior Exchange Notes to be issued in the exchange offer and will
vote on all matters with such Senior Notes.
PAYING AGENT AND REGISTRAR
We will pay the principal of, premium, if any, and interest on the Senior
Exchange Notes at any office of ours or any agency designated by us which is
located in the Borough of Manhattan, The City of New York. We have initially
designated the corporate trust office of the trustee to act as the agent of the
Issuers in such matters. The location of the corporate trust office is U.S.
Bank National Association, 180 East 5th Street, St. Paul, MN 55101. We,
however, reserve the right to pay interest to Holders by check mailed directly
to Holders at their registered addresses.
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Holders may exchange or transfer their Senior Notes at the same location
given in the preceding paragraph. No service charge will be made for any
registration of transfer or exchange of Senior Notes. We, however, may require
Holders to pay any transfer tax or other similar governmental charge payable in
connection with any such transfer or exchange.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, we may not redeem the
Senior Notes prior to November 15, 2006. After this date, we may redeem the
Senior Notes, in whole or in part, on not less than 30 nor more than 60 days'
prior notice, at the following redemption prices (expressed as percentages of
principal amount), plus accrued and unpaid interest thereon 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), if redeemed during
the 12-month period commencing on November 15 of the years set forth below:
REDEMPTION
YEAR PRICE
---- ----------
2006 ........................ 104.938%
2007 ........................ 102.469%
2008 and thereafter ......... 100.000%
Prior to November 15, 2005, we may, on one or more occasions, also redeem
up to a maximum of 35% of the original aggregate principal amount of the Senior
Notes (calculated giving effect to any issuance of Additional Senior Notes)
with the Net Cash Proceeds of one or more Equity Offerings (1) by the Company
or (2) by Dex Media or Parent to the extent the Net Cash Proceeds thereof are
contributed to the Company or used to purchase Capital Stock (other than
Disqualified Stock) of the Company from the Company, at a redemption price
equal to 109.875% of the principal amount thereof, plus accrued and unpaid
interest thereon 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:
(1) at least 65% of the original aggregate principal amount of the
Senior Notes (calculated giving effect to any issuance of
Additional Senior Notes) remains outstanding; and
(2) any such redemption by the Issuers must be made within 90 days of
such Equity Offering and must be made in accordance with certain
procedures set forth in the Senior Note Indenture.
SELECTION
If we partially redeem Senior Notes, the trustee will select the Senior
Notes to be redeemed 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, although
no Senior Note of $1,000 in original principal amount or less will be redeemed
in part. If we redeem any Senior Note in part only, the notice of redemption
relating to such Senior Note shall state the portion of the principal amount
thereof to be redeemed. A new Senior Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Senior Note. On and after the redemption
date, interest will cease to accrue on Senior Notes or portions thereof called
for redemption so long as we have deposited with the Paying Agent funds
sufficient to pay the principal of, plus accrued and unpaid interest thereon,
the Senior Notes to be redeemed.
RANKING
The Senior Notes are unsecured Senior Indebtedness of the Issuers, rank
equally in right of payment with all existing and future Senior Indebtedness of
the Issuers and are senior in right of payment to all existing and future
Subordinated Obligations of the Issuers. Dex Media East Finance has no
obligations other than the Senior Notes and the Senior Subordinated Notes and
its Guarantee
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in respect of Bank Indebtedness. The Senior Notes are effectively subordinated
to any Secured Indebtedness of the Company, Dex Media East Finance and the
other Subsidiaries of the Company to the extent of the value of the assets
securing such Indebtedness.
The Senior Note Guarantees are unsecured Senior Indebtedness of the
applicable Senior Note Guarantor, rank equally in right of payment with all
existing and future Senior Indebtedness of such Senior Note Guarantor and are
senior in right of payment to all existing and future Subordinated Obligations
of such Senior Note Guarantor. The Senior Note Guarantees are effectively
subordinated to any Secured Indebtedness of the applicable Senior Note
Guarantor and its Subsidiaries to the extent of the value of the assets
securing such Secured Indebtedness.
The Company does not currently have any Subsidiaries (other than Dex Media
East Finance and Dex Media International). The Senior Note Indenture does not
restrict the ability of the Company, to create, acquire or capitalize
Subsidiaries in the future. To the extent such Subsidiaries are not Senior Note
Guarantors, creditors of such Subsidiaries, including trade creditors, and
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 creditors of the Issuers, including Holders. The Senior Notes,
therefore, will be effectively subordinated to the claims of creditors,
including trade creditors, and preferred stockholders, if any, of Subsidiaries
of the Company formed or acquired in the future that are not Senior Note
Guarantors.
Assuming that we had completed the Transactions and applied the net
proceeds we receive from the Transactions in the manner described under the
heading "Use of Proceeds," as of September 30, 2002, there would have been
outstanding:
(1) $1,730 million of Senior Indebtedness of the Issuers, including the
Senior Notes, of which $1,280 million would have been Secured
Indebtedness (exclusive of unused commitments under the Credit
Agreement);
(2) $525 million of Indebtedness of the Issuers that is subordinate or
junior in right of payment to the Senior Notes, consisting of the
Senior Subordinated Notes;
(3) no Indebtedness of Dex Media East Finance (other than the Senior
Notes and the Senior Subordinated Notes and its Guarantee in
respect of Bank Indebtedness); and
(4) no Indebtedness of Dex Media International (other than its Guarantee
in respect of Bank Indebtedness, the Senior Notes and the Senior
Subordinated Notes).
Although the Senior Note Indenture limits the Incurrence of Indebtedness
by the Company and the Restricted Subsidiaries and the issuance of Preferred
Stock by the Restricted Subsidiaries, such limitation is subject to a number of
significant qualifications. The Company and its Subsidiaries may be able to
Incur substantial amounts of Indebtedness in certain circumstances. Such
Indebtedness may be Senior Indebtedness.
The Senior Notes rank equally in all respects with all other Senior
Indebtedness of the Issuers. Unsecured Indebtedness is not deemed to be
subordinate or junior to Secured Indebtedness merely because it is unsecured.
SENIOR NOTE GUARANTEES
Dex Media International and certain future Subsidiaries of the Company (as
described below), as primary obligors and not merely as sureties, jointly and
severally irrevocably and unconditionally Guarantee on an unsecured senior
basis the performance and full and punctual payment when due, whether at Stated
Maturity, by acceleration or otherwise, of all obligations of the Issuers under
the Senior Note Indenture (including obligations to the trustee) and the Senior
Notes, whether for payment of principal of or interest on the Senior Notes,
expenses, indemnification or otherwise (all such obligations guaranteed by such
Senior Note Guarantors being herein called the "Guaranteed Obligations"). Such
Senior Note Guarantors agree to pay, in addition to the amount stated above,
any and all costs and expenses (including reasonable counsel fees and expenses)
incurred by the
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trustee or the Holders in enforcing any rights under the Senior Note
Guarantees. Each Senior Note Guarantee is limited in amount to an amount not to
exceed the maximum amount that can be Guaranteed by the applicable Senior Note
Guarantor without rendering the Senior Note Guarantee, as it relates to such
Senior Note Guarantor, voidable under applicable law relating to fraudulent
conveyance or fraudulent transfer or similar laws affecting the rights of
creditors generally. After November 8, 2002, the Company will cause each
Restricted Subsidiary (other than Dex Media East Finance) which Incurs or
Guarantees any Bank Indebtedness to execute and deliver to the trustee a
supplemental indenture pursuant to which such Restricted Subsidiary will
Guarantee payment of the Senior Notes. See "Certain Covenants--Future senior
note guarantors" below.
Each Senior Note Guarantee is a continuing guarantee and shall (a) remain
in full force and effect until payment in full of all the Guaranteed
Obligations, (b) be binding upon each Senior Note Guarantor and its successors
and (c) inure to the benefit of, and be enforceable by, the trustee, the
Holders and their successors, transferees and assigns.
The Senior Note Guarantee of a Senior Note Guarantor will be released:
(1) in connection with any sale of all of the Capital Stock of such Senior
Note Guarantor (including by way of merger or consolidation) to a
Person or a group of Persons that is not (either before or after giving
effect to such transaction) a Restricted Subsidiary of the Company, if
the sale complies with the covenant described under "Certain
Covenants--Limitation on sales of assets and subsidiary stock" and, to
the extent applicable, complies with the provisions described under
"Merger and Consolidation;"
(2) if the Company designates such Restricted Subsidiary that is a Senior
Note Guarantor as an Unrestricted Subsidiary in accordance with the
applicable provisions of the Senior Note Indenture; or
(3) if such Senior Note Guarantor is released from its Guarantee of, and
all pledges and security interests granted in connection with, the
Credit Agreement.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder will have the right to require the Issuers to purchase
all or any part of such Holder's 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 (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 notwithstanding the occurrence of a Change of Control,
the Issuers shall not be obligated to purchase the Senior Notes pursuant to
this section in the event that it has exercised its right to redeem all the
Senior Notes under the terms of the section titled "Optional Redemption":
(1) prior to the earliest to occur of (i) the first public offering of
common stock of Parent, (ii) the first public offering of common
stock of Dex Media or (iii) the first public offering of common
stock of the Company, (A) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) other than one or
more Permitted Holders is or becomes the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except
that such person shall be deemed to have "beneficial ownership" of
all shares that any such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 35% of the total voting
power of the Voting Stock of Parent, Dex Media or the Company, and
(B) the Permitted Holders "beneficially own" (as defined in Rules
13d-3 and 13d- 5 under the Exchange Act), directly or indirectly,
in the aggregate a lesser percentage of the total voting power of
the Voting Stock of Parent, Dex Media or the Company than such
other person and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority
of the Governing Board of Parent, Dex Media or the Company, as the
case may be, (for purposes of this clause (1) any such other person
shall be deemed to beneficially own
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any Voting Stock of an entity (the "specified entity") held by any
other entity (the "parent entity") so long as such person
beneficially owns (as defined in clause (A) above), directly or
indirectly, in the aggregate more than 50% of the voting power of
the Voting Stock of the parent entity);
(2) any "person" (as defined in clause (1) above), other than one or
more Permitted Holders, is or becomes the beneficial owner (as
defined in clause (1)(A) above), directly or indirectly, of a
majority of the total voting power of the Voting Stock of Parent,
Dex Media or the Company (for the purposes of this clause (2), such
other person shall be deemed to beneficially own any Voting Stock
of a specified entity held by a parent entity, if such other person
is the beneficial owner, directly or indirectly, of a majority of
the voting power of the Voting Stock of such parent entity);
(3) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Governing Board of Parent,
Dex Media or the Company, as the case may be (together with any new
persons whose election by such Governing Board of Parent, Dex Media
or the Company, as the case may be, or whose nomination for
election by the equity holders of Parent, Dex Media or the Company,
as the case may be, was approved by a vote of 66 2/3% of the
members of the Governing Board of Parent, Dex Media or the Company,
as the case may be, then still in office who were either members of
the Governing Board at the beginning of such period or whose
election or nomination for election was previously so approved)
cease for any reason to constitute a majority of the Governing
Board of Parent, Dex Media or the Company, as the case may be, then
in office;
(4) the adoption of a plan relating to the liquidation or dissolution of
the Company; or
(5) the Company ceases to own, beneficially or of record, all the
Capital Stock of Dex Media East Finance.
In the event that at the time of such Change of Control the terms of the
Bank Indebtedness restrict or prohibit the repurchase of Senior Notes pursuant
to this covenant, then prior to the mailing of the notice to Holders provided
for in the immediately following paragraph but in any event within 30 days
following any Change of Control, the Company shall:
(1) repay in full all Bank Indebtedness or, if doing so will allow the
purchase of Senior Notes, offer to repay in full all Bank
Indebtedness and repay the Bank Indebtedness of each lender who has
accepted such offer, or
(2) obtain the requisite consent under the agreements governing the Bank
Indebtedness to permit the repurchase of the Senior Notes as
provided for in the immediately following paragraph.
Within 30 days following any Change of Control, the Issuers shall mail a
notice to each Holder with a copy to the trustee (the "Change of Control
Offer") stating:
(1) that a Change of Control has occurred and that such Holder has the
right to require the Issuers to purchase all or a portion of such
Holder's 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 (subject to the right of Holders of record on
the relevant record date to receive interest on the relevant
interest payment date);
(2) the circumstances and relevant facts and financial information
regarding such Change of Control;
(3) the purchase date (which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed); and
(4) the instructions determined by the Issuers, consistent with this
covenant, that a Holder must follow in order to have its Senior
Notes purchased.
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The Issuers 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 Senior Note Indenture applicable to a Change of Control Offer made
by the Issuers and purchases all Senior Notes validly tendered and not
withdrawn under such Change of Control Offer.
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A Change of Control Offer may be made in advance of a Change of Control,
and conditioned upon such Change of Control, if a definitive agreement is in
place for the Change of Control at the time of making of the Change of Control
Offer. Senior Notes repurchased by the Issuers pursuant to a Change of Control
Offer will have the status of Senior Notes issued but not outstanding or will
be retired and canceled, at the option of the Issuers. Senior Notes purchased
by a third party pursuant to the preceding paragraph will have the status of
Senior Notes issued and outstanding.
The Issuers will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the purchase of Senior Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Issuers will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the initial purchasers of the Outstanding Senior Notes.
Management has no present intention to engage in a transaction involving a
Change of Control, although it is possible that we would decide to do so in the
future. Subject to the limitations discussed below, we could, in the future,
enter into certain transactions, including acquisitions, refinancings or
recapitalizations, that would not constitute a Change of Control under the
Senior Note Indenture, but that could increase the amount of indebtedness
outstanding at such time or otherwise affect our capital structure or credit
ratings. Restrictions on our ability to Incur additional Indebtedness are
contained in the covenants described under "Certain Covenants--Limitation on
indebtedness" and "--Limitation on liens". Such restrictions can only be waived
with the consent of the Holders of a majority in principal amount of the Senior
Notes then outstanding. Except for the limitations contained in such covenants,
however, the Senior Note Indenture will not contain any covenants or provisions
that may afford Holders protection in the event of a highly leveraged
transaction.
The occurrence of certain of the events which would constitute a Change of
Control would constitute a default under the Credit Agreement. Future Senior
Indebtedness of the Issuers may contain prohibitions of certain events which
would constitute a Change of Control or require such Senior Indebtedness to be
repurchased or repaid upon a Change of Control. Moreover, the exercise by the
Holders of their right to require the Issuers to purchase the Senior Notes
could cause a default under such Senior Indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on the
Issuers. Finally, the Issuers' ability to pay cash to the Holders upon a
purchase may be limited by the Issuers' then existing financial resources.
There can be no assurance that sufficient funds will be available when
necessary to make any required purchases. The provisions under the Senior Note
Indenture relative to the Issuers' obligation to make an offer to purchase the
Senior Notes as a result of a Change of Control may be waived or modified with
the written consent of the Holders of a majority in principal amount of the
Senior Notes.
CERTAIN COVENANTS
The Senior Note Indenture contains covenants including, among others, the
following:
Limitation on indebtedness. (a) The Company will not, and will not permit
any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness;
provided, however, that the Company or any Restricted Subsidiary that is a
Senior Note Guarantor may Incur Indebtedness if on the date of such Incurrence
and after giving effect thereto the Consolidated Leverage Ratio would not be
greater than 6:1.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:
(1) Bank Indebtedness Incurred pursuant to the Credit Agreement in an
aggregate principal amount not to exceed $1,490.0 million less the
aggregate amount of all prepayments of principal made pursuant to,
and in compliance with, the covenant described under "--Limitation
on sales of assets and subsidiary stock," applied to
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permanently reduce any such Indebtedness, provided that $160.0
million of such Bank Indebtedness may be Incurred only in connection
with, and upon the consummation of, the Dex Media West Acquisition;
(2) Indebtedness of the Company owed to and held by any Restricted
Subsidiary or Indebtedness of a Restricted Subsidiary owed to and
held by the Company or any Restricted Subsidiary; provided,
however, that (A) any subsequent issuance or transfer of any
Capital Stock or any other event that results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any
subsequent transfer of any such Indebtedness (except to the Company
or a Restricted Subsidiary) shall be deemed, in each case, to
constitute the Incurrence of such Indebtedness by the issuer
thereof and (B) if the Company or a Senior Note Guarantor is the
obligor on such Indebtedness, such Indebtedness (to the extent such
Indebtedness is owed to and held by a Restricted Subsidiary that is
not a Senior Note Guarantor) is expressly subordinated to the prior
payment in full in cash of all obligations of the Company or such
Senior Note Guarantor, with respect to the Senior Notes or the
Senior Note Guarantee of such Senior Note Guarantor, as applicable;
(3) Indebtedness (A) represented by the Senior Notes (not including any
Additional Senior Notes) and the Senior Note Guarantees and the
Senior Subordinated Notes (not including any Additional Senior
Subordinated Notes (as defined under "Description of Senior
Subordinated Exchange Notes")) and the Senior Subordinated Note
Guarantees (as defined under "Description of Senior Subordinated
Exchange Notes"), (B) outstanding on November 8, 2002 (other than
the Indebtedness described in clauses (1) and (2) above), (C)
consisting of Refinancing Indebtedness Incurred in respect of any
Indebtedness described in this clause (3) (including Indebtedness
that is Refinancing Indebtedness) or the foregoing paragraph (a)
and (D) consisting of Guarantees of any Indebtedness permitted
under this covenant; provided that if such Indebtedness is by its
express terms subordinated in right of payment to the Senior Notes
or the Senior Note Guarantees, as applicable, any such Guarantee
with respect to such Indebtedness shall be subordinated in right of
payment to the Senior Notes or the Senior Note Guarantees, as
applicable, substantially to the same extent as such Indebtedness
is subordinated to the Senior Notes or the Senior Note Guarantees,
as applicable;
(4) (A) Indebtedness of a Restricted Subsidiary Incurred and outstanding
on or prior to the date on which such Restricted Subsidiary was
acquired by the Company (other than Indebtedness Incurred in
contemplation of, in connection with, as consideration in, or to
provide all or any portion of the funds or credit support utilized
to consummate, the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Subsidiary of
or was otherwise acquired by the Company); provided, however, that
on the date that such Restricted Subsidiary is acquired by the
Company, the Company would have been able to Incur $1.00 of
additional Indebtedness pursuant to the foregoing paragraph (a)
after giving effect to the Incurrence of such Indebtedness pursuant
to this clause (4) and (B) Refinancing Indebtedness Incurred in
respect of Indebtedness Incurred pursuant to this clause (4);
(5) Indebtedness (A) in respect of performance bonds, bankers'
acceptances, letters of credit and surety or appeal bonds provided
by the Company and the Restricted Subsidiaries in the ordinary
course of their business, and (B) under Interest Rate Agreements
and Commodity Hedging Agreements entered into for bona fide hedging
purposes of the Company in the ordinary course of business;
provided, however, that (i) such Interest Rate Agreements do not
increase the Indebtedness of the Company outstanding at any time
other than as a result of fluctuations in interest rates or by
reason of fees, indemnities and compensation payable thereunder and
(ii) such Commodity Hedging Agreements do not increase the
Indebtedness of the Company outstanding at any time other than as a
result of fluctuations in commodity prices or by reason of fees,
indemnities and compensation payable thereunder;
115
(6) Purchase Money Indebtedness and Capitalized Lease Obligations (in an
aggregate principal amount not in excess of $30.0 million at any
time outstanding);
(7) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument drawn against
insufficient funds in the ordinary course of business, provided
that such Indebtedness is extinguished within five Business Days of
its Incurrence;
(8) Indebtedness consisting of customary indemnification, adjustment of
purchase price or similar obligations of the Company or any
Restricted Subsidiary, in each case Incurred in connection with the
acquisition or disposition of any assets by the Company or any
Restricted Subsidiary; or
(9) Indebtedness (other than Indebtedness permitted to be Incurred
pursuant to the foregoing paragraph (a) or any other clause of this
paragraph (b)) in an aggregate principal amount on the date of
Incurrence that, when added to all other Indebtedness Incurred
pursuant to this clause (9) and then outstanding, will not exceed
$125.0 million.
(c) Notwithstanding any other provision of this covenant, the maximum
amount of Indebtedness that the Company or any Restricted Subsidiary may Incur
pursuant to this covenant shall not be deemed to be exceeded solely as a result
of fluctuations in the exchange rates of currencies. For purposes of
determining the outstanding principal amount of any particular Indebtedness
Incurred pursuant to this covenant:
(1) Indebtedness Incurred pursuant to the Credit Agreement prior to or
on November 8, 2002 or in connection with the Dex Media West
Acquisition shall be treated as Incurred pursuant to clause (1) of
paragraph (b) above,
(2) the accrual of interest, the accretion of original issue discount,
the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of
dividends on Disqualified Stock in the form of additional shares of
the same class of Disqualified Stock will not be deemed to be an
Incurrence of Indebtedness or an issuance of Disqualified Stock for
purposes of this covenant,
(3) Indebtedness permitted by this covenant need not be permitted solely
by reference to one provision permitting such Indebtedness but may
be permitted in part by one such provision and in part by one or
more other provisions of this covenant permitting such
Indebtedness, and
(4) in the event that Indebtedness meets the criteria of more than one
of the types of Indebtedness described in this covenant, the
Company, in its sole discretion, shall classify such Indebtedness
on the date of its issuance, or later reclassify all or a portion
of such Indebtedness (other than as set forth in clause (c)(1)
above) in any manner that complies with the Senior Note Indenture,
and only be required to include the amount of such Indebtedness in
one of such clauses.
Limitation on restricted payments. (a) The Company will not, and will not
permit any Restricted Subsidiary, directly or indirectly, to:
(1) declare or pay any dividend, make any distribution on or in respect
of its Capital Stock or make any similar payment (including any
payment in connection with any merger or consolidation involving
the Company or any Subsidiary of the Company) to the direct or
indirect holders of its Capital Stock, except (x) dividends or
distributions payable solely in its Capital Stock (other than
Disqualified Stock or Preferred Stock) and (y) dividends or
distributions payable to the Company or a Restricted Subsidiary
(and, if such Restricted Subsidiary has shareholders other than the
Company or other Restricted Subsidiaries, to its other shareholders
on a pro rata basis),
116
(2) purchase, repurchase, redeem, retire or otherwise acquire for value
any Capital Stock of the Company or any Restricted Subsidiary held
by Persons other than the Company or a Restricted Subsidiary,
(3) purchase, repurchase, redeem, retire, defease or otherwise acquire
for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment any Subordinated Obligations (other
than the purchase, repurchase, redemption, retirement, defeasance
or other acquisition for value of Subordinated Obligations acquired
in anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year of
the date of acquisition), or
(4) make any Investment (other than a Permitted Investment) in any
Person (any such dividend, distribution, payment, purchase,
redemption, repurchase, defeasance, retirement, or other
acquisition or Investment set forth in these clauses (1) through
(4) being herein referred to as a "Restricted Payment") if at the
time the Company or such Restricted Subsidiary makes such Restricted
Payment:
(A) a Default will have occurred and be continuing (or would result
therefrom);
(B) the Company could not Incur at least $1.00 of additional
Indebtedness under paragraph (a) of the covenant described under
"--Limitation on indebtedness;" or
(C) the aggregate amount of such Restricted Payment and all other
Restricted Payments (the amount so expended, if other than in
cash, to be determined in good faith by the Governing Board of
the Company, whose determination will be conclusive and
evidenced by a resolution of the Governing Board of the Company)
declared or made subsequent to November 8, 2002 would exceed the
sum, without duplication, of:
(i) 50% of the Adjusted Consolidated Net Income accrued during
the period (treated as one accounting period) from the
beginning of the fiscal quarter immediately following the
fiscal quarter during which November 8, 2002 occurs to the
end of the most recent fiscal quarter ending at least 45
days prior to the date of such Restricted Payment (or, in
case such Consolidated Net Income will be a deficit, minus
100% of such deficit);
(ii) the aggregate Net Cash Proceeds received by the Company
from the issue or sale of its Capital Stock (other than
Disqualified Stock) subsequent to November 8, 2002 (other
than an issuance or sale (x) to a Subsidiary of the
Company, (y) to an employee stock ownership plan or other
trust established by the Company or any of its
Subsidiaries or (z) in connection with, or substantially
concurrently with, the Dex Media West Acquisition);
(iii) the amount by which Indebtedness of the Company or its
Restricted Subsidiaries is reduced on the Company's
balance sheet upon the conversion or exchange (other than
by a Subsidiary of the Company) subsequent to November 8,
2002 of any Indebtedness of the Company or its Restricted
Subsidiaries issued after November 8, 2002 which is
convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of the Company (less the amount of any
cash or the Fair Market Value of other property
distributed by the Company or any Restricted Subsidiary
upon such conversion or exchange plus the amount of any
cash received by the Company or any Restricted Subsidiary
upon such conversion or exchange); and
(iv) the amount equal to the net reduction in Investments in
Unrestricted Subsidiaries resulting from (x) payments of
dividends, repayments of the principal of loans or
advances or other transfers of assets to the Company
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or any Restricted Subsidiary from Unrestricted
Subsidiaries or (y) the redesignation of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each
case as provided in the definition of "Investment") not to
exceed, in the case of any Unrestricted Subsidiary, the
amount of Investments previously made by the Company or
any Restricted Subsidiary in such Unrestricted Subsidiary,
which amount was included in the calculation of the amount
of Restricted Payments.
(b) The provisions of the foregoing paragraph (a) will not prohibit:
(1) any prepayment, repayment, purchase, repurchase, redemption,
retirement or other acquisition for value of Subordinated
Obligations or Capital Stock of the Company made by exchange for,
or out of the proceeds of the substantially concurrent sale of,
Capital Stock of the Company (other than Disqualified Stock and
other than Capital Stock issued or sold to a Subsidiary of the
Company or an employee stock ownership plan or other trust
established by the Company or any of its Subsidiaries); provided,
however, that:
(A) such purchase, repurchase, redemption, retirement or other
acquisition for value will be excluded in the calculation of
the amount of Restricted Payments, and
(B) the Net Cash Proceeds from such sale applied in the manner set
forth in this clause (1) will be excluded from the calculation
of amounts under clause (4)(C)(ii) of paragraph (a) above;
(2) any prepayment, repayment, purchase, repurchase, redemption,
retirement, defeasance or other acquisition for value of
Subordinated Obligations of the Company made by exchange for, or
out of the proceeds of the substantially concurrent sale of,
Indebtedness of the Company that is permitted to be Incurred
pursuant to paragraph (b) of the covenant described under
"--Limitation on indebtedness;" provided that such Indebtedness is
subordinated to the Senior Notes to at least the same extent as
such Subordinated Obligations; provided, however, that such
prepayment, repayment, purchase, repurchase, redemption,
retirement, defeasance or other acquisition for value will be
excluded in the calculation of the amount of Restricted Payments;
(3) any prepayment, repayment, purchase, repurchase, redemption,
retirement, defeasance or other acquisition for value of
Subordinated Obligations from Net Available Cash to the extent
permitted by the covenant described under "--Limitation on sales of
assets and subsidiary stock;" provided, however, that such
prepayment, repayment, purchase, repurchase, redemption,
retirement, defeasance or other acquisition for value will be
excluded in the calculation of the amount of Restricted Payments;
(4) dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividends would have complied
with this covenant; provided, however, that such dividends will be
included in the calculation of the amount of Restricted Payments;
(5) for so long as the Company is treated as a pass-through or
disregarded entity for United States Federal income tax purposes or
for so long as the Company is a member of a consolidated group of
corporations for federal income tax purposes, other than as the
common parent, Tax Distributions; provided, however, that such Tax
Distributions shall be excluded in the calculation of the amount of
Restricted Payments;
(6) any purchase, repurchase, redemption, retirement or other
acquisition for value of shares of Capital Stock of the Company or
any of its Subsidiaries from employees, former employees, directors
or former directors of the Company 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
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agreements) or plans (or amendments thereto) approved by the
Governing Board of the Company under which such individuals purchase
or sell or are granted the option to purchase or sell, shares of
such Capital Stock; provided, however, that the aggregate amount of
such purchases, repurchases, redemptions, retirements and other
acquisitions for value will not exceed, together with Restricted
Payments made under clause (7)(B) below, $4.0 million per fiscal
year of the Company and up to an aggregate amount of, together with
Restricted Payments made under clause (7)(B) below, $10.0 million
during the term of the Indenture; provided further, however, that
such purchases, repurchases, redemptions, retirements and other
acquisitions for value shall be excluded in the calculation of the
amount of Restricted Payments;
(7) any payment of dividends, other distributions or other amounts by
the Company for the purposes set forth in clauses (A) through (C)
below; provided, however, that such dividend, distribution or other
amount set forth in clauses (A) through (C) will be excluded in the
calculation of the amount of Restricted Payments for the purposes
of paragraph (a) above:
(A) to Parent in amounts equal to the amounts required for Parent to
pay franchise taxes and other fees required to maintain its
corporate existence and provide for other operating costs of up
to $2.5 million per fiscal year;
(B) to Parent or Dex Media in amounts equal to amounts expended by
Parent or Dex Media to purchase, repurchase, redeem, retire or
otherwise acquire for value Capital Stock of Parent or Dex Media
from employees, former employees, directors or former directors
of the Company or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or
former directors); provided, however, that the aggregate amount
paid, loaned or advanced to Parent and Dex Media pursuant to
this clause (B) will not, in the aggregate, exceed, together
with Restricted Payments made under clause (6) above, $4.0
million per fiscal year of the Company, up to a maximum
aggregate amount of, together with Restricted Payments made
under clause (6) above, $10.0 million during the term of the
Indenture, plus any amounts contributed by Parent or Dex Media
to the Company as a result of resales of such repurchased shares
of Capital Stock; or
(C) to Parent or Dex Media to pay operating and overhead expenses
incurred in the ordinary course of business and allocable to the
Company;
(8) any payment of dividends, other distributions or other amounts by
the Company from the proceeds of $160.0 million of Bank
Indebtedness Incurred in connection with, and upon the consummation
of, the Dex Media West Acquisition, permitted by clause (b)(1) of
the covenant described under "--Limitation on indebtedness;"
provided, however, that such dividend, other distribution or other
amount will be excluded in the calculation of the amount of
Restricted Payments;
(9) the payment of dividends on Parent's, Dex Media's or the Company's
common stock following the first bona fide underwritten public
offering of common stock of Parent, Dex Media or the Company, as
the case may be, after November 8, 2002, of up to 6% per annum of
the net proceeds received by Parent, Dex Media or the Company, as
the case may be, from such public offering; provided, however, that
(A) the aggregate amount of all such dividends shall not exceed the
aggregate amount of net proceeds received by Parent, Dex Media or
the Company, as the case may be, from such public offering and (B)
such dividends will be included in the calculation of the amount of
Restricted Payments;
(10) the purchase, redemption, acquisition or retirement of any
Subordinated Obligations following a Change of Control after the
Company shall have complied with the
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provisions under "Change of Control," including the payment of the
applicable purchase price; provided, however, that such amounts
shall be excluded in the calculation of the amount of Restricted
Payments;
(11) other Restricted Payments not to exceed $20.0 million in the
aggregate; provided, however, that such amounts shall be included
in the calculation of the amount of Restricted Payments; or
(12) dividends paid with the proceeds of a cash common equity
contribution or sale of Capital Stock (other than Disqualified
Stock) in an amount of up to $50.0 million substantially
concurrently with the consummation of, and to fund a portion of the
purchase price of, the Dex Media West Acquisition; provided,
however, that:
(A) such dividends will be excluded in the calculation of the amount
of Restricted Payments, and
(B) the proceeds from such contribution or sale will be excluded from
the calculation of amounts under clause (4)(C)(ii) of paragraph
(a) above.
Limitation on restrictions on distributions from restricted
subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock
or pay any Indebtedness or other obligations owed to the Company;
(2) make any loans or advances to the Company; or
(3) transfer any of its property or assets to the Company, except:
(A) any encumbrance or restriction pursuant to applicable law or an
agreement in effect at or entered into on November 8, 2002 and
any encumbrance or restriction pursuant to any agreement
governing Bank Indebtedness;
(B) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness
Incurred by such Restricted Subsidiary prior to the date on
which such Restricted Subsidiary was acquired by the Company
(other than Indebtedness Incurred as consideration in, in
contemplation of, or to provide all or any portion of the funds
or credit support utilized to consummate, the transaction or
series of related transactions pursuant to which such Restricted
Subsidiary became a Restricted Subsidiary or was otherwise
acquired by the Company) and outstanding on such date;
(C) any encumbrance or restriction pursuant to an agreement effecting
a Refinancing of Indebtedness Incurred pursuant to an agreement
referred to in clause (A) or (B) of this covenant or this clause
(C) or contained in any amendment to an agreement referred to in
clause (A) or (B) of this covenant or this clause (C); provided,
however, that the encumbrances and restrictions contained in any
such Refinancing agreement or amendment, taken as a whole, are
not materially less favorable to the Holders than the
encumbrances and restrictions contained in such predecessor
agreements;
(D) in the case of clause (3), any encumbrance or restriction
(i) that restricts in a customary manner the subletting,
assignment or transfer of any property or asset that is
subject to a lease, license or similar contract, or
(ii) contained in security agreements securing Indebtedness of a
Restricted Subsidiary to the extent such encumbrance or
restriction restricts the transfer of the property subject
to such security agreements;
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(E) with respect to a Restricted Subsidiary, any restriction imposed
pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or
assets of such Restricted Subsidiary pending the closing of such
sale or disposition; and
(F) customary provisions in joint venture agreements; provided,
however, that (i) such encumbrance or restriction is applicable
only to such Restricted Subsidiary, (ii) the encumbrance or
restriction is not materially more disadvantageous to the
holders of the Senior Notes than is customary in comparable
agreements and (iii) the Company reasonably determines that any
such encumbrance or restriction will not materially affect the
ability of the Issuers to make any anticipated principal or
interest payments on the Senior Notes.
Limitation on sales of assets and subsidiary stock. (a) The Company will
not, and will not permit any Restricted Subsidiary to, make any Asset
Disposition unless:
(1) the Company or such Restricted Subsidiary receives consideration
(including by way of relief from, or by any other Person or group
of Persons assuming sole responsibility for, any liabilities,
contingent or otherwise) at the time of such Asset Disposition at
least equal to the Fair Market Value of the shares and assets
subject to such Asset Disposition,
(2) in the case of Asset Dispositions which are not Permitted Asset
Swaps, at least 75% of the consideration thereof received by the
Company or such Restricted Subsidiary is in the form of cash, and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted
Subsidiary, as the case may be) within 365 days after the later of
the date of such Asset Disposition or the receipt of such Net
Available Cash
(A) first, to the extent the Company elects (or is required by the
terms of any Indebtedness), to prepay, repay, purchase,
repurchase, redeem, retire, defease or otherwise acquire for
value Bank Indebtedness of the Company or Indebtedness (other
than obligations in respect of Preferred Stock) of a Wholly
Owned Subsidiary (in each case other than Indebtedness owed to
the Company or an Affiliate of the Company and other than
obligations in respect of Disqualified Stock);
(B) second, to the extent of the balance of Net Available Cash after
application in accordance with clause (A), to the extent the
Company or such Restricted Subsidiary elects, to reinvest in
Additional Assets (including by means of an Investment in
Additional Assets by a Restricted Subsidiary with Net Available
Cash received by the Company or another Restricted Subsidiary);
(C) third, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A) and (B), to
make an Offer (as defined in paragraph (b) of this covenant
below) to purchase Senior Notes pursuant to and subject to the
conditions set forth in paragraph (b) of this covenant;
provided, however, that if the Company elects (or is required by
the terms of any other Senior Indebtedness), such Offer may be
made ratably to purchase the Senior Notes and other Senior
Indebtedness of the Company; and
(D) fourth, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A), (B) and (C),
for any general corporate purpose permitted by the terms of the
Senior Note Indenture;
provided, however that in connection with any prepayment, repayment,
purchase, repurchase, redemption, retirement, defeasance or other
acquisition for value of Indebtedness pursuant to clause (A), (C) or
(D) above, the Company or such Restricted
121
Subsidiary will retire such Indebtedness and will cause the related
loan commitment (if any) to be permanently reduced in an amount equal
to the principal amount so prepaid, repaid, purchased, repurchased,
redeemed, retired, defeased or otherwise acquired for value.
Notwithstanding the foregoing provisions of this covenant, the Company and
the Restricted Subsidiaries will not be required to apply any Net Available
Cash in accordance with this covenant except to the extent that the aggregate
Net Available Cash from all Asset Dispositions that is not applied in
accordance with this covenant exceeds $20.0 million.
For the purposes of this covenant, the following are deemed to be cash:
o the assumption of Indebtedness of the Company (other than obligations in
respect of Disqualified Stock of the Company) or any Restricted
Subsidiary (other than obligations in respect of Disqualified Stock and
Preferred Stock of a Restricted Subsidiary that is a Senior Note
Guarantor) and the release of the Company or such Restricted Subsidiary
from all liability on such Indebtedness in connection with such Asset
Disposition; and
o securities received by the Company or any Restricted Subsidiary from the
transferee that are converted by the Company or such Restricted
Subsidiary into cash within 90 days of receipt.
(b) In the event of an Asset Disposition that requires the purchase of
Senior Notes pursuant to clause (a)(3)(C) of this covenant, the Issuers will be
required (i) to purchase Senior Notes tendered pursuant to an offer by the
Issuers for the Senior Notes (the "Offer") at a purchase price of 100% of their
principal amount plus accrued and unpaid interest thereon, to the date of
purchase (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 in the Senior Note Indenture and (ii) to purchase other Senior
Indebtedness of the Company on the terms and to the extent contemplated thereby
(provided that in no event shall the Issuers offer to purchase such other
Senior Indebtedness of the Company at a purchase price in excess of 100% of its
principal amount (without premium), plus accrued and unpaid interest thereon.
If the aggregate purchase price of Senior Notes (and other Senior Indebtedness)
tendered pursuant to the Offer is less than the Net Available Cash allotted to
the purchase of the Senior Notes (and other Senior Indebtedness), the Company
will apply the remaining Net Available Cash in accordance with clause (a)(3)(D)
of this covenant. The Issuers will not be required to make an Offer for Senior
Notes (and other Senior Indebtedness) pursuant to this covenant if the Net
Available Cash available therefor (after application of the proceeds as
provided in clauses (a)(3)(A) and (B)) is less than $5.0 million for any
particular Asset Disposition (which lesser amount will be carried forward for
purposes of determining whether an Offer is required with respect to the Net
Available Cash from any subsequent Asset Disposition).
(c) The Issuers will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Senior Notes pursuant to
this covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Issuers will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue thereof.
Limitation on transactions with affiliates. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter
into or conduct any transaction or series of related transactions (including
the purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of the Company (an "Affiliate Transaction") unless
such transaction is on terms:
(1) that are no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained
at the time of such transaction in arm's-length dealings with a
Person who is not such an Affiliate,
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(2) that, in the event such Affiliate Transaction involves an aggregate
amount in excess of $5.0 million,
(A) are set forth in writing, and
(B) have been approved by a majority of the members of the Governing
Board of the Company having no personal stake in such Affiliate
Transaction, and
(3) that, in the event such Affiliate Transaction involves an amount in
excess of $20.0 million, have been determined by a nationally
recognized appraisal or investment banking firm to be fair, from a
financial standpoint, to the Company and its Restricted
Subsidiaries.
(b) The provisions of the foregoing paragraph (a) will not prohibit:
(1) any Restricted Payment or Permitted Investment permitted to be paid
pursuant to the covenant described under "Limitation on restricted
payments,"
(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans or
similar employee benefit plans approved by the Governing Board of
the Company,
(3) the grant of stock options or similar rights to employees and
directors of the Company pursuant to plans approved by the
Governing Board of the Company,
(4) loans or advances to employees in the ordinary course of business in
accordance with past practices of the Company, but in any event not
to exceed $10.0 million in the aggregate outstanding at any one
time,
(5) the payment of reasonable fees to directors of the Company and its
Subsidiaries who are not employees of the Company or its
Subsidiaries,
(6) any transaction between the Company and a Restricted Subsidiary or
between Restricted Subsidiaries,
(7) amounts payable to Dex Media pursuant to the Management Agreement as
in effect on November 8, 2002 on the terms described in the
offering memorandum dated October 30, 2002 or pursuant to any
amendment, restatement or replacement thereof to the extent that
the terms of any such amendment, restatement or replacement are
not, taken as a whole, disadvantageous to the holders of the Senior
Notes in any material respect, provided that any payments pursuant
to this clause (7) with respect to management fees shall not exceed
$2.0 million in any fiscal year, plus all reasonable out-of-pocket
expenses incurred by Dex Media in connection with its performance
of management, consulting, monitoring, financial advisory or other
services with respect to the Company and its Restricted
Subsidiaries,
(8) any transaction with customers, clients, suppliers or purchasers or
sellers of goods or services, in each case in compliance with the
terms of the Senior Note Indenture, which are fair to the Company
or its Restricted Subsidiaries, in the reasonable good faith
determination of the Governing Board or its senior management, or
are on terms at least as favorable as could reasonably have been
obtained at such time from an unaffiliated party,
(9) the existence of, or the performance by the Company or any of its
Restricted Subsidiaries of its obligations under the terms of, any
agreements with Dex Media West or Dex Media that are described in
the offering memorandum dated October 30, 2002 under the heading
"The Transactions--Agreements between Us and Dex Media West and/or
Dex Media" to which it is a party as of the closing date of the Dex
Media West Acquisition on the terms described in the offering
memorandum and any amendments
123
thereto and any similar agreements which it may enter into
thereafter; provided, however, that the existence of, or the
performance by the Company or any of its Restricted Subsidiaries of
its obligations under, any future amendment to such agreements or
under any such similar agreements shall only be permitted by this
clause (9) to the extent that the terms of any such amendment or new
agreement, taken as a whole, are not disadvantageous to the holders
of the Senior Notes in any material respect, or
(10) the sale of receivables on substantially the terms that receivables
are purchased by Qwest Corporation pursuant to the billing and
collection services agreement as in effect on November 8, 2002 and
as described in the offering memorandum.
Limitation on liens. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any of its property or assets (including
Capital Stock of a Restricted Subsidiary), whether owned at November 8, 2002 or
thereafter acquired, other than Permitted Liens, without effectively providing
that the Senior Notes shall be secured equally and ratably with (or prior to)
the obligations so secured for so long as such obligations are so secured;
provided, however, that the Company may Incur other Liens to secure
Indebtedness as long as the amount of outstanding Indebtedness secured by Liens
Incurred pursuant to this proviso does not exceed 5% of Consolidated Net
Tangible Assets, as determined based on the consolidated balance sheet of the
Company as of the end of the most recent fiscal quarter ending at least 45 days
prior thereto.
SEC reports. Notwithstanding that the Issuers may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
will file with the SEC (unless the SEC will not accept such a filing because
the Issuers are not subject to any SEC reporting requirements at the time) and
provide the trustee and Holders and prospective Holders (upon request) within
15 days after it files them with the SEC, copies of the Company's annual report
and the information, documents and other reports that are specified in Sections
13 and 15(d) of the Exchange Act. In addition, following a public equity
offering, the Company shall furnish to the trustee and the Holders, promptly
upon their becoming available, copies of the annual report to shareholders and
any other information provided by Parent, Dex Media or the Company to its
public shareholders generally. The Company also will comply with the other
provisions of Section 314(a) of the TIA.
Future senior note guarantors. The Company will cause each Restricted
Subsidiary (other than Dex Media East Finance) that Incurs or Guarantees any
Bank Indebtedness to become a Senior Note Guarantor, and, if applicable,
execute and deliver to the trustee a supplemental indenture in the form set
forth in the Senior Note Indenture pursuant to which such Restricted Subsidiary
will Guarantee payment of the Senior Notes. Each Senior Note Guarantee will be
limited to an amount not to exceed the maximum amount that can be Guaranteed by
that Restricted Subsidiary without rendering the Senior Note Guarantee, as it
relates to such Restricted Subsidiary, voidable under applicable law relating
to fraudulent conveyance or fraudulent transfer or similar laws affecting the
rights of creditors generally.
Limitation on lines of business. The Company will not, and will not permit
any Restricted Subsidiary to, engage in any business, other than a Permitted
Business.
Limitation on the conduct of business of Dex Media East Finance. In
addition to the other restrictions set forth in the Senior Note Indenture, the
Senior Note Indenture will provide that Dex Media East Finance may not hold any
material assets, become liable for any material obligations or engage in any
significant business activities; provided that Dex Media East Finance may be a
co-obligor with respect to Indebtedness if the Company is an obligor of such
Indebtedness and the net proceeds of such Indebtedness are received by the
Company or one or more of the Company's Restricted Subsidiaries other than Dex
Media East Finance.
The Company will not sell or otherwise dispose of any shares of Capital
Stock of Dex Media East Finance and will not permit Dex Media East Finance,
directly or indirectly, to issue or sell or otherwise dispose of any shares of
its Capital Stock.
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MERGER AND CONSOLIDATION
Neither the Company nor Dex Media East Finance will consolidate with or
merge with or into, or convey, transfer or lease all or substantially all its
assets to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor
Company") will be a corporation organized and existing under the
laws of the United States of America, any State thereof or the
District of Columbia and the Successor Company (if not the Company
or Dex Media East Finance) will expressly assume, by a supplemental
indenture, executed and delivered to the trustee, in form
satisfactory to the trustee, all the obligations of the Company or
Dex Media East Finance under the Senior Notes and the Senior Note
Indenture;
(2) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or
any Restricted Subsidiary as a result of such transaction as having
been Incurred by the Successor Company or such Restricted Subsidiary
at the time of such transaction), no Default shall have occurred and
be continuing;
(3) immediately after giving effect to such transaction, the Successor
Company would be able to Incur an additional $1.00 of Indebtedness
under paragraph (a) of the covenant described under "Certain
Covenants--Limitation on indebtedness;"
(4) the Company shall have delivered to the trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture
(if any) comply with the Senior Note Indenture; and
(5) the Company shall have delivered to the trustee an Opinion of Counsel
to the effect that the Holders will not recognize income, gain or
loss for Federal income tax purposes as a result of such transaction
and will be subject to Federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if
such transaction had not occurred.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company or Dex Media East Finance, under
the Senior Note Indenture, but the predecessor company in the case of a
conveyance, transfer or lease of all or substantially all its assets will not
be released from the obligation to pay the principal of and interest on the
Senior Notes.
In addition, the Company will not permit any Senior Note Guarantor to
consolidate with or merge with or into, or convey, transfer or lease all or
substantially all of its assets to any Person unless:
(1) the resulting, surviving or transferee Person (the "Successor
Guarantor") will be a corporation organized and existing under the
laws of the United States of America, any State thereof or the
District of Columbia, and such Person (if not such Senior Note
Guarantor) will expressly assume, by a supplemental indenture,
executed and delivered to the trustee, in form satisfactory to the
trustee, all the obligations of such Senior Note Guarantor under its
Senior Note Guarantee;
(2) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Guarantor
or any Restricted Subsidiary as a result of such transaction as
having been Incurred by the Successor Guarantor or such Restricted
Subsidiary at the time of such transaction), no Default shall have
occurred and be continuing; and
(3) the Company will have delivered to the trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture
(if any) comply with the Senior Note Indenture.
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Notwithstanding the foregoing:
(A) any Restricted Subsidiary (other than Dex Media East Finance) may
consolidate with, merge into or transfer all or part of its
properties and assets to the Company or any Senior Note
Guarantor and
(B) the Company may merge with an Affiliate incorporated solely for the
purpose of reincorporating the Company, as the case may be, in
another jurisdiction to realize tax or other benefits.
DEFAULTS
Each of the following is an Event of Default:
(1) a default in any payment of interest (including additional interest)
on any Senior Note when due and payable, continued for 30 days,
(2) a default in the payment of principal of any Senior Note when due and
payable at its Stated Maturity, upon required redemption or
repurchase, upon declaration or otherwise,
(3) the failure by either Issuer or any Restricted Subsidiary of the
Company to comply with its obligations under the covenant described
under "Merger and Consolidation" above,
(4) the failure by either Issuer or any Restricted Subsidiary of the
Company to comply for 30 days after notice with any of its
obligations under the covenant described under "Change of Control"
above (other than a failure to purchase Senior Notes),
(5) the failure by either Issuer or any Restricted Subsidiary of the
Company to comply for 60 days after notice with any of its
obligations under the covenants described under "Certain Covenants"
above (other than a failure to purchase Senior Notes) or with its
other agreements contained in the Senior Notes or the Senior Note
Indenture,
(6) the failure by either Issuer or any Restricted Subsidiary of the
Company to pay any Indebtedness within any applicable grace period
after final maturity or the acceleration of any such Indebtedness by
the holders thereof because of a default if the total amount of such
Indebtedness unpaid or accelerated exceeds $10.0 million or its
foreign currency equivalent (the "cross acceleration provision"),
(7) certain events of bankruptcy, insolvency or reorganization of either
Issuer or a Significant Subsidiary (the "bankruptcy provisions"),
(8) the rendering of any judgment or decree for the payment of money
(other than judgments which are covered by enforceable insurance
policies issued by reputable and creditworthy insurance companies)
in excess of $10.0 million or its foreign currency equivalent
against the Company or a Restricted Subsidiary if:
(A) an enforcement proceeding thereon is commenced by any creditor or
(B) such judgment or decree remains outstanding for a period of 60 days
following such judgment and is not discharged, waived or stayed
(the "judgment default provision") or
(9) any Senior Note Guarantee ceases to be in full force and effect
(except as contemplated by the terms thereof) or any Senior Note
Guarantor or Person acting by or on behalf of such Senior Note
Guarantor denies or disaffirms such Senior Note Guarantor's
obligations under the Senior Note Indenture or any Senior Note
Guarantee and such Default continues for 10 days after receipt of
the notice specified in the Senior Note Indenture.
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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.
However, a default under clauses (4), (5) or (9) will not constitute an
Event of Default until the trustee notifies the Issuers or the Holders of at
least 25% in principal amount of the outstanding Senior Notes, including the
Senior Exchange Notes, notify the Issuers and the trustee of the default and
the Company or the Subsidiary, as applicable, does not cure such default within
the time specified in clauses (4), (5) or (9) hereof after receipt of such
notice.
If an Event of Default (other than an Event of Default relating to certain
events of bankruptcy, insolvency or reorganization of the Company or Dex Media
East Finance) occurs and is continuing, the trustee or the Holders of at least
25% in principal amount of the outstanding Senior Notes, including the Senior
Exchange Notes, by notice to the Issuers may declare the principal of and
accrued but unpaid interest on all the Senior Notes to be due and payable. Upon
such a declaration, such principal and interest will be due and payable
immediately. If an Event of Default relating to certain events of bankruptcy,
insolvency or reorganization of the Company or Dex Media East Finance occurs,
the principal of and interest on all the Senior Notes will become immediately
due and payable without any declaration or other act on the part of the trustee
or any Holders. Under certain circumstances, the Holders of a majority in
principal amount of the outstanding Senior Notes, including the Senior Exchange
Notes, may rescind any such acceleration with respect to the Senior Notes and
its consequences.
In the event of a declaration of acceleration of the Senior Notes because
an Event of Default described in clause (6) has occurred and is continuing, the
declaration of acceleration of the Senior Notes shall be automatically annulled
if the payment default or other default triggering such Event of Default
pursuant to clause (6) shall be remedied or cured by the Company or a
Restricted Subsidiary or waived by the holders of the relevant Indebtedness
within 60 days after the declaration of acceleration with respect thereto and
if (a) the annulment of the acceleration of the Senior 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 Senior Notes that became due solely because of the acceleration of the
Senior Notes, have been cured or waived.
Subject to the provisions of the Senior Note Indenture relating to the
duties of the trustee, in case an Event of Default occurs and is continuing,
the trustee will be under no obligation to exercise any of the rights or powers
under the Senior Note Indenture at the request or direction of any of the
Holders unless such Holders have offered to the trustee reasonable indemnity or
security against any loss, liability or expense. Except to enforce the right to
receive payment of principal, premium (if any) or interest when due, no Holder
may pursue any remedy with respect to the Senior Note Indenture or the Senior
Notes unless:
(1) such Holder has previously given the trustee notice that an Event of
Default is continuing,
(2) Holders of at least 25% in principal amount of the outstanding Senior
Notes, including the Senior Exchange Notes, have requested the
trustee in writing to pursue the remedy,
(3) such Holders have offered the trustee reasonable security or
indemnity against any loss, liability or expense,
(4) the trustee has not complied with such request within 60 days after
the receipt of the request and the offer of security or indemnity
and
(5) the Holders of a majority in principal amount of the outstanding
Senior Notes, including the Senior Exchange Notes, have not given
the trustee a direction inconsistent with such request within such
60-day period.
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Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding Senior Notes, including the Senior Exchange Notes,
will be given the right to direct the time, method and place of conducting any
proceeding for any remedy available to the trustee or of exercising any trust
or power conferred on the trustee. The trustee, however, may refuse to follow
any direction that conflicts with law or the Senior Note Indenture or that the
trustee determines is unduly prejudicial to the rights of any other Holder or
that would involve the trustee in personal liability. Prior to taking any
action under the Senior Note Indenture, the trustee will be entitled to
indemnification satisfactory to it in its sole discretion against all losses
and expenses caused by taking or not taking such action.
If a Default occurs and is continuing and is known to the trustee, the
trustee must mail to each Holder notice of the Default within the earlier of 90
days after it occurs or 30 days after it is known to a Trust Officer or written
notice of it is received by the trustee. Except in the case of a Default in the
payment of principal of, premium (if any) or interest on any Senior Note
(including payments pursuant to the redemption provisions of such Senior Note),
the trustee may withhold notice if and so long as a committee of its Trust
Officers in good faith determines that withholding notice is in the interests
of the Holders. In addition, the Issuers will be required to deliver to the
trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred during
the previous year. The Issuers will also be required to deliver to the trustee,
within 30 days after the occurrence thereof, written notice of any event which
would constitute certain Events of Default, their status and what action the
Issuers are taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Senior Note Indenture or the Senior
Notes may be amended with the written consent of the Holders of a majority in
principal amount of the Senior Notes then outstanding and any past default or
compliance with any provisions may be waived with the consent of the Holders of
a majority in principal amount of the Senior Notes then outstanding. However,
without the consent of each Holder of an outstanding Senior Note (including the
Senior Exchange Notes) affected, no amendment may, among other things:
(1) reduce the amount of Senior Notes whose Holders must consent to an
amendment,
(2) reduce the rate of or extend the time for payment of interest
(including additional interest, if any) on any Senior Note,
(3) reduce the principal of or extend the Stated Maturity of any Senior
Note,
(4) reduce the premium payable upon the redemption of any Senior Note or
change the time at which any Senior Note may be redeemed as
described under "Optional Redemption" above,
(5) make any Senior Note payable in money other than that stated in the
Senior Note,
(6) impair the right of any Holder to receive payment of principal of,
and interest (including additional interest, if any) on, such
Holder's Senior Notes on or after the due dates therefor or to
institute suit for the enforcement of any payment on or with respect
to such Holder's Senior Notes,
(7) make any change in the amendment provisions which require each
Holder's consent or in the waiver provisions, or
(8) modify the Senior Note Guarantees in any manner adverse to the
Holders.
Without the consent of any Holder, the Issuers, the Senior Note Guarantors
and the trustee may amend the Senior Note Indenture to:
o cure any ambiguity, omission, defect or inconsistency,
o provide for the assumption by a successor corporation of the obligations
of the Issuers under the Senior Note Indenture,
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o provide for uncertificated Senior Notes in addition to or in place of
certificated Senior Notes (provided, however, that the uncertificated
Senior Notes are issued in registered form for purposes of Section 163(f)
of the Code, or in a manner such that the uncertificated Senior Notes are
described in Section 163(f)(2)(B) of the Code),
o add additional Guarantees with respect to the Senior Notes,
o secure the Senior Notes,
o add to the covenants of the Company and the Restricted Subsidiaries for
the benefit of the Holders or to surrender any right or power conferred
upon the Issuers,
o make any change that does not adversely affect the rights of any Holder,
subject to the provisions of the Senior Note Indenture,
o provide for the issuance of the Senior Exchange Notes or Additional
Senior Notes; or
o comply with any requirement of the SEC in connection with the
qualification of the Senior Note Indenture under the TIA.
The consent of the Holders will not be necessary to approve the particular
form of any proposed amendment. It will be sufficient if such consent approves
the substance of the proposed amendment.
After an amendment becomes effective, the Issuers are required to mail to
Holders a notice briefly describing such amendment. However, the failure to
give such notice to all Holders, or any defect therein, will not impair or
affect the validity of the amendment.
TRANSFER AND EXCHANGE
A Holder will be able to transfer or exchange Senior Notes. Upon any
transfer or exchange, the registrar and the trustee may require a Holder, among
other things, to furnish appropriate endorsements and transfer documents and
the Issuers may require a Holder to pay any taxes required by law or permitted
by the Senior Note Indenture. The Issuers will not be required to transfer or
exchange any Senior Note selected for redemption or to transfer or exchange any
Senior Note for a period of 15 days prior to a selection of Senior Notes to be
redeemed. The Senior Notes will be issued in registered form and the Holder
will be treated as the owner of such Senior Note for all purposes.
DEFEASANCE
The Issuers may at any time terminate all their obligations under the
Senior Notes and the Senior Note Indenture ("legal defeasance"), except for
certain obligations, including those respecting the defeasance trust and
obligations to register the transfer or exchange of the Senior Notes, to
replace mutilated, destroyed, lost or stolen Senior Notes and to maintain a
registrar and paying agent in respect of the Senior Notes.
In addition, the Issuers may at any time terminate:
(1) their obligations under "Change of Control" and under the covenants
described under "Certain Covenants," or
(2) the operation of the cross acceleration provision, the bankruptcy
provisions with respect to Significant Subsidiaries and the judgment
default provision described under "Defaults" above and the
limitations contained in clause (3) under the first paragraph of
"Merger and Consolidation" above ("covenant defeasance").
In the event that the Issuers exercise their legal defeasance option or
their covenant defeasance option, each Senior Note Guarantor will be released
from all of its obligations with respect to its Senior Note Guarantee.
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The Issuers may exercise their legal defeasance option notwithstanding
their prior exercise of their covenant defeasance option. If the Issuers
exercise their legal defeasance option, payment of the Senior Notes may not be
accelerated because of an Event of Default with respect thereto. If the Issuers
exercise their covenant defeasance option, payment of the Senior Notes may not
be accelerated because of an Event of Default specified in clause (4), (5),
(6), (7) (with respect only to Significant Subsidiaries), (8) (with respect
only to Significant Subsidiaries) or (9) under "Defaults" above or because of
the failure of the Issuers to comply with clause (3) under the first paragraph
of "Merger and Consolidation" above.
In order to exercise either defeasance option, the Issuers must
irrevocably deposit in trust (the "defeasance trust") with the trustee money in
an amount sufficient or U.S. Government Obligations, the principal of and
interest (including additional interest, if any) on which will be sufficient,
or a combination thereof sufficient, to pay the of principal, premium (if any)
and interest on, in respect of the Senior Notes to redemption or maturity, as
the case may be, and must comply with certain other conditions, including
delivery to the trustee of an Opinion of Counsel to the effect that Holders
will not recognize income, gain or loss for Federal income tax purposes as a
result of such deposit and defeasance and will be subject to Federal income tax
on the same amounts and in the same manner and at the same times as would have
been the case if such deposit and defeasance had not occurred (and, in the case
of legal defeasance only, such Opinion of Counsel must be based on a ruling of
the Internal Revenue Service or other change in applicable Federal income tax
law).
SATISFACTION AND DISCHARGE
The Senior Note Indenture will be discharged and will cease to be of
further effect as to all Senior Notes issued thereunder, when:
(1) either
(a) all Senior Notes that have been authenticated, except lost, stolen
or destroyed Senior Notes that have been replaced or paid, have
been delivered to the trustee for cancellation; or
(b) all Senior 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 the Issuers or any Senior Note
Guarantor have irrevocably deposited or caused to be deposited
with the trustee as trust funds in trust solely for the benefit
of the Holders, cash in U.S. dollars, non-callable U.S.
Government Obligations, or a combination of cash in U.S. dollars
and non-callable U.S. Government Obligations, in amounts as will
be sufficient without consideration of any reinvestment of
interest, to pay and discharge the entire Indebtedness on the
Senior Notes not delivered to the trustee for cancellation for
principal, premium, if any, and accrued and unpaid interest, if
any, 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) the Issuers or any Senior Note Guarantor have paid, or caused to be
paid, all sums payable by them under the Senior Note Indenture; and
(4) the Issuers have delivered irrevocable instructions to the trustee
under the Senior Note Indenture to apply the deposited money toward the
payment of the Senior Notes at maturity or the redemption date, as the
case may be.
In addition, in the case of paragraph (b) above, (i) the Issuers must
deliver an Officers' Certificate and an Opinion of Counsel to the trustee
stating that all conditions precedent to the satisfaction and discharge have
been satisfied and (ii) the Issuers obligations that would survive legal
defeasance will remain outstanding.
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CONCERNING THE TRUSTEE
U.S. Bank National Association is the trustee under the Senior Note
Indenture and has been appointed by the Issuers as Registrar and Paying Agent
with regard to the Senior Notes.
GOVERNING LAW
The Senior Note Indenture and the Senior Notes are governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means:
(1) any property or assets (other than Indebtedness and Capital Stock) to
be used by the Company or a Restricted Subsidiary in a Permitted
Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary as
a result of the acquisition of such Capital Stock by the Company or
another Restricted Subsidiary; or
(3) Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary; provided, however, that:
any such Restricted Subsidiary described in clauses (2) or (3) above is
primarily engaged in a Permitted Business.
"Adjusted Consolidated Net Income" means, for any period, Consolidated Net
Income for such period adjusted to eliminate the effect of the increased basis
in assets of the Company and its Restricted Subsidiaries as a result of
purchase accounting adjustments in connection with the Transactions.
"Adjusted EBITDA" for any period means the Consolidated Net Income for
such period, plus, without duplication, the following to the extent deducted in
calculating such Consolidated Net Income:
(1) income tax expense of the Company and its Consolidated Restricted
Subsidiaries,
(2) Consolidated Interest Expense,
(3) customary fees and expenses of the Company and its Consolidated
Restricted Subsidiaries payable in connection with any Equity
Offering, the Incurrence of Indebtedness permitted by the covenant
described under "--Limitation on indebtedness" or any acquisition
permitted hereunder,
(4) depreciation expense of the Company and its Consolidated Restricted
Subsidiaries,
(5) amortization expense of the Company and its Consolidated Restricted
Subsidiaries (excluding amortization expense attributable to a
prepaid cash item that was paid in a prior period),
(6) all nonrecurring charges, and
(7) all other noncash charges of the Company and its Consolidated
Restricted Subsidiaries (excluding any such noncash charge to the
extent it represents an accrual or reserve for cash expenditures in
any future period) less all noncash items of income of the Company
and its Consolidated Restricted Subsidiaries.
Notwithstanding the foregoing, the provision for taxes based on the income
or profits of, the rental expense of, the fees and expenses of, the
depreciation and amortization of, and other noncash charges of, a Restricted
Subsidiary of the Company shall be added to Consolidated Net Income to compute
Adjusted 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 and only if a
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corresponding amount would be permitted at the date of determination to be
dividended to the Company by such Restricted Subsidiary without prior approval
(that has not been obtained), pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to such Restricted Subsidiary or its
stockholders.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. 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 provisions described under "Certain Covenants--Limitation on
transactions with affiliates" and "Certain Covenants--Limitation on sales of
assets and subsidiary stock" only, "Affiliate" shall also mean any beneficial
owner of shares representing 5% or more of the total voting power of the Voting
Stock (on a fully diluted basis) of Parent, Dex Media or the Company 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.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
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:
(1) 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 the Company or a Restricted
Subsidiary),
(2) all or substantially all the assets of any division or line of
business of the Company or any Restricted Subsidiary or
(3) any other assets of the Company or any Restricted Subsidiary outside
of the ordinary course of business of the Company or such Restricted
Subsidiary
other than, in the case of (1), (2) and (3) above,
(A) a disposition by a Restricted Subsidiary to the Company or by the
Company or a Restricted Subsidiary to a Restricted Subsidiary,
(B) for purposes of the provisions described under "Certain
Covenants--Limitation on sales of assets and subsidiary stock" only,
a disposition permitted by the covenant described under "Certain
Covenants--Limitation on restricted payments,"
(C) a disposition of assets with a Fair Market Value of less than $2.0
million,
(D) the sale of Capital Stock of an Unrestricted Subsidiary,
(E) the sale or other disposition of cash or Temporary Cash Investments,
and
(F) the sale of receivables on substantially the terms that receivables
are purchased by Qwest Corporation pursuant to the billing and
collection services agreement as in effect on November 8, 2002 and
as described in the offering memorandum dated October 30, 2002.
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"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing:
(1) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal
payment of such Indebtedness or scheduled redemption or similar
payment with respect to such Preferred Stock multiplied by the
amount of such payment by
(2) the sum of all such payments.
"Bank Indebtedness" means any and all amounts payable under or in respect
of the Credit Agreement and any Refinancing Indebtedness with respect thereto,
as amended from time to time, including principal, premium (if any), interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to either of the Issuers or any
Senior Note Guarantor whether or not a claim for post-filing interest is
allowed in such proceedings), fees, charges, expenses, reimbursement
obligations, guarantees and all other amounts payable thereunder or in respect
thereof. It is understood and agreed that Refinancing Indebtedness in respect
of the Credit Agreement may be Incurred from time to time after termination of
the Credit Agreement.
"Business Day" means each day which is not a Legal Holiday.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such
equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation 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 prepaid by the lessee without payment
of a penalty.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commodity Hedging Agreement" means any forward contract, swap, option,
hedge or other similar financial agreement or arrangement designed to protect
against fluctuations in commodity prices.
"Consolidated Current Liabilities" as of the date of determination means
the aggregate amount of liabilities of the Company and its Consolidated
Restricted Subsidiaries which may properly be classified as current liabilities
(including taxes accrued as estimated), on a Consolidated basis, after
eliminating:
(1) all intercompany items between the Company and any Restricted
Subsidiary and
(2) all current maturities of long-term Indebtedness, all as determined
in accordance with GAAP consistently applied.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Consolidated Restricted Subsidiaries, plus, to
the extent Incurred by the Company and its Consolidated Restricted Subsidiaries
in such period but not included in such interest expense, without duplication:
(1) interest expense attributable to Capitalized Lease Obligations,
(2) amortization of debt discount and debt issuance costs,
(3) capitalized interest,
(4) noncash interest expense,
133
(5) commissions, discounts and other fees and charges attributable to
letters of credit and bankers' acceptance financing,
(6) interest accruing on any Indebtedness of any other Person to the
extent such Indebtedness is Guaranteed by the Company or any
Restricted Subsidiary,
(7) net costs associated with Hedging Obligations (including
amortization of fees),
(8) dividends in respect of all Disqualified Stock of the Company and
all Senior Note Guarantors and all Preferred Stock of any of the
Restricted Subsidiaries that are not Senior Note Guarantors of the
Company, to the extent held by Persons other than the Company or a
Restricted Subsidiary,
(9) interest Incurred in connection with investments in discontinued
operations and
(10) 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 the
Company) in connection with Indebtedness Incurred by such plan or
trust.
"Consolidated Leverage Ratio" as of any date of determination means the
ratio of:
(1) the Total Consolidated Indebtedness as of the date of determination
(the "Determination Date") to
(2) the aggregate amount of Adjusted EBITDA for the period of the most
recent four consecutive fiscal quarters ending at least 45 days
prior to the Determination Date (the "Measurement Period");
provided, however, that for purposes of calculating Adjusted EBITDA for the
Measurement Period immediately prior to the relevant Determination Date:
(A) any Person that is a Restricted Subsidiary on the Determination
Date (or would become a Restricted Subsidiary on such
Determination Date in connection with the transaction that
requires the determination of such Adjusted EBITDA) will be
deemed to have been a Restricted Subsidiary at all times during
such Measurement Period,
(B) any Person that is not a Restricted Subsidiary on such
Determination Date (or would cease to be a Restricted Subsidiary
on such Determination Date in connection with the transaction
that requires the determination of such Adjusted EBITDA) will be
deemed not to have been a Restricted Subsidiary at any time
during such Measurement Period, and
(C) if the Company or any Restricted Subsidiary shall have in any
manner (x) acquired (through an acquisition or the commencement
of activities constituting such operating business) or (y)
disposed of (by an Asset Disposition or the termination or
discontinuance of activities constituting such operating
business) any operating business during such Measurement Period
or after the end of such period and on or prior to such
Determination Date, such calculation will be made on a pro forma
basis in accordance with GAAP as if all such transactions had
been consummated prior to the first day of such Measurement
Period (it being understood that in calculating Adjusted EBITDA,
the exclusions set forth in clauses (1) through (4) of the
definition of Consolidated Net Income shall apply to a Person
which has been acquired as if it were a Restricted Subsidiary).
For purposes of this definition, whenever pro forma effect is to be given
to an acquisition of assets or other Investment and the amount of income or
earnings relating thereto, the pro forma calculations shall be determined in
good faith by a responsible financial or accounting Officer of the Company and
shall comply with the requirements of Rule 11-02 of Regulation S-X promulgated
by
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the SEC. For purposes of this definition, in respect of any calculation for
which the Measurement Period includes the fiscal quarter in which the
Transactions were consummated, pro forma effect shall be given to the
Transactions in the same manner as described in the offering memorandum dated
October 30, 2002 under "Unaudited Pro Forma Financial Data" and shall include
all adjustments to net income and EBITDA set forth in footnote (e) under
"Summary Historical and Pro Forma Financial Data" in the offering memorandum.
"Consolidated Net Income" means, for any period, the net income of the
Company and its Consolidated Subsidiaries for such period; provided, however,
that there shall not be included in such Consolidated Net Income:
(1) any net income of any Person (other than the Company) if such Person
is not a Restricted Subsidiary, except that:
(A) subject to the limitations contained in clause (4) below, the
Company's 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 actually distributed by such Person
during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a
dividend or other distribution made to a Restricted Subsidiary,
to the limitations contained in clause (3) below) and
(B) the Company's equity in a net loss of any such Person for such
period shall be included in determining such Consolidated Net
Income;
(2) any net income (or loss) of any Person acquired by the Company or a
Subsidiary of the Company in a pooling of interests transaction for
any period prior to the date of such acquisition;
(3) any net income (or loss) of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of
distributions by such Restricted Subsidiary, directly or indirectly,
to the Company, except that:
(A) subject to the limitations contained in clause (4) below, the
Company's 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
actually distributed by such Restricted Subsidiary during such
period to the Company or another Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a
dividend or other distribution made to another Restricted
Subsidiary, to the limitation contained in this clause) and
(B) the Company's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such
Consolidated Net Income;
(4) any gain (but not loss) realized upon the sale or other disposition
of any asset of the Company or its Consolidated Subsidiaries that is
not sold or otherwise disposed of in the ordinary course of business
and any gain (but not loss) realized upon the sale or other
disposition of any Capital Stock of any Person;
(5) any noncash SFAS 133 income (or loss) related to hedging activities;
(6) any income (or loss) from discontinued operations;
(7) to the extent noncash, any unusual, nonoperating or nonrecurring
gain, loss or charge;
(8) any extraordinary gain or loss;
(9) the cumulative effect of a change in accounting principles; and
135
(10) the income statement effects of the writedown of the deferred revenue
and prepaid directory cost balance sheet accounts as part of the
purchase accounting adjustments made in connection with the
Transactions applicable to the given period.
Notwithstanding the foregoing, for the purpose 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 the
Company 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 (a)(4)(C)(iv) thereof.
"Consolidated Net Tangible Assets" as of any date of determination, means
the total amount of assets (less accumulated depreciation and amortization,
allowances for doubtful receivables, other applicable reserves and other
properly deductible items) which would appear on a consolidated balance sheet
of the Company and its Consolidated Restricted Subsidiaries, determined on a
Consolidated basis in accordance with GAAP, and after giving effect to purchase
accounting and after deducting therefrom Consolidated Current Liabilities and,
to the extent otherwise included, the amounts of:
(1) minority interests in consolidated Subsidiaries held by Persons other
than the Company or a Restricted Subsidiary;
(2) excess of cost over fair value of assets of businesses acquired, as
determined in good faith by the Governing Board of the Company;
(3) any revaluation or other write-up in book value of assets subsequent
to November 8, 2002 as a result of a change in the method of valuation
in accordance with GAAP consistently applied;
(4) unamortized debt discount and expenses and other unamortized deferred
charges, goodwill, patents, trademarks, service marks, trade names,
copyrights, licenses, organization or developmental expenses and other
intangible items;
(5) treasury stock;
(6) cash set apart and held in a sinking or other analogous fund
established for the purpose of redemption or other retirement of
Capital Stock to the extent such obligation is not reflected in
Consolidated Current Liabilities; and
(7) Investments in and assets of Unrestricted Subsidiaries.
"Consolidation" means the consolidation of the accounts of each of the
Restricted Subsidiaries with those of the Company in accordance with GAAP
consistently applied; provided, however, that "Consolidation" will not include
consolidation of the accounts of any Unrestricted Subsidiary, but the interest
of the Company or any Restricted Subsidiary in an Unrestricted Subsidiary will
be accounted for as an investment. The term "Consolidated" has a correlative
meaning.
"Credit Agreement" means the credit agreement dated as of November 8,
2002, as amended, restated, supplemented, waived, replaced (whether or not upon
termination, and whether with the original lenders or otherwise), refinanced,
restructured or otherwise modified from time to time, among Dex Media, the
Company, JPMorgan Chase Bank, as administrative agent and collateral agent, and
Bank of America, N.A., Lehman Commercial Paper Inc., Wachovia Bank, National
Association and Deutsche Bank Trust Company Americas, as syndication agents
(except to the extent that any such amendment, restatement, supplement, waiver,
replacement, refinancing, restructuring or other modification thereto would be
prohibited by the terms of the Senior Note Indenture, unless otherwise agreed
to by the Holders of at least a majority in aggregate principal amount of
Senior Notes at the time outstanding).
"Currency Agreement" means with respect to any Person any foreign exchange
contract, currency swap agreements or other similar agreement or arrangement to
which such Person is a party or of which it is a beneficiary.
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"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Dex Media West" means the newly-formed limited liability company, all of
the interest in which will be purchased by Dex Media in connection with the Dex
Media West Acquisition.
"Dex Media West Acquisition" means the acquisition by Dex Media or one of
its Subsidiaries of Quest Dex, Inc.'s directory business in the States of
Arizona, Idaho, Montana, Oregon, Utah, Washington and Wyoming.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable or exercisable) or upon the
happening of any event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise,
(2) is convertible or exchangeable for Indebtedness or Disqualified Stock
(excluding Capital Stock convertible or exchangeable solely at the
option of the Company or a Restricted Subsidiary; provided, however,
that any such conversion or exchange shall be deemed an Incurrence of
Indebtedness or Disqualified Stock, as applicable) or
(3) is redeemable at the option of the holder thereof, in whole or in
part,
in the case of each of clauses (1), (2) and (3), on or prior to the 91st day
after the Stated Maturity of the Senior Notes; provided, however, that any
Capital Stock that would not constitute Disqualified Stock but for provisions
thereof giving holders thereof the right to require such Person to repurchase
or redeem such Capital Stock upon the occurrence of an "asset sale" or "change
of control" occurring prior to the 91st day after the Stated Maturity of the
Senior Notes shall not constitute Disqualified Stock if the "asset sale" or
"change of control" provisions applicable to such Capital Stock are not more
favorable to the holders of such Capital Stock than the provisions of the
covenants described under "Change of Control" and "Certain
Covenants--Limitation on sale of assets and subsidiary stock."
"Equity Offering" means any public or private sale of common stock of
Parent, Dex Media or the Company other than (i) public offerings with respect
to Parent's, Dex Media's or the Company's common stock registered on Form S-8
and (ii) other issuances upon exercise of options by employees of Parent, Dex
Media or the Company or any of their Restricted Subsidiaries.
"Fair Market Value" means, with respect to any asset or property, the
price which could be negotiated in an arm's-length, free market transaction,
for cash, between a willing seller and a willing and able buyer, neither of
whom is under undue pressure or compulsion to complete the transaction. For all
purposes of the Senior Note Indenture, Fair Market Value will be determined in
good faith by the Governing Board of the Company, whose determination will be
conclusive and evidenced by a resolution of the Governing Board of the Company.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of November 8, 2002, including those set forth in:
(1) the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants,
(2) statements and pronouncements of the Financial Accounting Standards
Board,
(3) such other statements by such other entities as approved by a
significant segment of the accounting profession, and
(4) the rules and regulations of the SEC 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 SEC.
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All ratios and computations based on GAAP contained in the Senior Note
Indenture shall be computed in conformity with GAAP.
"Governing Board" of the Company or any other Person means, (i) the
managing member or members or any controlling committee of members of the
Company or such Person, for so long as the Company or such Person is a limited
liability company, (ii) the board of directors of the Company or such Person,
if the Company or such Person is a corporation or (iii) any similar governing
body.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise,
of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such other Person
(whether arising by virtue of partnership arrangements, or by
agreement to keep-well, to purchase assets, goods, securities or
services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or
(2) entered into for purposes of assuring in any other manner the obligee
of such Indebtedness or other obligation of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in
part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. 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 the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" means the Person in whose name a Senior Note is registered on the
Registrar's books.
"Income Tax Liabilities" means an amount determined by multiplying (a)(i)
all taxable income and gains of the Company and its Restricted Subsidiaries for
such taxable year (the "Taxable Amount") minus (ii) an amount (not to exceed
the Taxable Amount for such taxable year) equal to all losses of the Company
and its Restricted Subsidiaries in any of the three prior taxable years that
have not been previously subtracted pursuant to this clause (ii) from the
Taxable Amount for any prior year by (b) forty-four percent (44%) or, if there
is a change in applicable federal, state or local tax rates, such other rate as
the Issuers determine in good faith to be a reasonable approximation of the
effective combined federal, state and local income taxation rates generally
payable by Parent or its owners with respect to the income and gains of the
Company and its Restricted Subsidiaries.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Person at the time it becomes a Subsidiary. The term "Incurrence" when used as
a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall be deemed the Incurrence
of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination, without duplication:
(1) the principal of and premium (if any) in respect of indebtedness of
such Person for borrowed money;
(2) the principal of and premium (if any) in respect of obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments;
(3) all obligations of such Person in respect of letters of credit or
other similar instruments (including reimbursement obligations with
respect thereto);
138
(4) all obligations of such Person to pay the deferred and unpaid purchase
price of property or services (except Trade Payables), which purchase
price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the
completion of such services;
(5) all Capitalized Lease Obligations of such Person;
(6) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock
or, with respect to any Restricted Subsidiary of such Person, any
Preferred Stock (but excluding, in each case, any accrued dividends);
(7) all Indebtedness of other Persons secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such
Person; provided, however, that the amount of Indebtedness of such
Person shall be the lesser of:
(A) the Fair Market Value of such asset at such date of determination
and
(B) the amount of such Indebtedness of such other Persons;
(8) Hedging Obligations of such Person; and
(9) all obligations of the type referred to in clauses (1) through (8) 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.
The amount of Indebtedness of any Person at any date shall be 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.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement to which such Person is party or of which it is a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extension of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary" and the covenant described under "Certain
Covenants--Limitation on restricted payments":
(1) "Investment" shall include the portion (proportionate to the Company's
equity interest in such Subsidiary) of the Fair Market Value of the
net assets of any (i) Subsidiary of the Company at the time that such
Subsidiary is designated an Unrestricted Subsidiary and (ii)
Restricted Subsidiary at the time of any sale or other disposition of
any shares of such Restricted Subsidiary that results in such
Restricted Subsidiary no longer constituting a Restricted Subsidiary;
provided, however, that upon a redesignation of an Unrestricted
Subsidiary as a Restricted Subsidiary, the Company shall be deemed to
continue to have a permanent "Investment" in an Unrestricted
Subsidiary in an amount (if positive) equal to:
(A) the Company's "Investment" in such Subsidiary at the time of such
redesignation less
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(B) the portion (proportionate to the Company's equity interest in
such Subsidiary) of the Fair Market Value of the net assets of
such Subsidiary at the time of such redesignation; and
(2) any property transferred to or from an Unrestricted Subsidiary shall
be valued at its Fair Market Value at the time of such transfer.
"Legal Holiday" means a Saturday, Sunday or other day on which banking
institutions are not required by law or regulation to be open in the State of
New York.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments
received (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and
proceeds from the sale or other disposition of any securities received as
consideration, but only as and when received, but excluding any other
consideration received in the form of assumption by the acquiring Person of
Indebtedness or other obligations relating to the properties or assets that are
the subject of such Asset Disposition or received in any other noncash form)
therefrom, in each case net of:
(1) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and all Federal, state, provincial,
foreign and local taxes required to be paid or accrued as a liability
under GAAP, as a consequence of such Asset Disposition,
(2) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any
Lien upon or other security agreement of any kind with respect to such
assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law be repaid out
of the proceeds from such Asset Disposition,
(3) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition and
(4) appropriate amounts to be provided by the seller as a reserve, in
accordance with GAAP, against any liabilities associated with the
property or other assets disposed of in such Asset Disposition and
retained by the Company or any Restricted Subsidiary after such Asset
Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale 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.
"Officer" means the Chairman of the Board, the Chief Executive Officer,
the Chief Financial Officer, the President, any Vice President, the Treasurer
or the Secretary of the Company. "Officer" of Dex Media East Finance or a
Senior Note Guarantor has a correlative meaning.
"Officers' Certificate" means a certificate signed by two Officers.
"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 the
Company, a Senior Note Guarantor or the trustee.
"Permitted Asset Swap" means any transfer of properties or assets by the
Company 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 Permitted Business; provided that (i)
the aggregate fair market value (as determined in good faith by the Governing
Board of the Company) of the property or assets being transferred by the
Company or such Restricted Subsidiary is not greater than the aggregate fair
market value (as determined in good faith by the Governing Board of the
140
Company) of the property or assets received by the Company or such Restricted
Subsidiary in such exchange and (ii) the aggregate fair market value (as
determined in good faith by the Governing Board of the Company) of all property
or assets transferred by the Company and any of its Restricted Subsidiaries in
any such transfer, together with the aggregate fair market value of property or
assets transferred in all prior Permitted Asset Swaps, shall not exceed 15% of
the Company's Consolidated net revenues for the prior fiscal year.
"Permitted Business" means any business engaged in by the Company or any
Restricted Subsidiary on November 8, 2002 and any Related Business.
"Permitted Holders" means The Carlyle Group, Welsh, Carson, Anderson &
Stowe and their respective Affiliates and any Person acting in the capacity of
an underwriter in connection with a public or private offering of Parent's, Dex
Media's or the Company's Capital Stock.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in:
(1) the Company, a Restricted Subsidiary or a Person that will, upon the
making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a
Permitted Business;
(2) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted
Subsidiary (other than Dex Media East Finance); provided, however,
that such Person's primary business is a Permitted Business;
(3) Temporary Cash Investments;
(4) receivables owing to the Company or any Restricted Subsidiary (other
than Dex Media East Finance) 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 the Company or any such
Restricted Subsidiary deems reasonable under the circumstances;
(5) payroll, travel 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;
(6) loans or advances to employees made in the ordinary course of business
consistent with past practices of the Company or such Restricted
Subsidiary and not exceeding $10.0 million in the aggregate
outstanding at any one time;
(7) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company or
any Restricted Subsidiary or in satisfaction of judgments;
(8) any Person to the extent such Investment represents the noncash
portion of the consideration received for an Asset Disposition that
was made pursuant to and in compliance with the covenant described
under "Certain Covenants--Limitation on sale of assets and subsidiary
stock";
(9) Interest Rate Agreements and Commodity Hedging Agreements permitted
under clause (b)(5) of the covenant described under "Certain
Covenants--Limitation on indebtedness";
(10) any Person; provided, however, that the payment for such Investments
consists solely of Net Cash Proceeds from either the sale of Capital
Stock of the Company (other than Disqualified Stock) or cash common
equity contributions to the Company; provided, however, that such Net
Cash Proceeds or equity contributions will be excluded from the
calculation of amounts under clause (4)(C)(ii) of paragraph (a) of the
covenant described under "Certain Covenants--Limitation on restricted
payments"; or
141
(11) any Person in an aggregate amount outstanding at any time not to
exceed $50.0 million.
"Permitted Liens" means, with respect to any Person:
(1) pledges or deposits by such Person under worker's compensation laws,
unemployment insurance laws or similar legislation, or good faith
deposits in connection with bids, tenders, contracts (other than for
the payment of Indebtedness) or leases to which such Person is a
party, or deposits to secure public or statutory obligations of such
Person or deposits of cash or United States government bonds to secure
surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import duties or for the payment of
rent, in each case Incurred in the ordinary course of business;
(2) Liens imposed by law, such as carriers', warehousemen's and mechanics'
Liens, in each case for sums not yet due or being contested in good
faith by appropriate proceedings or other Liens arising out of
judgments or awards against such Person with respect to which such
Person shall then be proceeding with an appeal or other proceedings
for review;
(3) Liens for property taxes not yet due or payable or subject to
penalties for non-payment or which are being contested in good faith
by appropriate proceedings;
(4) Liens in favor of issuers of surety bonds or letters of credit issued
pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters
of credit do not constitute Indebtedness;
(5) minor survey exceptions, minor encumbrances, easements or reservations
of, or rights of others for, licenses, rights-of-way, sewers, electric
lines, telegraph and telephone lines and other similar purposes, or
zoning or other restrictions as to the use of real property or Liens
incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
Indebtedness and which do not in the aggregate materially adversely
affect the value of said properties or materially impair their use in
the operation of the business of such Person;
(6) Liens securing Indebtedness Incurred to finance the construction,
purchase or lease of, or repairs, improvements or additions to,
property of such Person; provided, however, that the Lien may not
extend to any other property owned by such Person or any of its
Restricted Subsidiaries at the time the Lien is Incurred, and the
Indebtedness (other than any interest thereon) secured by the Lien may
not be Incurred more than 180 days after the later of the acquisition,
completion of construction, repair, improvement, addition or
commencement of full operation of the property subject to the Lien;
(7) Liens to secure Indebtedness permitted pursuant to clause (b)(1) of
the covenant described under "Certain Covenants--Limitation on
indebtedness";
(8) Liens existing on November 8, 2002;
(9) Liens on property or shares of stock of another Person at the time
such other Person becomes a Subsidiary of such Person; provided,
however, that such Liens are not created, Incurred or assumed in
connection with, or in contemplation of, such other Person becoming
such a Subsidiary; provided further, however, that such Liens do not
extend to any other property owned by such Person or any of its
Restricted Subsidiaries;
(10) Liens on property at the time such Person or any of its Subsidiaries
acquires the property, including any acquisition by means of a merger
or consolidation with or into such Person or any Subsidiary of such
Person; provided, however, that such Liens are
142
not created, Incurred or assumed in connection with, or in
contemplation of, such acquisition; provided further, however, that
the Liens do not extend to any other property owned by such Person
or any of its Restricted Subsidiaries;
(11) Liens securing Indebtedness or other obligations of a Subsidiary of
such Person owing to such Person or a Restricted Subsidiary of such
Person;
(12) judgment liens in respect of judgments that do not constitute an Event
of Default;
(13) Liens securing obligations under Interest Rate Agreements and
Commodity Hedging Agreements so long as such obligations relate to
Indebtedness that is, and is permitted under the Senior Note Indenture
to be, secured by a Lien on the same property securing such
obligations; and
(14) Liens to secure any Refinancing (or successive Refinancings) as a
whole, or in part, of any Indebtedness secured by any Lien referred to
in the foregoing clauses (6), (8), (9) and (10); provided, however,
that:
(A) such new Lien shall be limited to all or part of the same
property that secured the original Lien (plus improvements to or
on such property) and
(B) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of:
(i) the outstanding principal amount or, if greater, committed
amount of the Indebtedness secured by Liens described under
clauses (6), (8), (9) or (10) at the time the original Lien
became a Permitted Lien under the Senior Note Indenture and
(ii) an amount necessary to pay any fees and expenses, including
premiums, related to such Refinancings.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) that is preferred as
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 Capital Stock of any other class of such Person.
"principal" of a Senior Note means the principal of the Senior Note plus
the premium, if any, payable on the Senior Note which is due or overdue or is
to become due at the relevant time.
"Purchase Money Indebtedness" means Indebtedness:
(1) consisting of the deferred purchase price of an asset, conditional
sale obligations, obligations under any title retention agreement and
other purchase money obligations, in each case where the maturity of
such Indebtedness does not exceed the anticipated useful life of the
asset being financed, and
(2) Incurred to finance the acquisition by the Company or a Restricted
Subsidiary of such asset, including additions and improvements;
provided, however, that such Indebtedness is incurred within 180 days after the
acquisition by the Company or such Restricted Subsidiary of such asset.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced"
and "Refinancing" shall have correlative meanings.
143
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any
defeasance or discharge mechanism) any Indebtedness of the Company or any
Restricted Subsidiary existing on November 8, 2002 or Incurred in compliance
with the Senior Note Indenture (including Indebtedness of the Company that
Refinances Refinancing Indebtedness); provided, however, that:
(1) the Refinancing Indebtedness has a Stated Maturity no earlier than the
Stated Maturity of the Indebtedness being Refinanced,
(2) the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than
the Average Life of the Indebtedness being Refinanced,
(3) such Refinancing Indebtedness is Incurred in an aggregate principal
amount (or if issued with original issue discount, an aggregate issue
price) that is equal to or less than the aggregate principal amount
(or if issued with original issue discount, the aggregate accreted
value) then outstanding of the Indebtedness being Refinanced (plus
fees and expenses, including any premium and defeasance costs) and
(4) if the Indebtedness being Refinanced is subordinated in right of
payment to the Senior Notes, such Refinancing Indebtedness is
subordinated in right of payment to the Senior Notes at least to the
same extent as the Indebtedness being Refinanced;
provided further, however, that Refinancing Indebtedness shall not include:
(A) Indebtedness of a Restricted Subsidiary that is not a Senior Note
Guarantor that Refinances Indebtedness of the Company or
(B) Indebtedness of the Company or a Restricted Subsidiary that
Refinances Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or complementary
to the businesses of the Company and the Restricted Subsidiaries on November 8,
2002.
"Restricted Subsidiary" means Dex Media East Finance and any other
Subsidiary of the Company other than an Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Issuers secured by a
Lien. "Secured Indebtedness" of a Senior Note Guarantor has a correlative
meaning.
"Senior Indebtedness" of the Company, Dex Media East Finance or any Senior
Note Guarantor means the principal of, premium (if any) and accrued and unpaid
interest on (including interest accruing on or after the filing of any petition
in bankruptcy or for reorganization of the Company, Dex Media East Finance or
any Senior Note Guarantor, regardless of whether or not a claim for post-filing
interest is allowed in such proceedings), and fees and other amounts owing in
respect of, Bank Indebtedness and all other Indebtedness of the Company, Dex
Media East Finance or any Senior Note Guarantor, as applicable, whether
outstanding on November 8, 2002 or thereafter Incurred, unless in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding it is provided that such obligations are subordinated in right of
payment to the Senior Notes or such Senior Note Guarantor's Senior Note
Guarantee; provided, however, that Senior Indebtedness of the Company, Dex
Media East Finance or any Senior Note Guarantor shall not include:
(1) any obligation of the Company to any Subsidiary of the Company or of
such Senior Note Guarantor to the Company or any other Subsidiary of
the Company;
(2) any liability for Federal, state, local or other taxes owed or owing
by the Company, Dex Media East Finance or such Senior Note Guarantor,
as applicable;
144
(3) any accounts payable or other liability to trade creditors arising in
the ordinary course of business (including Guarantees thereof or
instruments evidencing such liabilities);
(4) any Indebtedness or obligation of the Company, Dex Media East Finance
or such Senior Note Guarantor, as applicable (and any accrued and
unpaid interest in respect thereof) that by its terms is subordinate
or junior in any respect to any other Indebtedness or obligation of
the Company, Dex Media East Finance or such Senior Note Guarantor, as
applicable, including any Senior Subordinated Indebtedness and any
Subordinated Obligations of the Company, Dex Media East Finance or
such Senior Note Guarantor, as applicable;
(5) any obligations with respect to any Capital Stock; or
(6) any Indebtedness Incurred in violation of the Senior Note Indenture.
"Senior Note Guarantee" means each Guarantee of the obligations with
respect to the Senior Notes issued by a Person pursuant to the terms of the
Senior Note Indenture.
"Senior Note Guarantor" means any Person that has issued a Senior Note
Guarantee.
"Senior Subordinated Notes" means the 12 1/8% Senior Subordinated Notes
due 2012 issued by the Company and Dex Media East Finance.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final 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 the issuer unless such contingency has
occurred).
"Subordinated Obligation" means the Senior Subordinated Notes and any
other Indebtedness of the Company (whether outstanding on November 8, 2002 or
thereafter Incurred) that is subordinate or junior in right of payment to the
Senior Notes pursuant to a written agreement. "Subordinated Obligation" of Dex
Media East Finance or a Senior Note Guarantor has a correlative meaning.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by:
(1) such Person,
(2) such Person and one or more Subsidiaries of such Person or
(3) one or more Subsidiaries of such Person.
"Tax Distribution" means any distribution by the Company to its direct or
indirect owners which (i) with respect to quarterly estimated tax payments due
in each calendar year shall be equal to twenty-five percent (25%) of the Income
Tax Liabilities for such calendar year as estimated in writing by the chief
financial officer of the Company, (ii) with respect to tax payments to be made
with income tax returns filed for an entire taxable year or with respect to
adjustments to such returns imposed by the Internal Revenue Service or other
taxing authority, shall be equal to the Income Tax Liabilities for each taxable
year minus the aggregate amount distributed for such taxable year as provided
in clause (i) above and (iii) with respect to taxes not determined by reference
to income, represents the amount of any such taxes imposed on a direct or
indirect owner of the Company as a
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result of such owner's ownership of the equity of the Company. In the event the
amount determined under clause (ii) is a negative amount, the amount of any Tax
Distributions in the succeeding taxable year (or, if necessary, any subsequent
taxable years) shall be reduced by such negative amount.
"Temporary Cash Investments" means any of the following:
(1) any investment in direct obligations of the United States of America
or any agency thereof or obligations Guaranteed by the United States
of America or any agency thereof,
(2) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 365 days of the date of
acquisition thereof issued by a bank or trust company that is
organized under the laws of the United States of America, any state
thereof or any foreign country recognized by the United States of
America having capital, surplus and undivided profits aggregating in
excess of $250,000,000 (or the foreign currency equivalent thereof)
and whose long-term debt is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act),
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above
entered into with a bank meeting the qualifications described in
clause (2) above,
(4) investments in commercial paper, maturing not more than 365 days after
the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of
the United States of America or any foreign country recognized by the
United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's
Investors Service, Inc. or "A-1" (or higher) according to Standard &
Poor's Rating Services, a division of The McGraw-Hill Companies, Inc.
("S&P"), and
(5) 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 of America, or by any
political subdivision or taxing authority thereof, and rated at least
"A" by S&P or "A" by Moody's Investors Service, Inc.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. 77aaa- 77bbbb) as
in effect on November 8, 2002.
"Total Consolidated Indebtedness" means, as of any date of determination,
an amount equal to the aggregate amount of all Indebtedness of the Company and
its Restricted Subsidiaries, determined on a Consolidated basis in accordance
with GAAP, outstanding as of such date of determination, after giving effect to
any Incurrence of Indebtedness and the application of the proceeds therefrom
giving rise to such determination.
"Trade Payables" means, with respect to any Person, any accounts payable
or any indebtedness or monetary obligation to trade creditors created, assumed
or Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Trust Officer" means the Chairman of the Board, the President or any
other officer or assistant officer of the trustee assigned by the trustee to
administer its corporate trust matters.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of the Company that at the time of determination shall
be designated an Unrestricted Subsidiary by the Governing Board of the
Company in the manner provided below and
(2) any Subsidiary of an Unrestricted Subsidiary.
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The Governing Board of the Company may designate any Subsidiary of the
Company (including any newly acquired or newly formed Subsidiary of the
Company, but excluding Dex Media East Finance) to be an Unrestricted Subsidiary
unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or
Indebtedness of, or owns or holds any Lien on any property of, the Company or
any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary
to be so designated; provided, however, that either:
(A) the Subsidiary to be so designated has total Consolidated assets
of $1,000 or less or
(B) if such Subsidiary has Consolidated assets greater than $1,000,
then such designation would be permitted under the covenant
entitled "Certain Covenants--Limitation on restricted payments."
The Governing Board of the Company may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation:
(x) the Company could Incur $1.00 of additional Indebtedness under
paragraph (a) of the covenant described under "Certain
Covenants--Limitation on indebtedness" and
(y) no Default shall have occurred and be continuing.
Any such designation of a Subsidiary as a Restricted Subsidiary or
Unrestricted Subsidiary by the Governing Board of the Company shall be
evidenced to the trustee by promptly filing with the trustee a copy of the
resolution of the Governing Board of the Company giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a 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 Subsidiary" means a Restricted Subsidiary of the Company all
the Capital Stock of which (other than directors' qualifying shares) is owned
by the Company or another Wholly Owned Subsidiary.
REGISTRATION RIGHTS
We have filed a registration statement to comply with our obligation under
the registration rights agreements to register the issuance of the exchange
notes. See "The Exchange Offer."
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DESCRIPTION OF SENIOR SUBORDINATED EXCHANGE NOTES
Definitions of certain terms used in this Description of the Senior
Subordinated Exchange Notes may be found under the heading "Certain
definitions." For purposes of this section, (1) the term "Company" refers only
to Dex Media East LLC and not to any of its Subsidiaries, (2) the term "Dex
Media East Finance" refers to Dex Media East Finance Co., a Wholly Owned
Subsidiary of the Company with nominal assets which conducts no operations, (3)
the term "Issuers" refers to the Company and Dex Media East Finance, (4) the
term "Parent" refers to Dex Media East, Inc., the parent of the Company, and
not to any of its Subsidiaries, (5) the term "Dex Media" refers to Dex Media,
Inc., the parent of Parent, and not to any of its Subsidiaries, (6) the term
"Outstanding Senior Subordinated Notes" means the Senior Subordinated Notes of
the Issuers issued on November 8, 2002 and (7) "Senior Subordinated Notes"
means the Senior Subordinated Exchange Notes and the Outstanding Senior
Subordinated Notes, in each case outstanding at any given time and issued under
the Indenture. Dex Media International, Inc., a Wholly Owned Subsidiary of the
Company with nominal assets which currently conducts no operations ("Dex Media
International"), and certain of the Company's Subsidiaries formed or acquired
in the future will guarantee the Senior Subordinated Notes and therefore will
be subject to many of the provisions contained in this Description of the
Senior Subordinated Exchange Notes. Each company which guarantees the Senior
Subordinated Notes is referred to in this section as a "Senior Subordinated
Note Guarantor." Each such guarantee is termed a "Senior Subordinated Note
Guarantee." The Senior Subordinated Notes are obligations solely of the
Company, Dex Media East Finance and Dex Media International. The notes are not
issued or guaranteed by, and are not otherwise an obligation of, any of Qwest
and/or its affiliates (including Qwest LEC).
The Issuers issued the Outstanding Senior Subordinated Notes to the
initial purchasers on November 8, 2002. The initial purchasers subsequently
resold the Outstanding Senior Subordinated Notes to qualified institutional
buyers pursuant to Rule 144A under the Securities Act and to non-U.S. persons
outside the United States in reliance on Regulation S under the Securities Act.
The Issuers issued the Outstanding Senior Subordinated Notes and will issue the
Senior Subordinated Exchange Notes under an Indenture, dated as of November 8,
2002 (the "Senior Subordinated Note Indenture"), among the Issuers, Dex Media
International and U.S. Bank National Association, as trustee, a copy of which
is available upon request to the Issuers. The terms of the Senior Subordinated
Exchange Notes are identical in all material respects to the Outstanding Senior
Subordinated Notes except that, upon completion of the exchange offer, the
Senior Subordinated Exchange Notes will be:
o registered under the Securities Act, and
o free of any covenants regarding exchange registration rights.
In addition, the Senior Subordinated Exchange Notes are new issues of
securities and will not be listed on any securities exchange or included in any
automated quotation system. The Senior Subordinated Note Indenture contains
provisions which define your rights under the Senior Subordinated Notes. In
addition, the Senior Subordinated Note Indenture governs the obligations of the
Issuers and of each Senior Subordinated Note Guarantor under the Senior
Subordinated Notes. The terms of the Senior Subordinated Notes include those
stated in the Senior Subordinated Note Indenture and those made part of the
Senior Subordinated Note Indenture by reference to the TIA.
The following description is meant to be only a summary of certain
provisions of the Senior Subordinated Note Indenture. It does not restate the
terms of the Senior Subordinated Note Indenture in their entirety. We urge that
you carefully read the Senior Subordinated Note Indenture as it, and not this
description, governs your rights as Holders. We have filed a copy of the
Indenture as an exhibit to the registration statement which includes this
prospectus.
OVERVIEW OF THE SENIOR SUBORDINATED NOTES AND THE SENIOR SUBORDINATED NOTE
GUARANTEES
The Senior Subordinated Notes:
o are general unsecured obligations of the Issuers;
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o rank equally in right of payment with all existing and future Senior
Subordinated Indebtedness of the Issuers;
o are subordinated in right of payment to all existing and future Senior
Indebtedness of the Issuers;
o are senior in right of payment to all existing and future Subordinated
Obligations of the Issuers;
o are effectively subordinated to any Secured Indebtedness of the Company,
Dex Media East Finance and any other Subsidiaries of the Company to the
extent of the value of the assets securing such Indebtedness; and
o are effectively subordinated to all liabilities (including Trade
Payables) and Preferred Stock of each Subsidiary of the Company (other
than Dex Media East Finance) that is not a Senior Subordinated Note
Guarantor.
Dex Media East Finance has no obligations other than the Senior
Subordinated Notes and the Senior Notes and its Guarantee in respect of Bank
Indebtedness.
THE SENIOR SUBORDINATED NOTE GUARANTEES
The Senior Subordinated Notes are guaranteed by Dex Media International,
which is currently Dex Media East LLC's only subsidiary (other than Dex Media
East Finance, which is a co-issuer of the Senior Subordinated Notes) and each
future subsidiary that Dex Media East LLC forms or acquires and does not
subsequently designate as an Unrestricted Subsidiary in accordance with the
provisions set forth in the Senior Subordinated Note Indenture which Incurs or
Guarantees any Bank Indebtedness.
The Senior Subordinated Note Guarantee of each Senior Subordinated Note
Guarantor:
o are general unsecured obligations of such Senior Subordinated Note
Guarantor;
o rank equally in right of payment with all existing and future Senior
Subordinated Indebtedness of such Senior Subordinated Note Guarantor;
o are subordinated in right of payment to all existing and future Senior
Indebtedness of such Senior Subordinated Note Guarantor;
o are senior in right of payment to all existing and future Subordinated
Obligations of such Senior Subordinated Note Guarantor; and
o are effectively subordinated to any Secured Indebtedness of such Senior
Subordinated Note Guarantor and its Subsidiaries to the extent of the
value of the assets securing such Indebtedness.
PRINCIPAL, MATURITY AND INTEREST
We initially issued Senior Subordinated Notes in an aggregate principal
amount of $525 million. The Senior Subordinated Notes will mature on November
15, 2012. We issued the Senior Subordinated Notes in fully registered form,
without coupons, in denominations of $1,000 and any integral multiple of
$1,000.
Each Senior Subordinated Note bears interest at a rate of 12 1/8% per
annum beginning on November 8, 2002, or from the most recent date to which
interest has been paid or provided for. We will pay interest semiannually to
Holders of record at the close of business on the May 1 or November 1
immediately preceding the interest payment date on May 15 and November 15 of
each year. We will begin paying interest to Holders on May 15, 2003.
INDENTURE MAY BE USED FOR FUTURE ISSUANCES
We may issue from time to time additional Senior Subordinated Notes having
identical terms and conditions to the Outstanding Exchange Notes (the
"Additional Senior Subordinated Notes"). We will only be permitted to issue
such Additional Senior Subordinated Notes if at the time of such issuance we
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are in compliance with the covenants contained in the Senior Subordinated Note
Indenture. Any Additional Senior Subordinated Notes will be part of the same
issue as the Senior Subordinated Exchange Notes to be issued in the exchange
offer and will vote on all matters with such Senior Subordinated Notes.
PAYING AGENT AND REGISTRAR
We will pay the principal of, premium, if any, and interest on the Senior
Subordinated Exchange Notes at any office of ours or any agency designated by
us which is located in the Borough of Manhattan, The City of New York. We have
initially designated the corporate trust office of the trustee to act as the
agent of the Issuers in such matters. The location of the corporate trust
office is U.S. Bank National Association, 180 East 5th Street, St. Paul, MN
55101. We, however, reserve the right to pay interest to Holders by check
mailed directly to Holders at their registered addresses.
Holders may exchange or transfer their Senior Subordinated Notes at the
same location given in the preceding paragraph. No service charge will be made
for any registration of transfer or exchange of Senior Subordinated Notes. We,
however, may require Holders to pay any transfer tax or other similar
governmental charge payable in connection with any such transfer or exchange.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, we may not redeem the
Senior Subordinated Notes prior to November 15, 2007. After this date, we may
redeem the Senior Subordinated Notes, in whole or in part, on not less than 30
nor more than 60 days' prior notice, at the following redemption prices
(expressed as percentages of principal amount), plus accrued and unpaid
interest thereon 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), if redeemed during the 12-month period commencing on
November 15 of the years set forth below:
REDEMPTION
YEAR PRICE
---- ----------
2007 ........................ 106.063%
2008 ........................ 104.042%
2009 ........................ 102.021%
2010 and thereafter ......... 100.000%
Prior to November 15, 2005, we may, on one or more occasions, also redeem
up to a maximum of 35% of the original aggregate principal amount of the Senior
Subordinated Notes (calculated giving effect to any issuance of Additional
Senior Subordinated Notes) with the Net Cash Proceeds of one or more Equity
Offerings (1) by the Company or (2) by Dex Media or Parent to the extent the
Net Cash Proceeds thereof are contributed to the Company or used to purchase
Capital Stock (other than Disqualified Stock) of the Company from the Company,
at a redemption price equal to 112.125% of the principal amount thereof, plus
accrued and unpaid interest thereon 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:
(1) at least 65% of the original aggregate principal amount of the
Senior Subordinated Notes (calculated giving effect to any issuance
of Additional Senior Subordinated Notes) remains outstanding; and
(2) any such redemption by the Issuers must be made within 90 days of
such Equity Offering and must be made in accordance with certain
procedures set forth in the Senior Subordinated Note Indenture.
SELECTION
If we partially redeem Senior Subordinated Notes, the trustee will select
the Senior Subordinated Notes to be redeemed 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, although no Senior Subordinated Note of $1,000 in original
principal amount or less will be redeemed in part. If we redeem any Senior
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Subordinated Note in part only, the notice of redemption relating to such Senior
Subordinated Note shall state the portion of the principal amount thereof to be
redeemed. A new Senior Subordinated Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Senior Subordinated Note. On and after the
redemption date, interest will cease to accrue on Senior Subordinated Notes or
portions thereof called for redemption so long as we have deposited with the
Paying Agent funds sufficient to pay the principal of, plus accrued and unpaid
interest thereon, the Senior Subordinated Notes to be redeemed.
RANKING
The Senior Subordinated Notes are unsecured Senior Subordinated
Indebtedness of the Issuers, are subordinated in right of payment to all
existing and future Senior Indebtedness of the Issuers, rank equally in right
of payment with all existing and future Senior Subordinated Indebtedness of the
Issuers and are senior in right of payment to all existing and future
Subordinated Obligations of the Issuers. Dex Media East Finance has no
obligations other than the Senior Subordinated Notes and the Senior Notes and
its Guarantee in respect of Bank Indebtedness. The Senior Subordinated Notes
also will be effectively subordinated to any Secured Indebtedness of the
Company, Dex Media East Finance and the other Subsidiaries of the Company to
the extent of the value of the assets securing such Indebtedness. However,
payment from the money or the proceeds of U.S. Government Obligations held in
any defeasance trust described below under the caption "--Defeasance" will not
be subordinated to any Senior Indebtedness or subject to the restrictions
described herein.
The Senior Subordinated Note Guarantees are unsecured Senior Subordinated
Indebtedness of the applicable Senior Subordinated Note Guarantor, are
subordinated in right of payment to all existing and future Senior Indebtedness
of such Senior Subordinated Note Guarantor, rank equally in right of payment
with all existing and future Senior Subordinated Indebtedness of such Senior
Subordinated Note Guarantor and are senior in right of payment to all existing
and future Subordinated Obligations of such Senior Subordinated Note Guarantor.
The Senior Subordinated Note Guarantees also are effectively subordinated to
any Secured Indebtedness of the applicable Senior Subordinated Note Guarantor
and its Subsidiaries to the extent of the value of the assets securing such
Secured Indebtedness.
The Company does not currently have any Subsidiaries (other than Dex Media
East Finance) and Dex Media International. The Senior Subordinated Note
Indenture does not restrict the ability of the Company, to create, acquire or
capitalize Subsidiaries in the future. To the extent such Subsidiaries are not
Senior Subordinated Note Guarantors, creditors of such Subsidiaries, including
trade creditors, and 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 creditors of the Issuers, including Holders.
The Senior Subordinated Notes, therefore, will be effectively subordinated to
the claims of creditors, including trade creditors, and preferred stockholders,
if any, of Subsidiaries of the Company formed or acquired in the future that
are not Senior Subordinated Note Guarantors.
Assuming that we had completed the Transactions and applied the net
proceeds we receive from the Transactions in the manner described under the
heading "Use of Proceeds," as of September 30, 2002, there would have been
outstanding:
(1) $1,730 million of Senior Indebtedness of the Issuers, including the
Senior Notes, of which $1,280 million would have been Secured
Indebtedness (exclusive of unused commitments under the Credit
Agreement);
(2) no Senior Subordinated Indebtedness of the Issuers (other than the
Senior Subordinated Notes) and no indebtedness of the Issuers that
is subordinate or junior in right of repayment to the Senior
Subordinated Notes;
(3) no Indebtedness of Dex Media East Finance (other than the Senior
Subordinated Notes and the Senior Notes and its Guarantee in
respect of Bank Indebtedness); and
(4) no Indebtedness of Dex Media International (other than its Guarantee
in respect of Bank Indebtedness, the Senior Notes and the Senior
Subordinated Notes).
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Although the Senior Subordinated Note Indenture limits the Incurrence of
Indebtedness by the Company and the Restricted Subsidiaries and the issuance of
Preferred Stock by the Restricted Subsidiaries, such limitation is subject to a
number of significant qualifications. The Company and its Subsidiaries may be
able to Incur substantial amounts of Indebtedness in certain circumstances.
Such Indebtedness may be Senior Indebtedness.
"Senior Indebtedness" of the Company, Dex Media East Finance or any Senior
Subordinated Note Guarantor means the principal of, premium (if any) and
accrued and unpaid interest on (including interest accruing on or after the
filing of any petition in bankruptcy or for reorganization of the Company, Dex
Media East Finance or any Senior Subordinated Note Guarantor, regardless of
whether or not a claim for post-filing interest is allowed in such
proceedings), and fees and other amounts owing in respect of, Bank
Indebtedness, the Senior Notes and all other Indebtedness of the Company, Dex
Media East Finance or any Senior Subordinated Note Guarantor, as applicable,
whether outstanding on November 8, 2002 or thereafter Incurred, unless in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding it is provided that such obligations are pari passu with or
subordinated in right of payment to the Senior Subordinated Notes or such
Senior Subordinated Note Guarantor's Senior Subordinated Note Guarantee, as
applicable; provided, however, that Senior Indebtedness of the Company, Dex
Media East Finance or any Senior Subordinated Note Guarantor shall not include:
(1) any obligation of the Company to any Subsidiary of the Company or of
any Senior Subordinated Note Guarantor or Dex Media East Finance to
the Company or any other Subsidiary of the Company;
(2) any liability for Federal, state, local or other taxes owed or owing
by the Company, Dex Media East Finance or such Senior Subordinated
Note Guarantor, as applicable;
(3) any accounts payable or other liability to trade creditors arising
in the ordinary course of business (including Guarantees thereof or
instruments evidencing such liabilities);
(4) any Indebtedness or obligation of the Company, Dex Media East
Finance or such Senior Subordinated Note Guarantor, as applicable
(and any accrued and unpaid interest in respect thereof) that by
its terms is subordinate or junior in any respect to any other
Indebtedness or obligation of the Company, Dex Media East Finance
or such Senior Subordinated Note Guarantor, as applicable,
including any Senior Subordinated Indebtedness and any Subordinated
Obligations of the Company, Dex Media East Finance or such Senior
Subordinated Note Guarantor, as applicable;
(5) any obligations with respect to any Capital Stock; or
(6) any Indebtedness Incurred in violation of the Senior Subordinated
Note Indenture.
Only Indebtedness of the Company or Dex Media East Finance that is Senior
Indebtedness will rank senior to the Senior Subordinated Notes. The Senior
Subordinated Notes will rank equally in all respects with all other Senior
Subordinated Indebtedness of the Company or Dex Media East Finance. The Issuers
will not Incur, directly or indirectly, any Indebtedness which is subordinate
or junior in ranking in any respect to Senior Indebtedness unless such
Indebtedness is Senior Subordinated Indebtedness or is expressly subordinated
in right of payment to Senior Subordinated Indebtedness. Unsecured Indebtedness
is not deemed to be subordinate or junior to Secured Indebtedness merely
because it is unsecured.
The Issuers may not pay principal of, premium (if any) or interest on the
Senior Subordinated Notes, or make any deposit pursuant to the provisions
described under "Defeasance" below, and may not otherwise purchase, repurchase,
redeem or otherwise acquire or retire for value any Senior Subordinated Notes
(collectively, "pay the Senior Subordinated Notes") if:
(1) any Designated Senior Indebtedness of either of the Issuers is not
paid when due, or
(2) any other default on Designated Senior Indebtedness of either of the
Issuers occurs and the maturity of such Designated Senior
Indebtedness is accelerated in accordance with its terms
unless, in either case,
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(x) the default has been cured or waived and any such acceleration has
been rescinded, or
(y) such Designated Senior Indebtedness has been paid in full;
provided, however, that the Issuers may pay the Senior Subordinated Notes
without regard to the foregoing if the Issuers and the trustee receive written
notice approving such payment from the Representative of the Designated Senior
Indebtedness with respect to which either of the events set forth in clause (1)
or (2) above has occurred and is continuing.
During the continuance of any default (other than a default described in
clause (1) or (2) of the immediately preceding paragraph) with respect to any
Designated Senior Indebtedness of either Issuer pursuant to which the maturity
thereof may be accelerated immediately without further notice (except such
notice as may be required to effect such acceleration) or the expiration of any
applicable grace periods, we may not pay the Senior Subordinated Notes for a
period (a "Payment Blockage Period") commencing upon the receipt by the trustee
(with a copy to us) of written notice (a "Blockage Notice") of such default from
the Representative of such Designated Senior Indebtedness specifying an election
to effect a Payment Blockage Period and ending 179 days thereafter (or earlier
if such Payment Blockage Period is terminated:
(1) by written notice to the trustee and the Issuers from the Person or
Persons who gave such Blockage Notice,
(2) by repayment in full of such Designated Senior Indebtedness, or
(3) because the default giving rise to such Blockage Notice is no longer
continuing).
Notwithstanding the provisions described in the immediately preceding
paragraph (but subject to the provisions contained in the second preceding and
in the immediately succeeding paragraph), unless the holders of such Designated
Senior Indebtedness or the Representative of such holders have accelerated the
maturity of such Designated Senior Indebtedness, the Issuers may resume
payments on the Senior Subordinated Notes after the end of such Payment
Blockage Period, including any missed payments.
Not more than one Blockage Notice may be given in any consecutive 360-day
period, irrespective of the number of defaults with respect to Designated
Senior Indebtedness during such period. However, if any Blockage Notice within
such 360-day period is given by or on behalf of any holders of Designated
Senior Indebtedness other than the Bank Indebtedness, the Representative of the
Bank Indebtedness may give another Blockage Notice within such period. In no
event, however, may the total number of days during which any Payment Blockage
Period or Periods is in effect exceed 179 days in the aggregate during any 360
consecutive day period. For purposes of this paragraph, no default or event of
default that existed or was continuing on the date of the commencement of any
Payment Blockage Period with respect to the Designated Senior Indebtedness
initiating such Payment Blockage Period shall be, or be made, the basis of the
commencement of a subsequent Payment Blockage Period by the Representative of
such Designated Senior Indebtedness, whether or not within a period of 360
consecutive days, unless such default or event of default shall have been cured
or waived for a period of not less than 90 consecutive days.
Upon any payment or distribution of the assets of the Company or Dex Media
East Finance to their respective creditors upon a total or partial liquidation
or a total or partial dissolution of the Company or Dex Media East Finance or
in a bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to the Company or its property or Dex Media East Finance or its
property:
(1) the holders of Senior Indebtedness of the Company or Dex Media East
Finance, as the case may be, will be entitled to receive payment in
full of such Senior Indebtedness before the Holders are entitled to
receive any payment of principal of or interest on the Senior
Subordinated Notes; and
(2) until such Senior Indebtedness is paid in full any payment or
distribution to which Holders would be entitled but for the
subordination provisions of the Senior Subordinated Note Indenture
will be made to holders of such Senior Indebtedness as their
interests may appear, except that Holders may receive:
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(x) shares of stock; and
(y) any debt securities that are subordinated to such Senior
Indebtedness to at least the same extent as the Senior
Subordinated Notes.
If a distribution is made to Holders that due to the subordination
provisions of the Senior Subordinated Note Indenture should not have been made
to them, such Holders will be required to hold it in trust for the holders of
Senior Indebtedness of the Company or Dex Media East Finance, as the case may
be, and pay it over to them as their interests may appear.
If payment of the Senior Subordinated Notes is accelerated because of an
Event of Default, the Issuers or the trustee (provided that the trustee shall
have received written notice from the Issuers, on which notice the trustee
shall be entitled to conclusively rely) shall promptly notify the holders of
the Designated Senior Indebtedness of each Issuer (or their Representative) of
the acceleration. If any Designated Senior Indebtedness of the Issuers is
outstanding, the Issuers may not pay the Senior Subordinated Notes until five
Business Days after such holders or the Representative of such Designated
Senior Indebtedness receive notice of such acceleration and, thereafter, may
pay the Senior Subordinated Notes only if the subordination provisions of the
Senior Subordinated Note Indenture otherwise permit payment at that time.
By reason of the subordination provisions of the Senior Subordinated Note
Indenture, in the event of insolvency, creditors of the Issuers who are holders
of Senior Indebtedness of the Issuers may recover more, ratably, than the
Holders, and creditors of the Issuers who are not holders of Senior
Indebtedness of the Issuers or of Senior Subordinated Indebtedness of the
Issuers (including the Senior Subordinated Notes) may recover less, ratably,
than holders of Senior Indebtedness of the Issuers and may recover more,
ratably, than the holders of Senior Subordinated Indebtedness of the Issuers.
The Senior Subordinated Note Indenture contains substantially identical
subordination provisions relating to each Senior Subordinated Note Guarantor's
obligations under its Senior Subordinated Note Guarantee.
SENIOR SUBORDINATED NOTE GUARANTEES
Dex Media International and certain future Subsidiaries of the Company (as
described below), as primary obligors and not merely as sureties, jointly and
severally irrevocably and unconditionally Guarantee on an unsecured senior
subordinated basis the performance and full and punctual payment when due,
whether at Stated Maturity, by acceleration or otherwise, of all obligations of
the Issuers under the Senior Subordinated Note Indenture (including obligations
to the trustee) and the Senior Subordinated Notes, whether for payment of
principal of or interest on the Senior Subordinated Notes, expenses,
indemnification or otherwise (all such obligations guaranteed by such Senior
Subordinated Note Guarantors being herein called the "Guaranteed Obligations").
Such Senior Subordinated Note Guarantors agree to pay, in addition to the
amount stated above, any and all costs and expenses (including reasonable
counsel fees and expenses) incurred by the trustee or the Holders in enforcing
any rights under the Senior Subordinated Note Guarantees. Each Senior
Subordinated Note Guarantee is limited in amount to an amount not to exceed the
maximum amount that can be Guaranteed by the applicable Senior Subordinated
Note Guarantor without rendering the Senior Subordinated Note Guarantee, as it
relates to such Senior Subordinated Note Guarantor, voidable under applicable
law relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally. After November 8, 2002, the
Company will cause each Restricted Subsidiary (other than Dex Media East
Finance) which Incurs or Guarantees any Bank Indebtedness to execute and
deliver to the trustee a supplemental indenture pursuant to which such
Subsidiary will Guarantee payment of the Senior Subordinated Notes. See
"Certain Covenants--Future senior subordinated note guarantors" below.
The obligations of a Senior Subordinated Note Guarantor under its
Guarantee are senior subordinated obligations. As such, the rights of Holders
to receive payment by a Senior Subordinated Note Guarantor pursuant to its
Senior Subordinated Note Guarantee will be subordinated in right of payment to
the rights of holders of Senior Indebtedness of such Senior Subordinated Note
Guarantor.
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The terms of the subordination provisions described above with respect to the
Issuers' obligations under the Senior Subordinated Notes apply equally to a
Senior Subordinated Note Guarantor and the obligations of such Senior
Subordinated Note Guarantor under its Senior Subordinated Note Guarantee.
Each Senior Subordinated Note Guarantee is a continuing guarantee and
shall (a) remain in full force and effect until payment in full of all the
Guaranteed Obligations, (b) be binding upon each Senior Subordinated Note
Guarantor and its successors and (c) inure to the benefit of, and be
enforceable by, the trustee, the Holders and their successors, transferees and
assigns.
The Senior Subordinated Note Guarantee of a Senior Subordinated Note
Guarantor will be released:
(1) in connection with any sale of all of the Capital Stock of such
Senior Subordinated Note Guarantor (including by way of merger or
consolidation) to a Person or a group of Persons that is not (either
before or after giving effect to such transaction) a Restricted
Subsidiary of the Company, if the sale complies with the covenant
described under "Certain Covenants--Limitation on sales of assets
and subsidiary stock" and, to the extent applicable, complies with
the provisions described under "Merger and Consolidation;"
(2) if the Company designates such Restricted Subsidiary that is a
Senior Subordinated Note Guarantor as an Unrestricted Subsidiary in
accordance with the applicable provisions of the Senior Subordinated
Note Indenture; or
(3) if such Senior Subordinated Note Guarantor is released from its
Guarantee of, and all pledges and security interests granted in
connection with, the Credit Agreement.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder will have the right to require the Issuers to purchase
all or any part of such Holder's Senior Subordinated 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 (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 notwithstanding the occurrence of a
Change of Control, the Issuers shall not be obligated to purchase the Senior
Subordinated Notes pursuant to this section in the event that it has exercised
its right to redeem all the Senior Subordinated Notes under the terms of the
section titled "Optional Redemption":
(1) prior to the earliest to occur of (i) the first public offering of
common stock of Parent, (ii) the first public offering of common
stock of Dex Media or (iii) the first public offering of common
stock of the Company, (A) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) other than one or more
Permitted Holders is or becomes the "beneficial owner" (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act, except that such
person shall be deemed to have "beneficial ownership" of all shares
that any such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly
or indirectly, of more than 35% of the total voting power of the
Voting Stock of Parent, Dex Media or the Company, and (B) the
Permitted Holders "beneficially own" (as defined in Rules 13d-3 and
13d-5 under the Exchange Act), directly or indirectly, in the
aggregate a lesser percentage of the total voting power of the
Voting Stock of Parent, Dex Media or the Company than such other
person and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority
of the Governing Board of Parent, Dex Media or the Company, as the
case may be, (for purposes of this clause (1) any such other person
shall be deemed to beneficially own any Voting Stock of an entity
(the "specified entity") held by any other entity (the "parent
entity") so long as such person beneficially owns (as defined in
clause (A) above), directly or indirectly, in the aggregate more
than 50% of the voting power of the Voting Stock of the parent
entity);
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(2) any "person" (as defined in clause (1) above), other than one or
more Permitted Holders, is or becomes the beneficial owner (as
defined in clause (1)(A) above), directly or indirectly, of a
majority of the total voting power of the Voting Stock of Parent,
Dex Media or the Company (for the purposes of this clause (2), such
other person shall be deemed to beneficially own any Voting Stock of
a specified entity held by a parent entity, if such other person is
the beneficial owner, directly or indirectly, of a majority of the
voting power of the Voting Stock of such parent entity);
(3) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Governing Board of Parent,
Dex Media or the Company, as the case may be (together with any new
persons whose election by such Governing Board of Parent, Dex Media
or the Company, as the case may be, or whose nomination for election
by the equity holders of Parent, Dex Media or the Company, as the
case may be, was approved by a vote of 66 2/3% of the members of the
Governing Board of Parent, Dex Media or the Company, as the case may
be, then still in office who were either members of the Governing
Board at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any
reason to constitute a majority of the Governing Board of Parent,
Dex Media or the Company, as the case may be, then in office;
(4) the adoption of a plan relating to the liquidation or dissolution of
the Company; or
(5) the Company ceases to own, beneficially or of record, all the
Capital Stock of Dex Media East Finance.
In the event that at the time of such Change of Control the terms of the
Bank Indebtedness restrict or prohibit the repurchase of Senior Subordinated
Notes pursuant to this covenant, then prior to the mailing of the notice to
Holders provided for in the immediately following paragraph but in any event
within 30 days following any Change of Control, the Company shall:
(1) repay in full all Bank Indebtedness or, if doing so will allow the
purchase of Senior Subordinated Notes, offer to repay in full all
Bank Indebtedness and repay the Bank Indebtedness of each lender who
has accepted such offer, or
(2) obtain the requisite consent under the agreements governing the Bank
Indebtedness to permit the repurchase of the Senior Subordinated
Notes as provided for in the immediately following paragraph.
Within 30 days following any Change of Control, the Issuers shall mail a
notice to each Holder with a copy to the trustee (the "Change of Control
Offer") stating:
(1) that a Change of Control has occurred and that such Holder has the
right to require the Issuers to purchase all or a portion of such
Holder's Senior Subordinated 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 (subject to the right of Holders of
record on the relevant record date to receive interest on the
relevant interest payment date);
(2) the circumstances and relevant facts and financial information
regarding such Change of Control;
(3) the purchase date (which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed); and
(4) the instructions determined by the Issuers, consistent with this
covenant, that a Holder must follow in order to have its Senior
Subordinated Notes purchased.
The Issuers 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 Senior Subordinated Note Indenture applicable to a Change of
Control Offer made by the Issuers and purchases all Senior Subordinated Notes
validly tendered and not withdrawn under such Change of Control Offer.
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A Change of Control Offer may be made in advance of a Change of Control,
and conditioned upon such Change of Control, if a definitive agreement is in
place for the Change of Control at the time of making of the Change of Control
Offer. Senior Subordinated Notes repurchased by the Issuers pursuant to a
Change of Control Offer will have the status of Senior Subordinated Notes
issued but not outstanding or will be retired and canceled, at the option of
the Issuers. Senior Subordinated Notes purchased by a third party pursuant to
the preceding paragraph will have the status of Senior Subordinated Notes
issued and outstanding.
The Issuers will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the purchase of Senior Subordinated Notes
pursuant to this covenant. To the extent that the provisions of any securities
laws or regulations conflict with provisions of this covenant, the Issuers will
comply with the applicable securities laws and regulations and will not be
deemed to have breached its obligations under this covenant by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the initial purchasers of the Outstanding Senior Subordinated
Notes. Management has no present intention to engage in a transaction involving
a Change of Control, although it is possible that we would decide to do so in
the future. Subject to the limitations discussed below, we could, in the
future, enter into certain transactions, including acquisitions, refinancings
or recapitalizations, that would not constitute a Change of Control under the
Senior Subordinated Note Indenture, but that could increase the amount of
indebtedness outstanding at such time or otherwise affect our capital structure
or credit ratings. Restrictions on our ability to Incur additional Indebtedness
are contained in the covenants described under "Certain Covenants--Limitation
on indebtedness." Such restrictions can only be waived with the consent of the
Holders of a majority in principal amount of the Senior Subordinated Notes then
outstanding. Except for the limitations contained in such covenants, however,
the Senior Subordinated Note Indenture will not contain any covenants or
provisions that may afford Holders protection in the event of a highly
leveraged transaction.
The occurrence of certain of the events which would constitute a Change of
Control would constitute a default under the Credit Agreement. Future Senior
Indebtedness of the Issuers may contain prohibitions of certain events which
would constitute a Change of Control or require such Senior Indebtedness to be
repurchased or repaid upon a Change of Control. Moreover, the exercise by the
Holders of their right to require the Issuers to purchase the Senior
Subordinated Notes could cause a default under such Senior Indebtedness, even
if the Change of Control itself does not, due to the financial effect of such
repurchase on the Issuers. Finally, the Issuers' ability to pay cash to the
Holders upon a purchase may be limited by the Issuers' then existing financial
resources. There can be no assurance that sufficient funds will be available
when necessary to make any required purchases. The provisions under the Senior
Subordinated Note Indenture relative to the Issuers' obligation to make an
offer to purchase the Senior Subordinated Notes as a result of a Change of
Control may be waived or modified with the written consent of the Holders of a
majority in principal amount of the Senior Subordinated Notes.
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CERTAIN COVENANTS
The Senior Subordinated Note Indenture contains covenants including, among
others, the following:
Limitation on indebtedness. (a) The Company will not, and will not permit
any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness;
provided, however, that the Company or any Restricted Subsidiary that is a
Senior Subordinated Note Guarantor may Incur Indebtedness if on the date of
such Incurrence and after giving effect thereto the Consolidated Leverage Ratio
would not be greater than 6:1.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:
(1) Bank Indebtedness Incurred pursuant to the Credit Agreement in an
aggregate principal amount not to exceed $1,490.0 million less the
aggregate amount of all prepayments of principal made pursuant to,
and in compliance with, the covenant described under "--Limitation
on sales of assets and subsidiary stock," applied to permanently
reduce any such Indebtedness, provided that $160.0 million of such
Bank Indebtedness may be Incurred only in connection with, and upon
the consummation of, the Dex Media West Acquisition;
(2) Indebtedness of the Company owed to and held by any Restricted
Subsidiary or Indebtedness of a Restricted Subsidiary owed to and
held by the Company or any Restricted Subsidiary; provided, however,
that (A) any subsequent issuance or transfer of any Capital Stock or
any other event that results in any such Restricted Subsidiary
ceasing to be a Restricted Subsidiary or any subsequent transfer of
any such Indebtedness (except to the Company or a Restricted
Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Indebtedness by the issuer thereof and (B) if the
Company or a Senior Subordinated Note Guarantor is the obligor on
such Indebtedness, such Indebtedness (to the extent such
Indebtedness is owed to and held by a Restricted Subsidiary that is
not a Senior Subordinated Note Guarantor) is expressly subordinated
to the prior payment in full in cash of all obligations of the
Company or such Senior Subordinated Note Guarantor with respect to
the Senior Subordinated Notes or the Senior Subordinated Note
Guarantee of such Senior Subordinated Note Guarantor, as applicable;
(3) Indebtedness (A) represented by the Senior Subordinated Notes (not
including any Additional Senior Subordinated Notes) and the Senior
Subordinated Note Guarantees and the Senior Notes (not including any
Additional Senior Notes (as defined under "Description of Senior
Exchange Notes")) and the Senior Note Guarantees (as defined under
"Description of Senior Exchange Notes"), (B) outstanding on November
8, 2002 (other than the Indebtedness described in clauses (1) and
(2) above), (C) consisting of Refinancing Indebtedness Incurred in
respect of any Indebtedness described in this clause (3) (including
Indebtedness that is Refinancing Indebtedness) or the foregoing
paragraph (a) and (D) consisting of Guarantees of any Indebtedness
permitted under this covenant; provided that if such Indebtedness is
by its express terms subordinated in right of payment to the Senior
Subordinated Notes or the Senior Subordinated Note Guarantees, as
applicable, any such Guarantee with respect to such Indebtedness
shall be subordinated in right of payment to the Senior Subordinated
Notes or the Senior Subordinated Note Guarantees, as applicable,
substantially to the same extent as such Indebtedness is
subordinated to the Senior Subordinated Notes or the Senior
Subordinated Note Guarantees, as applicable;
(4) (A) Indebtedness of a Restricted Subsidiary Incurred and outstanding
on or prior to the date on which such Restricted Subsidiary was
acquired by the Company (other than Indebtedness Incurred in
contemplation of, in connection with, as consideration in, or
158
to provide all or any portion of the funds or credit support
utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a
Subsidiary of or was otherwise acquired by the Company); provided,
however, that on the date that such Restricted Subsidiary is
acquired by the Company, the Company would have been able to Incur
$1.00 of additional Indebtedness pursuant to the foregoing paragraph
(a) after giving effect to the Incurrence of such Indebtedness
pursuant to this clause (4) and (B) Refinancing Indebtedness
Incurred in respect of Indebtedness Incurred pursuant to this clause
(4);
(5) Indebtedness (A) in respect of performance bonds, bankers'
acceptances, letters of credit and surety or appeal bonds provided
by the Company and the Restricted Subsidiaries in the ordinary
course of their business, and (B) under Interest Rate Agreements and
Commodity Hedging Agreements entered into for bona fide hedging
purposes of the Company in the ordinary course of business;
provided, however, that (i) such Interest Rate Agreements do not
increase the Indebtedness of the Company outstanding at any time
other than as a result of fluctuations in interest rates or by
reason of fees, indemnities and compensation payable thereunder and
(ii) such Commodity Hedging Agreements do not increase the
Indebtedness of the Company outstanding at any time other than as a
result of fluctuations in commodity prices or by reason of fees,
indemnities and compensation payable thereunder;
(6) Purchase Money Indebtedness and Capitalized Lease Obligations (in an
aggregate principal amount not in excess of $30.0 million at any
time outstanding);
(7) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument drawn against
insufficient funds in the ordinary course of business, provided that
such Indebtedness is extinguished within five Business Days of its
Incurrence;
(8) Indebtedness consisting of customary indemnification, adjustment of
purchase price or similar obligations of the Company or any
Restricted Subsidiary, in each case Incurred in connection with the
acquisition or disposition of any assets by the Company or any
Restricted Subsidiary; or
(9) Indebtedness (other than Indebtedness permitted to be Incurred
pursuant to the foregoing paragraph (a) or any other clause of this
paragraph (b)) in an aggregate principal amount on the date of
Incurrence that, when added to all other Indebtedness Incurred
pursuant to this clause (9) and then outstanding, will not exceed
$125.0 million.
(c) The Company may not Incur any Indebtedness if such Indebtedness is
subordinate or junior in ranking in any respect to any Senior Indebtedness
unless such Indebtedness is Senior Subordinated Indebtedness or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness. In
addition, the Company may not Incur any Secured Indebtedness which is not
Senior Indebtedness unless contemporaneously therewith effective provision is
made to secure the Senior Subordinated Notes equally and ratably with (or on a
senior basis to, in the case of Indebtedness subordinated in right of payment
to the Senior Subordinated Notes) such Secured Indebtedness for so long as such
Secured Indebtedness is secured by a Lien. A Senior Subordinated Note Guarantor
may not Incur any Indebtedness if such Indebtedness is by its terms expressly
subordinate or junior in ranking in any respect to any Senior Indebtedness of
such Senior Subordinated Note Guarantor unless such Indebtedness is Senior
Subordinated Indebtedness of such Senior Subordinated Note Guarantor or is
expressly subordinated in right of payment to Senior Subordinated Indebtedness
of such Senior Subordinated Note Guarantor. In addition, a Senior Subordinated
Note Guarantor may not Incur any Secured Indebtedness that is not Senior
Indebtedness of such Senior Subordinated Note Guarantor unless
contemporaneously therewith effective provision is made to secure the Senior
Subordinated Note Guarantee of such Senior Subordinated Note Guarantor equally
and ratably with (or on a senior basis to, in the case of Indebtedness
subordinated in right of payment to such Senior Subordinated Note Guarantee)
such Secured Indebtedness for as long as such Secured Indebtedness is secured
by a Lien.
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(d) Notwithstanding any other provision of this covenant, the maximum
amount of Indebtedness that the Company or any Restricted Subsidiary may Incur
pursuant to this covenant shall not be deemed to be exceeded solely as a result
of fluctuations in the exchange rates of currencies. For purposes of
determining the outstanding principal amount of any particular Indebtedness
Incurred pursuant to this covenant:
(1) Indebtedness Incurred pursuant to the Credit Agreement prior to or
on November 8, 2002 or in connection with the Dex Media West
Acquisition shall be treated as Incurred pursuant to clause (1) of
paragraph (b) above,
(2) the accrual of interest, the accretion of original issue discount,
the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of
dividends on Disqualified Stock in the form of additional shares of
the same class of Disqualified Stock will not be deemed to be an
Incurrence of Indebtedness or an issuance of Disqualified Stock for
purposes of this covenant,
(3) Indebtedness permitted by this covenant need not be permitted solely
by reference to one provision permitting such Indebtedness but may
be permitted in part by one such provision and in part by one or
more other provisions of this covenant permitting such Indebtedness,
and
(4) in the event that Indebtedness meets the criteria of more than one
of the types of Indebtedness described in this covenant, the
Company, in its sole discretion, shall classify such Indebtedness on
the date of its issuance, or later reclassify all or a portion of
such Indebtedness (other than as set forth in clause (c)(1) above)
in any manner that complies with the Senior Subordinated Note
Indenture, and only be required to include the amount of such
Indebtedness in one of such clauses.
Limitation on restricted payments. (a) The Company will not, and will not
permit any Restricted Subsidiary, directly or indirectly, to:
(1) declare or pay any dividend, make any distribution on or in respect
of its Capital Stock or make any similar payment (including any
payment in connection with any merger or consolidation involving the
Company or any Subsidiary of the Company) to the direct or indirect
holders of its Capital Stock, except (x) dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock
or Preferred Stock) and (y) dividends or distributions payable to
the Company or a Restricted Subsidiary (and, if such Restricted
Subsidiary has shareholders other than the Company or other
Restricted Subsidiaries, to its other shareholders on a pro rata
basis),
(2) purchase, repurchase, redeem, retire or otherwise acquire for value
any Capital Stock of the Company or any Restricted Subsidiary held
by Persons other than the Company or a Restricted Subsidiary,
(3) purchase, repurchase, redeem, retire, defease or otherwise acquire
for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment any Subordinated Obligations (other
than the purchase, repurchase, redemption, retirement, defeasance or
other acquisition for value of Subordinated Obligations acquired in
anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year of
the date of acquisition), or
(4) make any Investment (other than a Permitted Investment) in any
Person (any such dividend, distribution, payment, purchase,
redemption, repurchase, defeasance, retirement, or other acquisition
or Investment set forth in these clauses (1) through (4) being
herein referred to as a "Restricted Payment") if at the time the
Company or such Restricted Subsidiary makes such Restricted Payment:
(A) a Default will have occurred and be continuing (or would result
therefrom);
160
(B) the Company could not Incur at least $1.00 of additional
Indebtedness under paragraph (a) of the covenant described under
"--Limitation on indebtedness;" or
(C) the aggregate amount of such Restricted Payment and all other
Restricted Payments (the amount so expended, if other than in
cash, to be determined in good faith by the Governing Board of
the Company, whose determination will be conclusive and
evidenced by a resolution of the Governing Board of the Company)
declared or made subsequent to November 8, 2002 would exceed the
sum, without duplication, of:
(i) 50% of the Adjusted Consolidated Net Income accrued during
the period (treated as one accounting period) from the
beginning of the fiscal quarter immediately following the
fiscal quarter during which November 8, 2002 occurs to the
end of the most recent fiscal quarter ending at least 45
days prior to the date of such Restricted Payment (or, in
case such Consolidated Net Income will be a deficit, minus
100% of such deficit);
(ii) the aggregate Net Cash Proceeds received by the Company
from the issue or sale of its Capital Stock (other than
Disqualified Stock) subsequent to November 8, 2002 (other
than an issuance or sale (x) to a Subsidiary of the
Company, (y) to an employee stock ownership plan or other
trust established by the Company or any of its
Subsidiaries or (z) in connection with, or substantially
concurrently with, the Dex Media West Acquisition);
(iii) the amount by which Indebtedness of the Company or its
Restricted Subsidiaries is reduced on the Company's
balance sheet upon the conversion or exchange (other than
by a Subsidiary of the Company) subsequent to November 8,
2002 of any Indebtedness of the Company or its Restricted
Subsidiaries issued after November 8, 2002 which is
convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of the Company (less the amount of any
cash or the Fair Market Value of other property
distributed by the Company or any Restricted Subsidiary
upon such conversion or exchange plus the amount of any
cash received by the Company or any Restricted Subsidiary
upon such conversion or exchange); and
(iv) the amount equal to the net reduction in Investments in
Unrestricted Subsidiaries resulting from (x) payments of
dividends, repayments of the principal of loans or
advances or other transfers of assets to the Company or
any Restricted Subsidiary from Unrestricted Subsidiaries
or (y) the redesignation of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided
in the definition of "Investment") not to exceed, in the
case of any Unrestricted Subsidiary, the amount of
Investments previously made by the Company or any
Restricted Subsidiary in such Unrestricted Subsidiary,
which amount was included in the calculation of the amount
of Restricted Payments.
(b) The provisions of the foregoing paragraph (a) will not prohibit:
(1) any purchase, prepayment, repayment, repurchase, redemption,
retirement or other acquisition for value of Subordinated
Obligations or Capital Stock of the Company made by exchange for,
or out of the proceeds of the substantially concurrent sale of,
Capital Stock of the Company (other than Disqualified Stock and
other than Capital Stock issued or sold to a Subsidiary of the
Company or an employee stock ownership plan or other trust
established by the Company or any of its Subsidiaries); provided,
however, that:
(A) such purchase, repurchase, redemption, retirement or other
acquisition for value will be excluded in the calculation of
the amount of Restricted Payments, and
161
(B) the Net Cash Proceeds from such sale applied in the manner set
forth in this clause (1) will be excluded from the calculation
of amounts under clause (4)(C)(ii) of paragraph (a) above;
(2) any prepayment, repayment, purchase, repurchase, redemption,
retirement, defeasance or other acquisition for value of
Subordinated Obligations of the Company made by exchange for, or
out of the proceeds of the substantially concurrent sale of,
Indebtedness of the Company that is permitted to be Incurred
pursuant to paragraph (b) of the covenant described under
"--Limitation on indebtedness;" provided that such Indebtedness is
subordinated to the Senior Subordinated Notes to at least the same
extent as such Subordinated Obligations; provided, however, that
such prepayment, repayment, purchase, repurchase, redemption,
retirement, defeasance or other acquisition for value will be
excluded in the calculation of the amount of Restricted Payments;
(3) any prepayment, repayment, purchase, repurchase, redemption,
retirement, defeasance or other acquisition for value of
Subordinated Obligations from Net Available Cash to the extent
permitted by the covenant described under "--Limitation on sales of
assets and subsidiary stock;" provided, however, that such
prepayment, repayment, purchase, repurchase, redemption,
retirement, defeasance or other acquisition for value will be
excluded in the calculation of the amount of Restricted Payments;
(4) dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividends would have complied
with this covenant; provided, however, that such dividends will be
included in the calculation of the amount of Restricted Payments;
(5) for so long as the Company is treated as a pass-through or
disregarded entity for United States Federal income tax purposes or
for so long as the Company is a member of a consolidated group of
corporations for federal income tax purposes, other than as the
common parent, Tax Distributions; provided, however, that such Tax
Distributions shall be excluded in the calculation of the amount of
Restricted Payments;
(6) any purchase, repurchase, redemption, retirement or other
acquisition for value of shares of Capital Stock of the Company or
any of its Subsidiaries from employees, former employees, directors
or former directors of the Company 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 Governing Board of the Company under which such
individuals purchase or sell or are granted the option to purchase
or sell, shares of such Capital Stock; provided, however, that the
aggregate amount of such purchases, repurchases, redemptions,
retirements and other acquisitions for value will not exceed,
together with Restricted Payments made under clause (7)(B) below,
$4.0 million per fiscal year of the Company and up to an aggregate
amount of, together with Restricted Payments made under clause
(7)(B) below, $10.0 million during the term of the Indenture;
provided further, however, that such purchases, repurchases,
redemptions, retirements and other acquisitions for value shall be
excluded in the calculation of the amount of Restricted Payments;
(7) any payment of dividends, other distributions or other amounts by
the Company for the purposes set forth in clauses (A) through (C)
below; provided, however, that such dividend, distribution or other
amount set forth in clauses (A) through (C) will be excluded in the
calculation of the amount of Restricted Payments for the purposes
of paragraph (a) above:
(A) to Parent in amounts equal to the amounts required for Parent
to pay franchise taxes and other fees required to maintain its
corporate existence and provide for other operating costs of up
to $2.5 million per fiscal year;
(B) to Parent or Dex Media in amounts equal to amounts expended by
Parent or Dex Media to purchase, repurchase, redeem, retire or
otherwise acquire for value Capital Stock of Parent or Dex
Media from employees, former employees,
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directors or former directors of the Company or any of its
Subsidiaries (or permitted transferees of such employees,
former employees, directors or former directors); provided,
however, that the aggregate amount paid, loaned or advanced to
Parent and Dex Media pursuant to this clause (B) will not, in
the aggregate, exceed, together with Restricted Payments made
under clause (6) above, $4.0 million per fiscal year of the
Company, up to a maximum aggregate amount of, together with
Restricted Payments made under clause (6) above, $10.0 million
during the term of the Indenture, plus any amounts contributed
by Parent or Dex Media to the Company as a result of resales of
such repurchased shares of Capital Stock; or
(C) to Parent or Dex Media to pay operating and overhead expenses
incurred in the ordinary course of business and allocable to
the Company;
(8) any payment of dividends, other distributions or other amounts by
the Company from the proceeds of $160.0 million of Bank
Indebtedness Incurred in connection with, and upon the consummation
of, the Dex Media West Acquisition, permitted by clause (b)(1) of
the covenant described under "--Limitation on indebtedness;"
provided, however, that such dividend, other distribution or other
amount will be excluded in the calculation of the amount of
Restricted Payments;
(9) the payment of dividends on Parent's, Dex Media's or the Company's
common stock following the first bona fide underwritten public
offering of common stock of Parent, Dex Media or the Company, as
the case may be, after November 8, 2002, of up to 6% per annum of
the net proceeds received by Parent, Dex Media or the Company, as
the case may be, from such public offering; provided, however, that
(A) the aggregate amount of all such dividends shall not exceed the
aggregate amount of net proceeds received by Parent, Dex Media or
the Company, as the case may be, from such public offering and (B)
such dividends will be included in the calculation of the amount of
Restricted Payments;
(10) the purchase, redemption, acquisition or retirement of any
Subordinated Obligations following a Change of Control after the
Company shall have complied with the provisions under "Change of
Control," including the payment of the applicable purchase price;
provided, however, that such amounts shall be excluded in the
calculation of the amount of Restricted Payments;
(11) other Restricted Payments not to exceed $20.0 million in the
aggregate; provided, however, that such amounts shall be included
in the calculation of the amount of Restricted Payments; or
(12) dividends paid with the proceeds of a cash common equity
contribution or sale of Capital Stock (other than Disqualified
Stock) in an amount of up to $50.0 million substantially
concurrently with the consummation of, and to fund a portion of the
purchase price of, the Dex Media West Acquisition; provided,
however, that:
(A) such dividends will be excluded in the calculation of the
amount of Restricted Payments, and
(B) the proceeds from such contribution or sale will be excluded
from the calculation of amounts under clause (4)(C)(ii) of
paragraph (a) above.
Limitation on restrictions on distributions from restricted
subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock
or pay any Indebtedness or other obligations owed to the Company;
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(2) make any loans or advances to the Company; or
(3) transfer any of its property or assets to the Company, except:
(A) any encumbrance or restriction pursuant to applicable law or an
agreement in effect at or entered into on November 8, 2002 and
any encumbrance or restriction pursuant to any agreement
governing Bank Indebtedness;
(B) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary prior to
the date on which such Restricted Subsidiary was acquired by
the Company (other than Indebtedness Incurred as consideration
in, in contemplation of, or to provide all or any portion of
the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which
such Restricted Subsidiary became a Restricted Subsidiary or
was otherwise acquired by the Company) and outstanding on such
date;
(C) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (A) or (B) of this covenant or
this clause (C) or contained in any amendment to an agreement
referred to in clause (A) or (B) of this covenant or this
clause (C); provided, however, that the encumbrances and
restrictions contained in any such Refinancing agreement or
amendment, taken as a whole, are not materially less favorable
to the Holders than the encumbrances and restrictions contained
in such predecessor agreements;
(D) in the case of clause (3), any encumbrance or restriction
(i) that restricts in a customary manner the subletting,
assignment or transfer of any property or asset that is
subject to a lease, license or similar contract, or
(ii) contained in security agreements securing Indebtedness of
a Restricted Subsidiary to the extent such encumbrance or
restriction restricts the transfer of the property subject
to such security agreements;
(E) with respect to a Restricted Subsidiary, any restriction
imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or
assets of such Restricted Subsidiary pending the closing of
such sale or disposition; and
(F) customary provisions in joint venture agreements; provided,
however, that (i) such encumbrance or restriction is applicable
only to such Restricted Subsidiary, (ii) the encumbrance or
restriction is not materially more disadvantageous to the
holders of the Senior Subordinated Notes than is customary in
comparable agreements and (iii) the Company reasonably
determines that any such encumbrance or restriction will not
materially affect the ability of the Issuers to make any
anticipated principal or interest payments on the Senior
Subordinated Notes.
Limitation on sales of assets and subsidiary stock. (a) The Company will
not, and will not permit any Restricted Subsidiary to, make any Asset
Disposition unless:
(1) the Company or such Restricted Subsidiary receives consideration
(including by way of relief from, or by any other Person or group
of Persons assuming sole responsibility for, any liabilities,
contingent or otherwise) at the time of such Asset Disposition at
least equal to the Fair Market Value of the shares and assets
subject to such Asset Disposition,
(2) in the case of Asset Dispositions which are not Permitted Asset
Swaps, at least 75% of the consideration thereof received by the
Company or such Restricted Subsidiary is in the form of cash, and
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(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted
Subsidiary, as the case may be) within 365 days after the later of
the date of such Asset Disposition or the receipt of such Net
Available Cash
(A) first, to the extent the Company elects (or is required by the
terms of any Indebtedness), to prepay, repay, purchase,
repurchase, redeem, retire, defease or otherwise acquire for
value Senior Indebtedness of the Company or Indebtedness
(other than obligations in respect of Preferred Stock) of a
Wholly Owned Subsidiary (in each case other than Indebtedness
owed to the Company or an Affiliate of the Company and other
than obligations in respect of Disqualified Stock);
(B) second, to the extent of the balance of Net Available Cash
after application in accordance with clause (A), to the extent
the Company or such Restricted Subsidiary elects, to reinvest
in Additional Assets (including by means of an Investment in
Additional Assets by a Restricted Subsidiary with Net
Available Cash received by the Company or another Restricted
Subsidiary);
(C) third, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A) and (B), to
make an Offer (as defined in paragraph (b) of this covenant
below) to purchase Senior Subordinated Notes pursuant to and
subject to the conditions set forth in paragraph (b) of this
covenant; provided, however, that if the Company elects (or is
required by the terms of any other Senior Subordinated
Indebtedness), such Offer may be made ratably to purchase the
Senior Subordinated Notes and other Senior Subordinated
Indebtedness of the Company; and
(D) fourth, to the extent of the balance of such Net Available
Cash after application in accordance with clauses (A), (B) and
(C), for any general corporate purpose permitted by the terms
of the Senior Subordinated Note Indenture;
provided, however that in connection with any prepayment, repayment,
purchase, repurchase, redemption, retirement, defeasance or other
acquisition for value of Indebtedness pursuant to clause (A), (C) or
(D) above, the Company or such Restricted Subsidiary will retire such
Indebtedness and will cause the related loan commitment (if any) to
be permanently reduced in an amount equal to the principal amount so
prepaid, repaid, purchased, repurchased, redeemed, retired, defeased
or otherwise acquired for value.
Notwithstanding the foregoing provisions of this covenant, the Company and
the Restricted Subsidiaries will not be required to apply any Net Available
Cash in accordance with this covenant except to the extent that the aggregate
Net Available Cash from all Asset Dispositions that is not applied in
accordance with this covenant exceeds $20.0 million.
For the purposes of this covenant, the following are deemed to be cash:
o the assumption of Indebtedness of the Company (other than obligations
in respect of Disqualified Stock of the Company) or any Restricted
Subsidiary (other than obligations in respect of Disqualified Stock and
Preferred Stock of a Restricted Subsidiary that is a Senior
Subordinated Note Guarantor) and the release of the Company or such
Restricted Subsidiary from all liability on such Indebtedness in
connection with such Asset Disposition; and
o securities received by the Company or any Restricted Subsidiary from
the transferee that are converted by the Company or such Restricted
Subsidiary into cash within 90 days of receipt.
(b) In the event of an Asset Disposition that requires the purchase of
Senior Subordinated Notes pursuant to clause (a)(3)(C) of this covenant, the
Issuers will be required (i) to purchase Senior Subordinated Notes tendered
pursuant to an offer by the Issuers for the Senior Subordinated Notes (the
"Offer") at a purchase price of 100% of their principal amount plus accrued and
unpaid interest thereon to the date of purchase (subject to the right of
Holders of record on the relevant
165
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 in the Senior Subordinated Note Indenture and (ii)
to purchase other Senior Subordinated Indebtedness of the Company on the terms
and to the extent contemplated thereby (provided that in no event shall the
Issuers offer to purchase such other Senior Subordinated Indebtedness of the
Company at a purchase price in excess of 100% of its principal amount (without
premium), plus accrued and unpaid interest thereon. If the aggregate purchase
price of Senior Subordinated Notes (and other Senior Subordinated Indebtedness)
tendered pursuant to the Offer is less than the Net Available Cash allotted to
the purchase of the Senior Subordinated Notes (and other Senior Subordinated
Indebtedness), the Company will apply the remaining Net Available Cash in
accordance with clause (a)(3)(D) of this covenant. The Issuers will not be
required to make an Offer for Senior Subordinated Notes (and other Senior
Subordinated Indebtedness) pursuant to this covenant if the Net Available Cash
available therefor (after application of the proceeds as provided in clauses
(a)(3)(A) and (B)) is less than $5.0 million for any particular Asset
Disposition (which lesser amount will be carried forward for purposes of
determining whether an Offer is required with respect to the Net Available Cash
from any subsequent Asset Disposition).
(c) The Issuers will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Senior Subordinated Notes
pursuant to this covenant. To the extent that the provisions of any securities
laws or regulations conflict with provisions of this covenant, the Issuers will
comply with the applicable securities laws and regulations and will not be
deemed to have breached its obligations under this covenant by virtue thereof.
Limitation on transactions with affiliates. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter
into or conduct any transaction or series of related transactions (including
the purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of the Company (an "Affiliate Transaction") unless
such transaction is on terms:
(1) that are no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained
at the time of such transaction in arm's-length dealings with a
Person who is not such an Affiliate,
(2) that, in the event such Affiliate Transaction involves an aggregate
amount in excess of $5.0 million,
(A) are set forth in writing, and
(B) have been approved by a majority of the members of the
Governing Board of the Company having no personal stake in such
Affiliate Transaction, and
(3) that, in the event such Affiliate Transaction involves an amount in
excess of $20.0 million, have been determined by a nationally
recognized appraisal or investment banking firm to be fair, from a
financial standpoint, to the Company and its Restricted
Subsidiaries.
(b) The provisions of the foregoing paragraph (a) will not prohibit:
(1) any Restricted Payment or Permitted Investment permitted to be paid
pursuant to the covenant described under "Limitation on restricted
payments,"
(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans or
similar employee benefit plans approved by the Governing Board of
the Company,
(3) the grant of stock options or similar rights to employees and
directors of the Company pursuant to plans approved by the
Governing Board of the Company,
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(4) loans or advances to employees in the ordinary course of business in
accordance with past practices of the Company, but in any event not
to exceed $10.0 million in the aggregate outstanding at any one
time,
(5) the payment of reasonable fees to directors of the Company and its
Subsidiaries who are not employees of the Company or its
Subsidiaries,
(6) any transaction between the Company and a Restricted Subsidiary or
between Restricted Subsidiaries,
(7) amounts payable to Dex Media pursuant to the Management Agreement as
in effect on November 8, 2002 on the terms described in the offering
memorandum dated October 30, 2002 or pursuant to any amendment,
restatement or replacement thereof to the extent that the terms of
any such amendment, restatement or replacement are not, taken as a
whole, disadvantageous to the holders of the Senior Subordinated
Notes in any material respect, provided that any payments pursuant
to this clause (7) with respect to management fees shall not exceed
$2.0 million in any fiscal year, plus all reasonable out-of-pocket
expenses incurred by Dex Media in connection with its performance of
management, consulting, monitoring, financial advisory or other
services with respect to the Company and its Restricted
Subsidiaries,
(8) any transaction with customers, clients, suppliers or purchasers or
sellers of goods or services, in each case in compliance with the
terms of the Senior Subordinated Note Indenture, which are fair to
the Company or its Restricted Subsidiaries, in the reasonable good
faith determination of the Governing Board or its senior management,
or are on terms at least as favorable as could reasonably have been
obtained at such time from an unaffiliated party,
(9) the existence of, or the performance by the Company or any of its
Restricted Subsidiaries of its obligations under the terms of, any
agreements with Dex Media West or Dex Media that are described in
the offering memorandum dated October 30, 2002 under the heading
"The Transactions--Agreements between Us and Dex Media West and/or
Dex Media" to which it is a party as of the closing date of the Dex
Media West Acquisition on the terms described in the offering
memorandum and any amendments thereto and any similar agreements
which it may enter into thereafter; provided, however, that the
existence of, or the performance by the Company or any of its
Restricted Subsidiaries of its obligations under, any future
amendment to such agreements or under any such similar agreements
shall only be permitted by this clause (9) to the extent that the
terms of any such amendment or new agreement, taken as a whole, are
not disadvantageous to the holders of the Senior Subordinated Notes
in any material respect, or
(10) the sale of receivables on substantially the terms that receivables
are purchased by Qwest Corporation pursuant to the billing and
collection services agreement as in effect on November 30, 2002 and
as described in the offering memorandum.
SEC reports. Notwithstanding that the Issuers may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
will file with the SEC (unless the SEC will not accept such a filing because
the Issuers are not subject to any SEC reporting requirements at the time) and
provide the trustee and Holders and prospective Holders (upon request) within
15 days after it files them with the SEC, copies of the Company's annual report
and the information, documents and other reports that are specified in Sections
13 and 15(d) of the Exchange Act. In addition, following a public equity
offering, the Company shall furnish to the trustee and the Holders, promptly
upon their becoming available, copies of the annual report to shareholders and
any other information provided by Parent, Dex Media or the Company to its
public shareholders generally. The Company also will comply with the other
provisions of Section 314(a) of the TIA.
Future senior subordinated note guarantors. The Company will cause each
Restricted Subsidiary (other than Dex Media East Finance) that Incurs or
Guarantees any Bank Indebtedness to become a Senior Subordinated Note
Guarantor, and, if applicable, execute and deliver to the trustee a
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supplemental indenture in the form set forth in the Senior Subordinated Note
Indenture pursuant to which such Restricted Subsidiary will Guarantee payment
of the Senior Subordinated Notes. Each Senior Subordinated Note Guarantee will
be limited to an amount not to exceed the maximum amount that can be Guaranteed
by that Restricted Subsidiary without rendering the Senior Subordinated Note
Guarantee, as it relates to such Restricted Subsidiary, voidable under
applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally.
Limitation on lines of business. The Company will not, and will not permit
any Restricted Subsidiary to, engage in any business, other than a Permitted
Business.
Limitation on the conduct of business of Dex Media East Finance. In
addition to the other restrictions set forth in the Senior Subordinated Note
Indenture, the Senior Subordinated Note Indenture will provide that Dex Media
East Finance may not hold any material assets, become liable for any material
obligations or engage in any significant business activities; provided that Dex
Media East Finance may be a co-obligor with respect to Indebtedness if the
Company is an obligor of such Indebtedness and the net proceeds of such
Indebtedness are received by the Company or one or more of the Company's
Restricted Subsidiaries other than Dex Media East Finance.
The Company will not sell or otherwise dispose of any shares of Capital
Stock of Dex Media East Finance and will not permit Dex Media East Finance,
directly or indirectly, to issue or sell or otherwise dispose of any shares of
its Capital Stock.
MERGER AND CONSOLIDATION
Neither the Company nor Dex Media East Finance will consolidate with or
merge with or into, or convey, transfer or lease all or substantially all its
assets to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor
Company") will be a corporation organized and existing under the
laws of the United States of America, any State thereof or the
District of Columbia and the Successor Company (if not the Company
or Dex Media East Finance) will expressly assume, by a supplemental
indenture, executed and delivered to the trustee, in form
satisfactory to the trustee, all the obligations of the Company or
Dex Media East Finance under the Senior Subordinated Notes and the
Senior Subordinated Note Indenture;
(2) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or
any Restricted Subsidiary as a result of such transaction as having
been Incurred by the Successor Company or such Restricted Subsidiary
at the time of such transaction), no Default shall have occurred and
be continuing;
(3) immediately after giving effect to such transaction, the Successor
Company would be able to Incur an additional $1.00 of Indebtedness
under paragraph (a) of the covenant described under "Limitation on
indebtedness;"
(4) the Company shall have delivered to the trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture
(if any) comply with the Senior Subordinated Note Indenture; and
(5) the Company shall have delivered to the trustee an Opinion of Counsel
to the effect that the Holders will not recognize income, gain or
loss for Federal income tax purposes as a result of such transaction
and will be subject to Federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if
such transaction had not occurred.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company or Dex Media East Finance, under
the Senior Subordinated Note Indenture, but the predecessor company in the case
of a conveyance, transfer or lease of all or substantially all its assets will
not be released from the obligation to pay the principal of and interest on the
Senior Subordinated Notes.
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In addition, the Company will not permit any Senior Subordinated Note
Guarantor to consolidate with or merge with or into, or convey, transfer or
lease all or substantially all of its assets to any Person unless:
(1) the resulting, surviving or transferee Person (the "Successor
Guarantor") will be a corporation organized and existing under the
laws of the United States of America, any State thereof or the
District of Columbia, and such Person (if not such Senior
Subordinated Note Guarantor) will expressly assume, by a
supplemental indenture, executed and delivered to the trustee, in
form satisfactory to the trustee, all the obligations of such Senior
Subordinated Note Guarantor under its Senior Subordinated Note
Guarantee;
(2) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Guarantor
or any Restricted Subsidiary as a result of such transaction as
having been Incurred by the Successor Guarantor or such Restricted
Subsidiary at the time of such transaction), no Default shall have
occurred and be continuing; and
(3) the Company will have delivered to the trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture
(if any) comply with the Senior Subordinated Note Indenture.
Notwithstanding the foregoing:
(A) any Restricted Subsidiary (other than Dex Media East Finance) may
consolidate with, merge into or transfer all or part of its
properties and assets to the Company or any Senior Subordinated Note
Guarantor and
(B) the Company may merge with an Affiliate incorporated solely for the
purpose of reincorporating the Company, as the case may be, in
another jurisdiction to realize tax or other benefits.
DEFAULTS
Each of the following is an Event of Default:
(1) a default in any payment of interest (including additional interest)
on any Senior Subordinated Note when due and payable whether or not
prohibited by the provisions described under "Ranking" above,
continued for 30 days,
(2) a default in the payment of principal of any Senior Subordinated Note
when due and payable at its Stated Maturity, upon required
redemption or repurchase, upon declaration or otherwise, whether or
not such payment is prohibited by the provisions described under
"Ranking" above,
(3) the failure by either Issuer or any Restricted Subsidiary of the
Company to comply with its obligations under the covenant described
under "Merger and Consolidation" above,
(4) the failure by either Issuer or any Restricted Subsidiary of the
Company to comply for 30 days after notice with any of its
obligations under the covenant described under "Change of Control"
above (other than a failure to purchase Senior Subordinated Notes),
(5) the failure by either Issuer or any Restricted Subsidiary of the
Company to comply for 60 days after notice with any of its
obligations under the covenants described under "Certain Covenants"
above (other than a failure to purchase Senior Subordinated Notes)
or with its other agreements contained in the Senior Subordinated
Notes or the Senior Subordinated Note Indenture,
169
(6) the failure by either Issuer or any Restricted Subsidiary of the
Company to pay any Indebtedness within any applicable grace period
after final maturity or the acceleration of any such Indebtedness by
the holders thereof because of a default if the total amount of such
Indebtedness unpaid or accelerated exceeds $10.0 million or its
foreign currency equivalent (the "cross acceleration provision"),
(7) certain events of bankruptcy, insolvency or reorganization of either
Issuer or a Significant Subsidiary (the "bankruptcy provisions"),
(8) the rendering of any judgment or decree for the payment of money
(other than judgments which are covered by enforceable insurance
policies issued by reputable and creditworthy insurance companies)
in excess of $10.0 million or its foreign currency equivalent
against the Company or a Restricted Subsidiary if:
(A) an enforcement proceeding thereon is commenced by any creditor or
(B) such judgment or decree remains outstanding for a period of 60
days following such judgment and is not discharged, waived or
stayed (the "judgment default provision") or
(9) any Senior Subordinated Note Guarantee ceases to be in full force and
effect (except as contemplated by the terms thereof) or any Senior
Subordinated Note Guarantor or Person acting by or on behalf of such
Senior Subordinated Note Guarantor denies or disaffirms such Senior
Subordinated Note Guarantor's obligations under the Senior
Subordinated Note Indenture or any Senior Subordinated Note
Guarantee and such Default continues for 10 days after receipt of
the notice specified in the Senior Subordinated Note Indenture.
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.
However, a default under clauses (4), (5) or (9) will not constitute an
Event of Default until the trustee notifies the Issuers or the Holders of at
least 25% in principal amount of the outstanding Senior Subordinated Notes,
including the Senior Subordinated Exchange Notes, notify the Issuers and the
trustee of the default and the Company or the Subsidiary, as applicable, does
not cure such default within the time specified in clauses (4), (5) or (9)
hereof after receipt of such notice.
If an Event of Default (other than an Event of Default relating to certain
events of bankruptcy, insolvency or reorganization of the Company or Dex Media
East Finance) occurs and is continuing, the trustee or the Holders of at least
25% in principal amount of the outstanding Senior Subordinated Notes, including
the Senior Subordinated Exchange Notes, by notice to the Issuers may declare
the principal of and accrued but unpaid interest on all the Senior Subordinated
Notes to be due and payable. Upon such a declaration, such principal and
interest will be due and payable immediately. If an Event of Default relating
to certain events of bankruptcy, insolvency or reorganization of the Company or
Dex Media East Finance occurs, the principal of and interest on all the Senior
Subordinated Notes will become immediately due and payable without any
declaration or other act on the part of the trustee or any Holders. Under
certain circumstances, the Holders of a majority in principal amount of the
outstanding Senior Subordinated Notes, including the Senior Subordinated
Exchange Notes, may rescind any such acceleration with respect to the Senior
Subordinated Notes and its consequences.
In the event of a declaration of acceleration of the Senior Subordinated
Notes because an Event of Default described in clause (6) has occurred and is
continuing, the declaration of acceleration of the Senior Subordinated Notes
shall be automatically annulled if the payment default or other default
triggering such Event of Default pursuant to clause (6) shall be remedied or
cured by the Company or a Restricted Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after
170
the declaration of acceleration with respect thereto and if (a) the annulment
of the acceleration of the Senior Subordinated 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 Senior Subordinated Notes that became due solely because of the
acceleration of the Senior Subordinated Notes, have been cured or waived.
Subject to the provisions of the Senior Subordinated Note Indenture
relating to the duties of the trustee, in case an Event of Default occurs and
is continuing, the trustee will be under no obligation to exercise any of the
rights or powers under the Senior Subordinated Note Indenture at the request or
direction of any of the Holders unless such Holders have offered to the trustee
reasonable indemnity or security against any loss, liability or expense. Except
to enforce the right to receive payment of principal, premium (if any) or
interest when due, no Holder may pursue any remedy with respect to the Senior
Subordinated Note Indenture or the Senior Subordinated Notes unless:
(1) such Holder has previously given the trustee notice that an Event of
Default is continuing,
(2) Holders of at least 25% in principal amount of the outstanding Senior
Subordinated Notes, including the Senior Subordinated Exchange Notes,
have requested the trustee in writing to pursue the remedy,
(3) such Holders have offered the trustee reasonable security or
indemnity against any loss, liability or expense,
(4) the trustee has not complied with such request within 60 days after
the receipt of the request and the offer of security or indemnity and
(5) the Holders of a majority in principal amount of the outstanding
Senior Subordinated Notes, including the Senior Subordinated Exchange
Notes, have not given the trustee a direction inconsistent with such
request within such 60-day period.
Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding Senior Subordinated Notes, including the Senior
Subordinated Exchange Notes, will be given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the trustee
or of exercising any trust or power conferred on the trustee. The trustee,
however, may refuse to follow any direction that conflicts with law or the
Senior Subordinated Note Indenture or that the trustee determines is unduly
prejudicial to the rights of any other Holder or that would involve the trustee
in personal liability. Prior to taking any action under the Senior Subordinated
Note Indenture, the trustee will be entitled to indemnification satisfactory to
it in its sole discretion against all losses and expenses caused by taking or
not taking such action.
If a Default occurs and is continuing and is known to the trustee, the
trustee must mail to each Holder notice of the Default within the earlier of 90
days after it occurs or 30 days after it is known to a Trust Officer or written
notice of it is received by the trustee. Except in the case of a Default in the
payment of principal of, premium (if any) or interest on any Senior
Subordinated Note (including payments pursuant to the redemption provisions of
such Senior Subordinated Note), the trustee may withhold notice if and so long
as a committee of its Trust Officers in good faith determines that withholding
notice is in the interests of the Holders. In addition, the Issuers will be
required to deliver to the trustee, within 120 days after the end of each
fiscal year, a certificate indicating whether the signers thereof know of any
Default that occurred during the previous year. The Issuers will also be
required to deliver to the trustee, within 30 days after the occurrence
thereof, written notice of any event which would constitute certain Events of
Default, their status and what action the Issuers are taking or proposes to
take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Senior Subordinated Note Indenture or
the Senior Subordinated Notes may be amended with the written consent of the
Holders of a majority in principal amount of the Senior Subordinated Notes then
outstanding and any past default or
171
compliance with any provisions may be waived with the consent of the Holders of
a majority in principal amount of the Senior Subordinated Notes then
outstanding. However, without the consent of each Holder of an outstanding
Senior Subordinated Note (including the Senior Subordinated Exchange Notes)
affected, no amendment may, among other things:
(1) reduce the amount of Senior Subordinated Notes whose Holders must
consent to an amendment,
(2) reduce the rate of or extend the time for payment of interest
(including additional interest, if any) on any Senior Subordinated
Note,
(3) reduce the principal of or extend the Stated Maturity of any Senior
Subordinated Note,
(4) reduce the premium payable upon the redemption of any Senior
Subordinated Note or change the time at which any Senior Subordinated
Note may be redeemed as described under "Optional Redemption" above,
(5) make any Senior Subordinated Note payable in money other than that
stated in the Senior Subordinated Note,
(6) make any change to the subordination provisions of the Senior
Subordinated Note Indenture that adversely affects the rights of any
Holder,
(7) impair the right of any Holder to receive payment of principal of,
and interest (including additional interest, if any) on, such
Holder's Senior Subordinated Notes on or after the due dates therefor
or to institute suit for the enforcement of any payment on or with
respect to such Holder's Senior Subordinated Notes,
(8) make any change in the amendment provisions which require each
Holder's consent or in the waiver provisions or
(9) modify the Senior Subordinated Note Guarantees in any manner adverse
to the Holders.
Without the consent of any Holder, the Issuers, the Senior Subordinated
Note Guarantors and the trustee may amend the Senior Subordinated Note
Indenture to:
o cure any ambiguity, omission, defect or inconsistency,
o provide for the assumption by a successor corporation of the
obligations of the Issuers under the Senior Subordinated Note
Indenture,
o provide for uncertificated Senior Subordinated Notes in addition to or
in place of certificated Senior Subordinated Notes (provided, however,
that the uncertificated Senior Subordinated Notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Senior Subordinated Notes are
described in Section 163(f)(2)(B) of the Code),
o to make any change in the subordination provisions of the Senior
Subordinated Note Indenture that would limit or terminate the benefits
available to any holder of Senior Indebtedness of the Issuers or a
Senior Subordinated Note Guarantor (or any Representative thereof)
under such subordination provisions,
o add additional Guarantees with respect to the Senior Subordinated
Notes,
o secure the Senior Subordinated Notes,
o add to the covenants of the Company and the Restricted Subsidiaries for
the benefit of the Holders or to surrender any right or power conferred
upon the Issuers,
o make any change that does not adversely affect the rights of any
Holder, subject to the provisions of the Senior Subordinated Note
Indenture,
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o provide for the issuance of the Senior Subordinated Exchange Notes or
Additional Senior Subordinated Notes; or
o comply with any requirement of the SEC in connection with the
qualification of the Senior Subordinated Note Indenture under the TIA.
However, no amendment may be made to the subordination provisions of the
Senior Subordinated Note Indenture that adversely affects the rights of any
holder of Senior Indebtedness of the Issuers or a Senior Subordinated Note
Guarantor then outstanding unless the holders of such Senior Indebtedness (or
any group or Representative thereof authorized to give a consent) consent to
such change.
The consent of the Holders will not be necessary to approve the particular
form of any proposed amendment. It will be sufficient if such consent approves
the substance of the proposed amendment.
After an amendment becomes effective, the Issuers are required to mail to
Holders a notice briefly describing such amendment. However, the failure to
give such notice to all Holders, or any defect therein, will not impair or
affect the validity of the amendment.
TRANSFER AND EXCHANGE
A Holder will be able to transfer or exchange Senior Subordinated Notes.
Upon any transfer or exchange, the registrar and the trustee may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and the Issuers may require a Holder to pay any taxes required by law
or permitted by the Senior Subordinated Note Indenture. The Issuers will not be
required to transfer or exchange any Senior Subordinated Note selected for
redemption or to transfer or exchange any Senior Subordinated Note for a period
of 15 days prior to a selection of Senior Subordinated Notes to be redeemed.
The Senior Subordinated Notes will be issued in registered form and the Holder
will be treated as the owner of such Senior Subordinated Note for all purposes.
DEFEASANCE
The Issuers may at any time terminate all their obligations under the
Senior Subordinated Notes and the Senior Subordinated Note Indenture ("legal
defeasance"), except for certain obligations, including those respecting the
defeasance trust and obligations to register the transfer or exchange of the
Senior Subordinated Notes, to replace mutilated, destroyed, lost or stolen
Senior Subordinated Notes and to maintain a registrar and paying agent in
respect of the Senior Subordinated Notes.
In addition, the Issuers may at any time terminate:
(1) their obligations under "Change of Control" and under the covenants
described under "Certain Covenants," or
(2) the operation of the cross acceleration provision, the bankruptcy
provisions with respect to Significant Subsidiaries and the judgment
default provision described under "Defaults" above and the limitations
contained in clause (3) under the first paragraph of "Merger and
Consolidation" above ("covenant defeasance").
In the event that the Issuers exercise their legal defeasance option or
their covenant defeasance option, each Senior Subordinated Note Guarantor will
be released from all of its obligations with respect to its Senior Subordinated
Note Guarantee.
The Issuers may exercise their legal defeasance option notwithstanding
their prior exercise of their covenant defeasance option. If the Issuers
exercise their legal defeasance option, payment of the Senior Subordinated
Notes may not be accelerated because of an Event of Default with respect
thereto. If the Issuers exercise their covenant defeasance option, payment of
the Senior Subordinated Notes may not be accelerated because of an Event of
Default specified in clause (4), (5), (6), (7)
173
(with respect only to Significant Subsidiaries), (8) (with respect only to
Significant Subsidiaries) or (9) under "Defaults" above or because of the
failure of the Issuers to comply with clause (3) under the first paragraph of
"Merger and Consolidation" above.
In order to exercise either defeasance option, the Issuers must
irrevocably deposit in trust (the "defeasance trust") with the trustee money in
an amount sufficient or U.S. Government Obligations, the principal of and
interest on which will be sufficient, or a combination thereof sufficient, to
pay the of principal, premium (if any) and interest (including additional
interest, if any) on, in respect of the Senior Subordinated Notes to redemption
or maturity, as the case may be, and must comply with certain other conditions,
including delivery to the trustee of an Opinion of Counsel to the effect that
Holders will not recognize income, gain or loss for Federal income tax purposes
as a result of such deposit and defeasance and will be subject to Federal
income tax on the same amounts and in the same manner and at the same times as
would have been the case if such deposit and defeasance had not occurred (and,
in the case of legal defeasance only, such Opinion of Counsel must be based on
a ruling of the Internal Revenue Service or other change in applicable Federal
income tax law).
SATISFACTION AND DISCHARGE
The Senior Subordinated Note Indenture will be discharged and will cease
to be of further effect as to all Senior Subordinated Notes issued thereunder,
when:
(1) either
(a) all Senior Subordinated Notes that have been authenticated, except
lost, stolen or destroyed Senior Subordinated Notes that have been
replaced or paid, have been delivered to the trustee for
cancellation; or
(b) all Senior Subordinated 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 the Issuers or any Senior
Subordinated Note Guarantor have irrevocably deposited or caused
to be deposited with the trustee as trust funds in trust solely
for the benefit of the Holders, cash in U.S. dollars, non-callable
U.S. Government Obligations, or a combination of cash in U.S.
dollars and non-callable U.S. Government Obligations, in amounts
as will be sufficient without consideration of any reinvestment of
interest, to pay and discharge the entire Indebtedness on the
Senior Subordinated Notes not delivered to the trustee for
cancellation for principal, premium, if any, and accrued and
unpaid interest, if any, 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) the Issuers or any Senior Subordinated Note Guarantor have paid, or
caused to be paid, all sums payable by them under the Senior
Subordinated Note Indenture; and
(4) the Issuers have delivered irrevocable instructions to the trustee
under the Senior Subordinated Note Indenture to apply the deposited
money toward the payment of the Senior Subordinated Notes at maturity
or the redemption date, as the case may be.
In addition, in the case of paragraph (b) above, (i) the Issuers must
deliver an Officers' Certificate and an Opinion of Counsel to the trustee
stating that all conditions precedent to the satisfaction and discharge have
been satisfied and (ii) the Issuers obligations that would survive legal
defeasance will remain outstanding.
CONCERNING THE TRUSTEE
U.S. Bank National Association is the trustee under the Senior
Subordinated Note Indenture and has been appointed by the Issuers as Registrar
and Paying Agent with regard to the Senior Subordinated Notes.
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GOVERNING LAW
The Senior Subordinated Note Indenture and the Senior Subordinated Notes
are governed by, and construed in accordance with, the laws of the State of New
York without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be
required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means:
(1) any property or assets (other than Indebtedness and Capital Stock)
to be used by the Company or a Restricted Subsidiary in a Permitted
Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary
as a result of the acquisition of such Capital Stock by the Company
or another Restricted Subsidiary; or
(3) Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary; provided, however, that:
any such Restricted Subsidiary described in clauses (2) or (3) above is
primarily engaged in a Permitted Business.
"Adjusted Consolidated Net Income" means, for any period, Consolidated Net
Income for such period adjusted to eliminate the effect of the increased basis
in assets of the Company and its Restricted Subsidiaries as a result of
purchase accounting adjustments in connection with the Transactions.
"Adjusted EBITDA" for any period means the Consolidated Net Income for
such period, plus, without duplication, the following to the extent deducted in
calculating such Consolidated Net Income:
(1) income tax expense of the Company and its Consolidated Restricted
Subsidiaries,
(2) Consolidated Interest Expense,
(3) customary fees and expenses of the Company and its Consolidated
Restricted Subsidiaries payable in connection with any Equity
Offering, the Incurrence of Indebtedness permitted by the covenant
described under "--Limitation on indebtedness" or any acquisition
permitted hereunder,
(4) depreciation expense of the Company and its Consolidated Restricted
Subsidiaries,
(5) amortization expense of the Company and its Consolidated Restricted
Subsidiaries (excluding amortization expense attributable to a
prepaid cash item that was paid in a prior period),
(6) all nonrecurring charges, and
(7) all other noncash charges of the Company and its Consolidated
Restricted Subsidiaries (excluding any such noncash charge to the
extent it represents an accrual or reserve for cash expenditures in
any future period) less all noncash items of income of the Company
and its Consolidated Restricted Subsidiaries.
Notwithstanding the foregoing, the provision for taxes based on the income
or profits of, the rental expense of, the fees and expenses of, the
depreciation and amortization of, and other noncash charges of, a Restricted
Subsidiary of the Company shall be added to Consolidated Net Income to compute
Adjusted 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 and only if a corresponding amount would be permitted at the date of
determination to be dividended to the
175
Company by such Restricted Subsidiary without prior approval (that has not been
obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to such Restricted Subsidiary or its stockholders.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. 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 provisions described under "Certain Covenants--Limitation on
transactions with affiliates" and "Certain Covenants--Limitation on sales of
assets and subsidiary stock" only, "Affiliate" shall also mean any beneficial
owner of shares representing 5% or more of the total voting power of the Voting
Stock (on a fully diluted basis) of Parent, Dex Media or the Company 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.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
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:
(1) 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 the Company or a Restricted
Subsidiary),
(2) all or substantially all the assets of any division or line of
business of the Company or any Restricted Subsidiary or
(3) any other assets of the Company or any Restricted Subsidiary outside
of the ordinary course of business of the Company or such Restricted
Subsidiary
other than, in the case of (1), (2) and (3) above,
(A) a disposition by a Restricted Subsidiary to the Company or by
the Company or a Restricted Subsidiary to a Restricted
Subsidiary,
(B) for purposes of the provisions described under "Certain
Covenants--Limitation on sales of assets and subsidiary stock"
only, a disposition permitted by the covenant described under
"Certain Covenants--Limitation on restricted payments,"
(C) a disposition of assets with a Fair Market Value of less than
$2.0 million,
(D) the sale of Capital Stock of an Unrestricted Subsidiary,
(E) the sale or other disposition of cash or Temporary Cash
Investments, and
(F) the sale of receivables on substantially the terms that
receivables are purchased by Qwest Corporation pursuant to the
billing and collection services agreement as in effect on
November 8, 2002 and as described in the offering memorandum
dated October 30, 2002.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing:
(1) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal
payment of such Indebtedness or scheduled redemption or similar
payment with respect to such Preferred Stock multiplied by the
amount of such payment by
(2) the sum of all such payments.
176
"Bank Indebtedness" means any and all amounts payable under or in respect
of the Credit Agreement and any Refinancing Indebtedness with respect thereto,
as amended from time to time, including principal, premium (if any), interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to either of the Issuers or any
Senior Subordinated Note Guarantor whether or not a claim for post-filing
interest is allowed in such proceedings), fees, charges, expenses,
reimbursement obligations, guarantees and all other amounts payable thereunder
or in respect thereof. It is understood and agreed that Refinancing
Indebtedness in respect of the Credit Agreement may be Incurred from time to
time after termination of the Credit Agreement.
"Business Day" means each day which is not a Legal Holiday.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such
equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation 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 prepaid by the lessee without payment
of a penalty.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commodity Hedging Agreement" means any forward contract, swap, option,
hedge or other similar financial agreement or arrangement designed to protect
against fluctuations in commodity prices.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Consolidated Restricted Subsidiaries, plus, to
the extent Incurred by the Company and its Consolidated Restricted Subsidiaries
in such period but not included in such interest expense, without duplication:
(1) interest expense attributable to Capitalized Lease Obligations,
(2) amortization of debt discount and debt issuance costs,
(3) capitalized interest,
(4) noncash interest expense,
(5) commissions, discounts and other fees and charges attributable to
letters of credit and bankers' acceptance financing,
(6) interest accruing on any Indebtedness of any other Person to the
extent such Indebtedness is Guaranteed by the Company or any
Restricted Subsidiary,
(7) net costs associated with Hedging Obligations (including amortization
of fees),
(8) dividends in respect of all Disqualified Stock of the Company and all
Senior Subordinated Note Guarantors and all Preferred Stock of any of
the Restricted Subsidiaries that are not Senior Subordinated Note
Guarantors of the Company, to the extent held by Persons other than
the Company or a Restricted Subsidiary,
(9) interest Incurred in connection with investments in discontinued
operations and
(10) 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 the
Company) in connection with Indebtedness Incurred by such plan or
trust.
177
"Consolidated Leverage Ratio" as of any date of determination means the
ratio of:
(1) the Total Consolidated Indebtedness as of the date of determination
(the "Determination Date") to
(2) the aggregate amount of Adjusted EBITDA for the period of the most
recent four consecutive fiscal quarters ending at least 45 days
prior to the Determination Date (the "Measurement Period");
provided, however, that for purposes of calculating Adjusted EBITDA for the
Measurement Period immediately prior to the relevant Determination Date:
(A) any Person that is a Restricted Subsidiary on the Determination
Date (or would become a Restricted Subsidiary on such
Determination Date in connection with the transaction that
requires the determination of such Adjusted EBITDA) will be
deemed to have been a Restricted Subsidiary at all times during
such Measurement Period,
(B) any Person that is not a Restricted Subsidiary on such
Determination Date (or would cease to be a Restricted Subsidiary
on such Determination Date in connection with the transaction
that requires the determination of such Adjusted EBITDA) will be
deemed not to have been a Restricted Subsidiary at any time
during such Measurement Period, and
(C) if the Company or any Restricted Subsidiary shall have in any
manner (x) acquired (through an acquisition or the commencement
of activities constituting such operating business) or (y)
disposed of (by an Asset Disposition or the termination or
discontinuance of activities constituting such operating
business) any operating business during such Measurement Period
or after the end of such period and on or prior to such
Determination Date, such calculation will be made on a pro forma
basis in accordance with GAAP as if all such transactions had
been consummated prior to the first day of such Measurement
Period (it being understood that in calculating Adjusted EBITDA,
the exclusions set forth in clauses (1) through (4) of the
definition of Consolidated Net Income shall apply to a Person
which has been acquired as if it were a Restricted Subsidiary).
For purposes of this definition, whenever pro forma effect is to be given
to an acquisition of assets or other Investment and the amount of income or
earnings relating thereto, the pro forma calculations shall be determined in
good faith by a responsible financial or accounting Officer of the Company and
shall comply with the requirements of Rule 11-02 of Regulation S-X promulgated
by the SEC. For purposes of this definition in respect of any calculation for
which the Measurement Period includes the fiscal quarter in which the
Transactions were consummated, pro forma effect shall also be given to the
Transactions in the same manner as described in the offering memorandum dated
October 30, 2002 under "Unaudited Pro Forma Financial Data" and shall include
all adjustments to net income and EBITDA set forth in footnote (e) under
"Summary Historical and Pro Forma Financial Data" in the offering memorandum.
"Consolidated Net Income" means, for any period, the net income of the
Company and its Consolidated Subsidiaries for such period; provided, however,
that there shall not be included in such Consolidated Net Income:
(1) any net income of any Person (other than the Company) if such Person
is not a Restricted Subsidiary, except that:
(A) subject to the limitations contained in clause (4) below, the
Company's 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 actually distributed
178
by such Person during such period to the Company or a Restricted
Subsidiary as a dividend or other distribution (subject, in the
case of a dividend or other distribution made to a Restricted
Subsidiary, to the limitations contained in clause (3) below)
and
(B) the Company's equity in a net loss of any such Person for such
period shall be included in determining such Consolidated Net
Income;
(2) any net income (or loss) of any Person acquired by the Company or a
Subsidiary of the Company in a pooling of interests transaction for
any period prior to the date of such acquisition;
(3) any net income (or loss) of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of
distributions by such Restricted Subsidiary, directly or indirectly,
to the Company, except that:
(A) subject to the limitations contained in clause (4) below, the
Company's 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
actually distributed by such Restricted Subsidiary during such
period to the Company or another Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a
dividend or other distribution made to another Restricted
Subsidiary, to the limitation contained in this clause) and
(B) the Company's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such
Consolidated Net Income;
(4) any gain (but not loss) realized upon the sale or other disposition
of any asset of the Company or its Consolidated Subsidiaries that is
not sold or otherwise disposed of in the ordinary course of business
and any gain (but not loss) realized upon the sale or other
disposition of any Capital Stock of any Person;
(5) any noncash SFAS 133 income (or loss) related to hedging activities;
(6) any income (or loss) from discontinued operations;
(7) to the extent noncash, any unusual, nonoperating or nonrecurring
gain, loss or charge;
(8) any extraordinary gain or loss;
(9) the cumulative effect of a change in accounting principles; and
(10) the income statement effects of the writedown of the deferred
revenue and prepaid directory cost balance sheet accounts as part of
the purchase accounting adjustments made in connection with the
Transactions applicable to the given period.
Notwithstanding the foregoing, for the purpose 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 the
Company 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 (a)(4)(C)(iv) thereof.
"Consolidation" means the consolidation of the accounts of each of the
Restricted Subsidiaries with those of the Company in accordance with GAAP
consistently applied; provided, however, that "Consolidation" will not include
consolidation of the accounts of any Unrestricted Subsidiary, but the interest
of the Company or any Restricted Subsidiary in an Unrestricted Subsidiary will
be accounted for as an investment. The term "Consolidated" has a correlative
meaning.
179
"Credit Agreement" means the credit agreement dated as of November 8,
2002, as amended, restated, supplemented, waived, replaced (whether or not upon
termination, and whether with the original lenders or otherwise), refinanced,
restructured or otherwise modified from time to time, among Dex Media, the
Company, JPMorgan Chase Bank, as administrative agent and collateral agent, and
Bank of America, N.A., Lehman Commercial Paper Inc., Wachovia Bank, National
Association and Deutsche Bank Trust Company Americas, as syndication agents
(except to the extent that any such amendment, restatement, supplement, waiver,
replacement, refinancing, restructuring or other modification thereto would be
prohibited by the terms of the Senior Subordinated Note Indenture, unless
otherwise agreed to by the Holders of at least a majority in aggregate
principal amount of Senior Subordinated Notes at the time outstanding).
"Currency Agreement" means with respect to any Person any foreign exchange
contract, currency swap agreements or other similar agreement or arrangement to
which such Person is a party or of which it is a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" of the Company means
(1) the Bank Indebtedness and the Senior Notes and
(2) any other Senior Indebtedness of the Company that, at the date of
determination, has an aggregate principal amount outstanding of, or
under which, at the date of determination, the holders thereof are
committed to lend up to at least $25.0 million and is specifically
designated by the Company in the instrument evidencing or governing
such Senior Indebtedness as "Designated Senior Indebtedness" for
purposes of the Senior Subordinated Note Indenture.
"Designated Senior Indebtedness" of Dex Media East Finance or a Senior
Subordinated Note Guarantor has a correlative meaning.
"Dex Media West" means the newly-formed limited liability company, all of
the interest in which will be purchased by Dex Media in connection with the Dex
Media West Acquisition.
"Dex Media West Acquisition" means the acquisition by Dex Media or one of
its Subsidiaries of Quest Dex, Inc.'s directory business in the States of
Arizona, Idaho, Montana, Oregon, Utah, Washington and Wyoming.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable or exercisable) or upon the
happening of any event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise,
(2) is convertible or exchangeable for Indebtedness or Disqualified
Stock (excluding Capital Stock convertible or exchangeable solely at
the option of the Company or a Restricted Subsidiary; provided,
however, that any such conversion or exchange shall be deemed an
Incurrence of Indebtedness or Disqualified Stock, as applicable) or
(3) is redeemable at the option of the holder thereof, in whole or in
part,
in the case of each of clauses (1), (2) and (3), on or prior to the 91st day
after the Stated Maturity of the Senior Subordinated Notes; provided, however,
that any Capital Stock that would not constitute Disqualified Stock but for
provisions thereof giving holders thereof the right to require such Person to
repurchase or redeem such Capital Stock upon the occurrence of an "asset sale"
or "change of control" occurring prior to the 91st day after the Stated
Maturity of the Senior Subordinated Notes shall not constitute Disqualified
Stock if the "asset sale" or "change of control" provisions applicable
180
to such Capital Stock are not more favorable to the holders of such Capital
Stock than the provisions of the covenants described under "Change of Control"
and "Certain Covenants--Limitation on sale of assets and subsidiary stock."
"Equity Offering" means any public or private sale of common stock of
Parent, Dex Media or the Company other than (i) public offerings with respect
to Parent's, Dex Media's or the Company's common stock registered on Form S-8
and (ii) other issuances upon exercise of options by employees of Parent, Dex
Media or the Company or any of their Restricted Subsidiaries.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the
price which could be negotiated in an arm's-length, free market transaction,
for cash, between a willing seller and a willing and able buyer, neither of
whom is under undue pressure or compulsion to complete the transaction. For all
purposes of the Senior Subordinated Note Indenture, Fair Market Value will be
determined in good faith by the Governing Board of the Company, whose
determination will be conclusive and evidenced by a resolution of the Governing
Board of the Company.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of November 30, 2002, including those set forth in:
(1) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants,
(2) statements and pronouncements of the Financial Accounting Standards
Board,
(3) such other statements by such other entities as approved by a
significant segment of the accounting profession, and
(4) the rules and regulations of the SEC 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 SEC.
All ratios and computations based on GAAP contained in the Senior
Subordinated Note Indenture shall be computed in conformity with GAAP.
"Governing Board" of the Company or any other Person means, (i) the
managing member or members or any controlling committee of members of the
Company or such Person, for so long as the Company or such Person is a limited
liability company, (ii) the board of directors of the Company or such Person,
if the Company or such Person is a corporation or (iii) any similar governing
body.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise,
of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such other
Person (whether arising by virtue of partnership arrangements, or by
agreement to keep-well, to purchase assets, goods, securities or
services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or
(2) entered into for purposes of assuring in any other manner the
obligee of such Indebtedness or other obligation of the payment
thereof or to protect such obligee against loss in respect thereof
(in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean any
Person Guaranteeing any obligation.
181
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" means the Person in whose name a Senior Subordinated Note is
registered on the Registrar's books.
"Income Tax Liabilities" means an amount determined by multiplying (a)(i)
all taxable income and gains of the Company and its Restricted Subsidiaries for
such taxable year (the "Taxable Amount") minus (ii) an amount (not to exceed
the Taxable Amount for such taxable year) equal to all losses of the Company
and its Restricted Subsidiaries in any of the three prior taxable years that
have not been previously subtracted pursuant to this clause (ii) from the
Taxable Amount for any prior year by (b) forty-four percent (44%) or, if there
is a change in applicable federal, state or local tax rates, such other rate as
the Issuers determine in good faith to be a reasonable approximation of the
effective combined federal, state and local income taxation rates generally
payable by Parent or its owners with respect to the income and gains of the
Company and its Restricted Subsidiaries.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Person at the time it becomes a Subsidiary. The term "Incurrence" when used as
a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall be deemed the Incurrence
of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination, without duplication:
(1) the principal of and premium (if any) in respect of indebtedness of
such Person for borrowed money;
(2) the principal of and premium (if any) in respect of obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments;
(3) all obligations of such Person in respect of letters of credit or
other similar instruments (including reimbursement obligations with
respect thereto);
(4) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables),
which purchase price is due more than six months after the date of
placing such property in service or taking delivery and title
thereto or the completion of such services;
(5) all Capitalized Lease Obligations of such Person;
(6) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock
or, with respect to any Restricted Subsidiary of such Person, any
Preferred Stock (but excluding, in each case, any accrued
dividends);
(7) all Indebtedness of other Persons secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such
Person; provided, however, that the amount of Indebtedness of such
Person shall be the lesser of:
(A) the Fair Market Value of such asset at such date of
determination and
(B) the amount of such Indebtedness of such other Persons;
(8) Hedging Obligations of such Person; and
(9) all obligations of the type referred to in clauses (1) through (8)
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.
182
The amount of Indebtedness of any Person at any date shall be 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.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement to which such Person is party or of which it is a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extension of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary" and the covenant described under "Certain
Covenants--Limitation on restricted payments":
(1) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the Fair Market
Value of the net assets of any (i) Subsidiary of the Company at the
time that such Subsidiary is designated an Unrestricted Subsidiary
and (ii) Restricted Subsidiary at the time of any sale or other
disposition of any shares of such Restricted Subsidiary that results
in such Restricted Subsidiary no longer constituting a Restricted
Subsidiary; provided, however, that upon a redesignation of an
Unrestricted Subsidiary as a Restricted Subsidiary, the Company
shall be deemed to continue to have a permanent "Investment" in an
Unrestricted Subsidiary in an amount (if positive) equal to:
(A) the Company's "Investment" in such Subsidiary at the time of
such redesignation less
(B) the portion (proportionate to the Company's equity interest in
such Subsidiary) of the Fair Market Value of the net assets of
such Subsidiary at the time of such redesignation; and
(2) any property transferred to or from an Unrestricted Subsidiary shall
be valued at its Fair Market Value at the time of such transfer.
"Legal Holiday" means a Saturday, Sunday or other day on which banking
institutions are not required by law or regulation to be open in the State of
New York.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments
received (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and
proceeds from the sale or other disposition of any securities received as
consideration, but only as and when received, but excluding any other
consideration received in the form of assumption by the acquiring Person of
Indebtedness or other obligations relating to the properties or assets that are
the subject of such Asset Disposition or received in any other noncash form)
therefrom, in each case net of:
(1) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and all Federal, state, provincial,
foreign and local taxes required to be paid or accrued as a
liability under GAAP, as a consequence of such Asset Disposition,
(2) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of
any Lien upon or other security agreement of any kind with respect
to such assets, or which must by its terms, or in order to obtain a
necessary consent to such Asset Disposition, or by applicable law be
repaid out of the proceeds from such Asset Disposition,
183
(3) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of
such Asset Disposition and
(4) appropriate amounts to be provided by the seller as a reserve, in
accordance with GAAP, against any liabilities associated with the
property or other assets disposed of in such Asset Disposition and
retained by the Company or any Restricted Subsidiary after such
Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale 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.
"Officer" means the Chairman of the Board, the Chief Executive Officer,
the Chief Financial Officer, the President, any Vice President, the Treasurer
or the Secretary of the Company. "Officer" of Dex Media East Finance or a
Senior Subordinated Note Guarantor has a correlative meaning.
"Officers' Certificate" means a certificate signed by two Officers.
"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 the
Company, a Senior Subordinated Note Guarantor or the trustee.
"Permitted Asset Swap" means any transfer of properties or assets by the
Company 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 Permitted Business; provided that (i)
the aggregate fair market value (as determined in good faith by the Governing
Board of the Company) of the property or assets being transferred by the
Company or such Restricted Subsidiary is not greater than the aggregate fair
market value (as determined in good faith by the Governing Board of the
Company) of the property or assets received by the Company or such Restricted
Subsidiary in such exchange and (ii) the aggregate fair market value (as
determined in good faith by the Governing Board of the Company) of all property
or assets transferred by the Company and any of its Restricted Subsidiaries in
any such transfer, together with the aggregate fair market value of property or
assets transferred in all prior Permitted Asset Swaps, shall not exceed 15% of
the Company's Consolidated net revenues for the prior fiscal year.
"Permitted Business" means any business engaged in by the Company or any
Restricted Subsidiary on November 8, 2002 and any Related Business.
"Permitted Holders" means The Carlyle Group, Welsh, Carson, Anderson &
Stowe and their respective Affiliates and any Person acting in the capacity of
an underwriter in connection with a public or private offering of Parent's, Dex
Media's or the Company's Capital Stock.
"Permitted Investment" means an Investment by the Company or any
Restricted Subsidiary in:
(1) the Company, a Restricted Subsidiary or a Person that will, upon the
making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is
a Permitted Business;
(2) another Person if as a result of such Investment such other Person
is merged or consolidated with or into, or transfers or conveys all
or substantially all its assets to, the Company or a Restricted
Subsidiary (other than Dex Media East Finance); provided, however,
that such Person's primary business is a Permitted Business;
(3) Temporary Cash Investments;
(4) receivables owing to the Company or any Restricted Subsidiary (other
than Dex Media East Finance) 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 the Company or any such
Restricted Subsidiary deems reasonable under the circumstances;
184
(5) payroll, travel 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;
(6) loans or advances to employees made in the ordinary course of
business consistent with past practices of the Company or such
Restricted Subsidiary and not exceeding $10.0 million in the
aggregate outstanding at any one time;
(7) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company
or any Restricted Subsidiary or in satisfaction of judgments;
(8) any Person to the extent such Investment represents the noncash
portion of the consideration received for an Asset Disposition that
was made pursuant to and in compliance with the covenant described
under "Certain Covenants--Limitation on sale of assets and
subsidiary stock";
(9) Interest Rate Agreements and Commodity Hedging Agreements permitted
under clause (b)(5) of the covenant described under "Certain
Covenants--Limitation on indebtedness";
(10) any Person; provided, however, that the payment for such Investments
consists solely of Net Cash Proceeds from either the sale of Capital
Stock of the Company (other than Disqualified Stock) or cash common
equity contributions to the Company; provided, however, that such
Net Cash Proceeds or equity contributions will be excluded from the
calculation of amounts under clause (4)(C)(ii) of paragraph (a) of
the covenant described under "Certain Covenants--Limitation on
restricted payments"; or
(11) any Person in an aggregate amount outstanding at any time not to
exceed $50.0 million.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) that is preferred as
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 Capital Stock of any other class of such Person.
"principal" of a Senior Subordinated Note means the principal of the
Senior Subordinated Note plus the premium, if any, payable on the Senior
Subordinated Note which is due or overdue or is to become due at the relevant
time.
"Purchase Money Indebtedness" means Indebtedness:
(1) consisting of the deferred purchase price of an asset, conditional
sale obligations, obligations under any title retention agreement
and other purchase money obligations, in each case where the
maturity of such Indebtedness does not exceed the anticipated useful
life of the asset being financed, and
(2) Incurred to finance the acquisition by the Company or a Restricted
Subsidiary of such asset, including additions and improvements;
provided, however, that such Indebtedness is incurred within 180 days after the
acquisition by the Company or such Restricted Subsidiary of such asset.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced"
and "Refinancing" shall have correlative meanings.
185
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any
defeasance or discharge mechanism) any Indebtedness of the Company or any
Restricted Subsidiary existing on November 8, 2002 or Incurred in compliance
with the Senior Subordinated Note Indenture (including Indebtedness of the
Company that Refinances Refinancing Indebtedness); provided, however, that:
(1) the Refinancing Indebtedness has a Stated Maturity no earlier than
the Stated Maturity of the Indebtedness being Refinanced,
(2) the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater
than the Average Life of the Indebtedness being Refinanced,
(3) such Refinancing Indebtedness is Incurred in an aggregate principal
amount (or if issued with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal
amount (or if issued with original issue discount, the aggregate
accreted value) then outstanding of the Indebtedness being
Refinanced (plus fees and expenses, including any premium and
defeasance costs) and
(4) if the Indebtedness being Refinanced is subordinated in right of
payment to the Senior Subordinated Notes, such Refinancing
Indebtedness is subordinated in right of payment to the Senior
Subordinated Notes at least to the same extent as the Indebtedness
being Refinanced;
provided further, however, that Refinancing Indebtedness shall not include:
(A) Indebtedness of a Restricted Subsidiary that is not a Senior
Subordinated Note Guarantor that Refinances Indebtedness of the
Company or
(B) Indebtedness of the Company or a Restricted Subsidiary that
Refinances Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or complementary
to the businesses of the Company and the Restricted Subsidiaries on November 8,
2002.
"Representative" means the trustee, agent or representative (if any) for
an issue of Senior Indebtedness.
"Restricted Subsidiary" means Dex Media East Finance and any other
Subsidiary of the Company other than an Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Issuers secured by a
Lien. "Secured Indebtedness" of a Senior Subordinated Note Guarantor has a
correlative meaning.
"Senior Notes" means the 9 7/8% Senior Notes due 2009 issued by the
Company and Dex Media East Finance.
"Senior Subordinated Indebtedness" of the Company means the Senior
Subordinated Notes and any other Indebtedness of the Company that specifically
provides that such Indebtedness is to rank equally with the Senior Subordinated
Notes in right of payment and is not subordinated by its terms in right of
payment to any Indebtedness or other obligation of the Company which is not
Senior Indebtedness. "Senior Subordinated Indebtedness" of Dex Media East
Finance or a Senior Subordinated Note Guarantor has a correlative meaning.
"Senior Subordinated Note Guarantee" means each Guarantee of the
obligations with respect to the Senior Subordinated Notes issued by a Person
pursuant to the terms of the Senior Subordinated Note Indenture.
"Senior Subordinated Note Guarantor" means any Person that has issued a
Senior Subordinated Note Guarantee.
186
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final 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 the issuer unless such contingency has
occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on November 8, 2002 or thereafter Incurred) that is subordinate or
junior in right of payment to the Senior Subordinated Notes pursuant to a
written agreement. "Subordinated Obligation" of Dex Media East Finance or a
Senior Subordinated Note Guarantor has a correlative meaning.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by:
(1) such Person,
(2) such Person and one or more Subsidiaries of such Person or
(3) one or more Subsidiaries of such Person.
"Tax Distribution" means any distribution by the Company to its direct or
indirect owners which (i) with respect to quarterly estimated tax payments due
in each calendar year shall be equal to twenty-five percent (25%) of the Income
Tax Liabilities for such calendar year as estimated in writing by the chief
financial officer of the Company, (ii) with respect to tax payments to be made
with income tax returns filed for an entire taxable year or with respect to
adjustments to such returns imposed by the Internal Revenue Service or other
taxing authority, shall be equal to the Income Tax Liabilities for each taxable
year minus the aggregate amount distributed for such taxable year as provided
in clause (i) above and (iii) with respect to taxes not determined by reference
to income, represents the amount of any such taxes imposed on a direct or
indirect owner of the Company as a result of such owner's ownership of the
equity of the Company. In the event the amount determined under clause (ii) is
a negative amount, the amount of any Tax Distributions in the succeeding
taxable year (or, if necessary, any subsequent taxable years) shall be reduced
by such negative amount.
"Temporary Cash Investments" means any of the following:
(1) any investment in direct obligations of the United States of America
or any agency thereof or obligations Guaranteed by the United States
of America or any agency thereof,
(2) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 365 days of the date of
acquisition thereof issued by a bank or trust company that is
organized under the laws of the United States of America, any state
thereof or any foreign country recognized by the United States of
America having capital, surplus and undivided profits aggregating in
excess of $250,000,000 (or the foreign currency equivalent thereof)
and whose long-term debt is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities
Act),
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above
entered into with a bank meeting the qualifications described in
clause (2) above,
187
(4) investments in commercial paper, maturing not more than 365 days
after the date of acquisition, issued by a corporation (other than
an Affiliate of the Company) organized and in existence under the
laws of the United States of America or any foreign country
recognized by the United States of America with a rating at the time
as of which any investment therein is made of "P-1" (or higher)
according to Moody's Investors Service, Inc. or "A-1" (or higher)
according to Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. ("S&P"), and
(5) 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 of America, or by any
political subdivision or taxing authority thereof, and rated at
least "A" by S&P or "A" by Moody's Investors Service, Inc.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. 77aaa-77bbbb) as in
effect on November 8, 2002.
"Total Consolidated Indebtedness" means, as of any date of determination,
an amount equal to the aggregate amount of all Indebtedness of the Company and
its Restricted Subsidiaries, determined on a Consolidated basis in accordance
with GAAP, outstanding as of such date of determination, after giving effect to
any Incurrence of Indebtedness and the application of the proceeds therefrom
giving rise to such determination.
"Trade Payables" means, with respect to any Person, any accounts payable
or any indebtedness or monetary obligation to trade creditors created, assumed
or Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Trust Officer" means the Chairman of the Board, the President or any
other officer or assistant officer of the trustee assigned by the trustee to
administer its corporate trust matters.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of the Company that at the time of determination
shall be designated an Unrestricted Subsidiary by the Governing
Board of the Company in the manner provided below and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Governing Board of the Company may designate any Subsidiary of the
Company (including any newly acquired or newly formed Subsidiary of the
Company, but excluding Dex Media East Finance) to be an Unrestricted Subsidiary
unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or
Indebtedness of, or owns or holds any Lien on any property of, the Company or
any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary
to be so designated; provided, however, that either:
(A) the Subsidiary to be so designated has total Consolidated assets
of $1,000 or less or
(B) if such Subsidiary has Consolidated assets greater than $1,000,
then such designation would be permitted under the covenant
entitled "Certain Covenants--Limitation on restricted payments."
The Governing Board of the Company may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation:
(x) the Company could Incur $1.00 of additional Indebtedness under
paragraph (a) of the covenant described under "Certain
Covenants--Limitation on indebtedness" and
(y) no Default shall have occurred and be continuing.
188
Any such designation of a Subsidiary as a Restricted Subsidiary or
Unrestricted Subsidiary by the Governing Board of the Company shall be
evidenced to the Trustee by promptly filing with the Trustee a copy of the
resolution of the Governing Board of the Company giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a 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 Subsidiary" means a Restricted Subsidiary of the Company all
the Capital Stock of which (other than directors' qualifying shares) is owned
by the Company or another Wholly Owned Subsidiary.
REGISTRATION RIGHTS
We have filed a registration statement to comply with our obligation under
the registration rights agreements to register the issuance of the exchange
notes. See "The Exchange Offer."
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BOOK-ENTRY; DELIVERY AND FORM
The notes will be represented by one or more permanent global notes in
definitive, fully registered form without interest coupons and will be
deposited with the Trustee as custodian for, and registered in the name of a
nominee of, The Depository Trust Company.
Ownership of beneficial interests in a global note will be limited to
persons who have accounts with The Depository Trust Company, which we refer to
as participants, or persons who hold interests through participants. Ownership
of beneficial interests in a global note will be shown on, and the transfer of
that ownership will be effected only through, records maintained by The
Depository Trust Company or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants).
So long as The Depository Trust Company, or its nominee, is the registered
owner or holder of a the exchange notes, The Depository Trust Company or that
nominee, as the case may be, will be considered the sole owner or holder of the
exchange notes represented by the global note for all purposes under the
indentures and the notes. No beneficial owner of an interest in a global note
will be able to transfer that interest except in accordance with The Depository
Trust Company's applicable procedures, in addition to those provided for under
the Indentures and, if applicable, those of Euroclear and Clearstream Banking.
Payments of the principal of, and interest on, a global note will be made
to The Depository Trust Company or its nominee, as the case may be, as the
registered owner thereof. None of Dex Media East, Dex Media East Finance, Dex
Media International, the Trustee or any paying agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a global note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
We expect that The Depository Trust Company or its nominee, upon receipt
of any payment of principal or interest in respect of a global note, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such global note as
shown on the records of The Depository Trust Company or its nominee. We also
expect that payments by participants to owners of beneficial interests in such
global note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in The Depository Trust Company will be
effected in the ordinary way in accordance with The Depository Trust Company
rules and will be settled in same-day funds. Transfers between participants in
Euroclear and Clearstream Banking will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
We expect that The Depository Trust Company will take any action permitted
be taken by a holder of notes (including the presentation of notes for as
described below) only at the direction of one or more participants account The
Depository Trust Company interests in a global note is and only in respect of
such portion of the aggregate principal amount as to which such participant or
participants has or have given such to exchange to whose credited of notes
direction. However, if there is an event of default under the notes, The
Depository Trust Company will exchange the applicable global note for
certificated notes, which it will distribute to its participants.
We understand that: The Depository Trust Company is a limited purpose
trust company organized under the laws of the State of New York, a "banking
organization" within the meaning of New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. The Depository Trust Company was
created to hold securities for its participants and facilitate the clearance
and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Indirect access to
The Depository Trust
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Company system is available to others such as banks, brokers, dealers and trust
companies and certain other organizations that clear through or maintain a
custodial relationship with a participant, either directly or indirectly, whom
we refer to as indirect participants.
Although The Depository Trust Company, Euroclear and Clearstream Banking
are expected to follow the foregoing procedures in order to facilitate
transfers of interests in a global note among participants of The Depository
Trust Company, Euroclear and Clearstream Banking, they are under no obligation
to perform or continue to perform such procedures, and such procedures may be
discontinued at any time. None of Dex Media East, Dex Media East Finance, Dex
Media International or the Trustee will have any responsibility for the
performance by The Depository Trust Company, Euroclear or Clearstream Banking
or their respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
If The Depository Trust Company is at any time unwilling or unable to
continue as a depositary for the global notes or if at any time The Depository
Trust Company ceases to be a "clearing agency" registered under the Exchange
Act and a successor depositary is not appointed by Dex Media East and Dex Media
East Finance within 90 days, we will issue certificated notes in exchange for
the global notes. Holders of an interest in a global note may receive
certificated notes in accordance with The Depository Trust Company's rules and
procedures in addition to those provided for under the applicable indenture.
191
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material United States income
tax consequences relevant to the exchange of the outstanding notes pursuant to
this exchange offer and the ownership and disposition of the notes, but does
not purport to be a complete analysis of all potential tax effects. The
discussion is based upon the Internal Revenue Code of 1986, as amended, or the
Code, United States Treasury Regulations issued thereunder, Internal Revenue
Service rulings and pronouncements and judicial decisions now in effect, all of
which are subject to change at any time. Any such change may be applied
retroactively in a manner that could adversely affect a holder of the notes.
This discussion does not address all of the United States federal income tax
consequences that may be relevant to a holder in light of such holder's
particular circumstances or to holders subject to special rules, such as
certain financial institutions, U.S. expatriates, insurance companies, dealers
in securities or currencies, traders in securities, United States Holders (as
defined below) whose functional currency is not the U.S. dollar, tax-exempt
organizations and persons holding the notes as part of a "straddle," "hedge,"
"conversion transaction" or other integrated transaction. In addition, the
effect of any applicable state, local, foreign or other tax laws, including
gift and estate tax laws is not discussed. The discussion deals only with notes
held as "capital assets" (generally, property for investment) within the
meaning of Section 1221 of the Code.
As used herein, "United States Holder" means a beneficial owner of the
notes who or that is:
o an individual that is a citizen or resident of the United States,
including an alien individual who is a lawful permanent resident of the
United States or meets the "substantial presence" test under Section
7701(b) of the Code;
o a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or a political
subdivision thereof;
o an estate, the income of which is subject to United States federal
income tax regardless of its source; or
o a trust, if a United States court can exercise primary supervision over
the administration of the trust and one or more United States persons
can control all substantial trust decisions, or, if the trust was in
existence on August 20, 1996, a trust that has elected to continue to
be treated as a United States person.
If a partnership or other entity taxable as a partnership holds notes, the
tax treatment of a partner in the partnership will generally depend upon the
status of the partner and the activities of the partnership. If you are a
partner of a partnership holding the notes, you should consult your tax advisor
regarding the tax consequences of the ownership and disposition of the notes.
We have not sought and will not seek any rulings from the Internal Revenue
Service, or the IRS, with respect to the matters discussed below. There can be
no assurance that the IRS will not take a different position concerning the tax
consequences of the exchange of the outstanding notes for the exchange notes
pursuant to this offer or the ownership or disposition of the notes or that any
such position would not be sustained.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO
THE APPLICATION OF THE TAX CONSEQUENCES DISCUSSED BELOW TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX
LAWS, INCLUDING GIFT AND ESTATE TAX LAWS, AND ANY TAX TREATIES.
THE EXCHANGE
The exchange of the outstanding notes for the exchange notes in the
exchange offer will not be treated as an "exchange" for federal income tax
purposes, because the exchange notes will not be considered to differ
materially in kind or extent from the outstanding notes. Accordingly, the
exchange of outstanding notes for exchange notes will not be a taxable event to
holders for federal
192
income tax purposes. Moreover, the exchange notes will have the same tax
attributes as the outstanding notes and the same tax consequences to holders as
the outstanding notes have to holders, including without limitation, the same
issue price, adjusted issue price, adjusted tax basis and holding period.
Therefore, references to "notes" apply equally to the exchange notes and the
outstanding notes.
UNITED STATES HOLDERS
INTEREST
Payments of stated interest on the notes generally will be taxable to a
United States Holder as ordinary income at the time that such payments are
received or accrued, in accordance with such United States Holder's method of
accounting for United States federal income tax purposes. In certain
circumstances (see "Description of Senior Exchange Notes--Change of Control,"
and "Description of Senior Subordinated Exchange Notes--Change of Control,") we
may be obligated to pay amounts in excess of stated interest or principal on
the notes. According to Treasury Regulations, the possibility that any such
payments in excess of stated interest or principal will be made will not affect
the amount of interest income a United States Holder recognizes if there is
only a remote chance as of the date the notes were issued that such payments
will be made. We believe that the likelihood that we will be obligated to make
any such payments is remote. Therefore, we do not intend to treat the potential
payment of a premium pursuant to the change of control provisions as part of
the yield to maturity of any notes. Our determination that these contingencies
are remote is binding on a United States Holder unless such holder discloses
its contrary position in the manner required by applicable Treasury
Regulations. Our determination is not, however, binding on the IRS, and if the
IRS were to challenge this determination, a United States Holder might be
required to accrue income on its notes in excess of stated interest, and to
treat as ordinary income rather than capital gain any income realized on the
taxable disposition of a note before the resolution of the contingencies. In
the event a contingency occurs, it would affect the amount and timing of the
income recognized by a United States Holder. If we pay a premium pursuant to
the change of control provisions, United States Holders will be required to
recognize such amounts as income.
MARKET DISCOUNT
If a United States Holder acquires a note at a cost that is less than the
stated redemption price at maturity, the amount of such difference is treated
as "market discount" for federal income tax purposes, unless such difference is
less than .0025 multiplied by the stated redemption price at maturity
multiplied by the number of complete years until maturity (from the date of
acquisition).
Under the market discount rules of the Code, a United States Holder is
required to treat any gain on the disposition of a note as ordinary income to
the extent of the accrued market discount that has not been previously included
in income. Thus, principal payments and payments received upon the disposition
of a note are treated as ordinary income to the extent of accrued market
discount that has not been previously included in income. If a United States
Holder disposes of a note with market discount in certain otherwise nontaxable
transactions, such holder may be required to include accrued market discount as
ordinary income as if the holder had sold the note at its then fair market
value.
In general, the amount of market discount that has accrued is determined
on a ratable basis. A United States Holder may, however, elect to determine the
amount of accrued market discount on a constant yield to maturity basis. This
election is made on a note-by-note basis and is irrevocable.
With respect to notes with market discount, a United States Holder may not
be allowed to deduct immediately a portion of the interest expense on any
indebtedness incurred or continued to purchase or to carry the notes. A United
States Holder may elect to include market discount in income currently as it
accrues, in which case the interest deferral rule set forth in the preceding
sentence will not apply. This election will apply to all debt instruments that
a U.S. holder acquires on or after the first day of the first taxable year to
which the election applies and is irrevocable without the consent of the IRS.
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AMORTIZABLE BOND PREMIUM
In general, if a United States Holder purchases a note for an amount in
excess of the sum of all amounts payable on the note after the acquisition date
(other than stated interest payments), such excess will constitute amortizable
bond premium. A United States Holder generally may elect to amortize the
premium over the remaining term of the note on a constant yield method as an
offset to interest when includible in income under such holder's regular
accounting method. The notes are subject to call provisions at our option at
various times, as described in this prospectus under "Description of Senior
Exchange Notes-Optional Redemption" and "Description of Senior Subordinated
Exchange Notes-Optional Redemption." A United States Holder will calculate the
amount of amortizable bond premium based on the amount payable at the
applicable call date, but only if the use of the call date (in lieu of the
stated maturity date) results in a smaller amortizable bond premium for the
period ending on the call date. If a United States Holder does not elect to
amortize bond premium, that premium will decrease the gain or increase the loss
such holder would otherwise recognize on disposition of the note. An election
to amortize premium on a constant yield method will also apply to all debt
obligations held or subsequently acquired by the electing United States Holder
on or after the first day of the first taxable year to which the election
applies. The election may not be revoked the without the consent of the IRS.
United States Holders should consult their own tax adviser before making this
election.
SALE OR OTHER TAXABLE DISPOSITION OF THE NOTES
A United States Holder will recognize gain or loss on the sale, exchange,
redemption, retirement or other taxable disposition of a note equal to the
difference between the sum of the cash and the fair market value of any
property received in exchange therefor (less a portion allocable to any accrued
and unpaid interest, which generally will be taxable as ordinary income if not
previously included in such holder's income) and the United States Holder's
adjusted tax basis in the note. A United States Holder's adjusted basis in a
note generally will be the United States Holder's cost therefor, reduced by any
principal payments received by such holder and by the amount of amortizable
bond premium, if any, taken into account in respect of the note, and increased
by the amount of market discount, if any, previously included in income in
respect of the note. This gain or loss generally will be a capital gain or
loss, except as described under "Market Discount" above. In the case of a
non-corporate United States Holder, such capital gain will be subject to tax at
a reduced rate if a note is held for more than one year. The deductibility of
capital losses is subject to limitation.
BACKUP WITHHOLDING
A United States Holder may be subject to a backup withholding tax (up to
31%) when such holder receives interest and principal payments on the notes
held or upon the proceeds received upon the sale or other disposition of such
notes. Certain holders (including, among others, corporations and certain
tax-exempt organizations) are generally not subject to backup withholding. A
United States Holder will be subject to this backup withholding tax if such
holder is not otherwise exempt and such holder:
o fails to furnish its taxpayer identification number, or TIN, which, for
an individual, is ordinarily his or her social security number;
o furnishes an incorrect TIN;
o is notified by the IRS that it has failed to properly report payments
of interest or dividends; or
o fails to certify, under penalties of perjury, that it has furnished a
correct TIN and that the IRS has not notified the United States Holder
that it is subject to backup withholding.
United States Holders should consult their personal tax advisor regarding
their qualification for an exemption from backup withholding and the procedures
for obtaining such an exemption, if applicable. The backup withholding tax is
not an additional tax and taxpayers may use amounts withheld as a credit
against their United States federal income tax liability or may claim a refund
as long as they timely provide certain information to the IRS.
194
NON-UNITED STATES HOLDERS
A non-United States Holder is a beneficial owner of the notes who is not a
United States Holder.
INTEREST
Interest paid to a non-United States Holder will not be subject to United
States federal withholding tax of 30% (or, if applicable, a lower treaty rate)
provided that:
o such holder does not directly or indirectly, actually or
constructively, own 10% or more of the total combined voting power of
all of Dex Media East, Inc.'s classes of stock;
o such holder is not a controlled foreign corporation that is related to
Dex Media East, Inc. through stock ownership and is not a bank that
received such notes on an extension of credit made pursuant to a loan
agreement entered into in the ordinary course of its trade or business;
o either (1) the non-United States Holder certifies in a statement
provided to us or our paying agent, under penalties of perjury, that it
is not a "United States person" within the meaning of the Code and
provides its name and address (generally by completing IRS Form
W-8BEN), (2) a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary
course of its trade or business and holds the notes on behalf of the
non-United States Holder certifies to us or our paying agent under
penalties of perjury that it, or the financial institution between it
and the non-United States Holder, has received from the non-United
States Holder a statement, under penalties of perjury, that such holder
is not a "United States person" and provides us or our paying agent
with a copy of such statement or (3) the non-United States Holder holds
its notes directly through a "qualified intermediary" and certain
conditions are satisfied; and
o the interest is not effectively connected with the conduct of a trade
or business within the United States.
Even if the above conditions are not met, a non-United States Holder may
be entitled to an exemption from withholding tax if the interest is effectively
connected to a United States trade or business as described below or to a
reduction in or an exemption from withholding tax on interest under a tax
treaty between the United States and the non-United States Holder's country of
residence. To claim a reduction or exemption under a tax treaty, a non-United
States Holder must generally complete an IRS Form W-8BEN and claim the
reduction or exemption on the form. In some cases, a non-United States Holder
may instead be permitted to provide documentary evidence of its claim to the
intermediary, or a qualified intermediary may already have some or all of the
necessary evidence in its files.
The certification requirements described above may require a non-United
States Holder that provides an IRS form, or that claims the benefit of an
income tax treaty, to also provide its United States taxpayer identification
number.
SALE OR OTHER TAXABLE DISPOSITION OF THE NOTES
A non-United States Holder will generally not be subject to United States
federal income tax or withholding tax on gain recognized on the sale, exchange,
redemption, retirement or other disposition of a note so long as (i) the gain
is not effectively connected with the conduct by the non-United States Holder
of a trade or business within the United States (or if a tax treaty applies,
the gain is not effectively connected with the conduct by the non-United States
Holder of a trade or business within the United States and attributable to a
U.S. permanent establishment maintained by such non-United States Holder) and
(ii) in the case of a Non-United States Holder who is an individual, such
non-United States Holder is not present in the United States for 183 days or
more in the taxable year of disposition and certain other requirements are met.
195
UNITED STATES TRADE OR BUSINESS
If interest or gain from a disposition of the notes is effectively
connected with a non-United States Holder's conduct of a United States trade or
business, or if an income tax treaty applies and the non-United States Holder
maintains a United States "permanent establishment" to which the interest or
gain is generally attributable, the non-United States Holder may be subject to
United States federal income tax on the interest or gain on a net basis in the
same manner as if it were a United States Holder. If interest income received
with respect to the notes is taxable on a net basis, the 30% withholding tax
described above will not apply (assuming an appropriate certification is
provided, generally IRS Form W-8ECI). A foreign corporation that is a holder of
a note also may be subject to a branch profits tax equal to 30% of its
effectively connected earnings and profits for the taxable year, subject to
certain adjustments, unless it qualifies for a lower rate under an applicable
income tax treaty. For this purpose, interest on a note or gain recognized on
the disposition of a note will be included in earnings and profits if the
interest or gain is effectively connected with the conduct by the foreign
corporation of a trade or business in the United States.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding will likely not apply to payments of principal or
interest made by us or our paying agents, in their capacities as such, to a
non-United States Holder of a note if the holder is exempt from withholding tax
on interest as described above. However, information reporting on IRS Form
1042-S may still apply with respect to interest payments. Payments of the
proceeds from a disposition by a non-United States Holder of a note made to or
through a foreign office of a broker will not be subject to information
reporting or backup withholding, except that information reporting (but
generally not backup withholding) may apply to those payments if the broker is:
o a United States person;
o a controlled foreign corporation for United States federal income tax
purposes;
o a foreign person 50% or more of whose gross income is effectively
connected with a United States trade or business for a specified
three-year period; or
o a foreign partnership, if at any time during its tax year, one or more
of its partners are United States persons, as defined in Treasury
Regulations, who in the aggregate hold more than 50% of the income or
capital interest in the partnership or if, at any time during its tax
year, the foreign partnership is engaged in a United States trade or
business.
Payment of the proceeds from a disposition by a non-United States Holder
of a note made to or through the United States office of a broker is generally
subject to information reporting and backup withholding unless the holder or
beneficial owner certifies as to its taxpayer identification number or
otherwise establishes an exemption from information reporting and backup
withholding.
Non-United States Holders should consult their own tax advisors regarding
application of withholding and backup withholding in their particular
circumstance and the availability of and procedure for obtaining an exemption
from withholding and backup withholding under current Treasury regulations. In
this regard, the current Treasury regulations provide that a certification may
not be relied on if we or our agent (or other payor) knows or has reasons to
know that the certification may be false. Any amounts withheld under the backup
withholding rules from a payment to a non-United States Holder will be allowed
as a credit against the holder's United States federal income tax liability or
may be refunded, provided the required information is furnished in a timely
manner to the IRS.
196
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus together with
any resale of those exchange notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in the resales
of exchange notes received in exchange for outstanding notes where those
outstanding notes were acquired as a result of market-making activities or
other trading activities. We have agreed that for a period of up to 180 days
after the expiration date, we will make this prospectus, as amended or
supplemented, available to any broker-dealer that requests it in the letter of
transmittal for use in any such resale.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers or any other persons. 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 of those
exchange notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on 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.
We have agreed to pay all expenses incident to our performance of, or
compliance with, the registration rights agreements and will indemnify the
holders of outstanding notes including any broker-dealers, and certain parties
related to such holders, against certain types of liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the securities offered hereby is being passed upon for us
by Latham & Watkins, New York, New York.
EXPERTS
The combined financial statements of the operations of Qwest Dex Holdings,
Inc. and subsidiary ("Dex") in the states of Colorado, Iowa, Minnesota,
Nebraska, New Mexico, North Dakota and South Dakota, referred to as Dex East
(as more fully described in Note 1 to the combined financial statements), as of
December 31, 2001 and 2000, and for each of the years in the three-year period
ended December 31, 2001, have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Dex Media East, Dex Media East Finance and Dex Media International have
filed with the U.S. Securities and Exchange Commission a registration statement
on Form S-4 pursuant to the Securities Act of 1933, as amended, covering the
exchange notes being offered hereby. This prospectus is not required to contain,
and does not contain, all the information contained in the registration
statement, such as information relating to the indemnification of directors and
officers, exhibits and undertakings by Dex Media, Dex Media East Finance and Dex
Media International. For further information with respect to Dex Media East, Dex
Media East Finance, Dex Media International and the exchange offer,
197
please refer to the registration statement. Although we have summarized the
material provisions of the contracts, agreements and other documents filed as
exhibits to the registration statement, we encourage you to read the documents
contained in the exhibits for a more complete understanding and description of
each contract, agreement or other document filed as an exhibit.
The indentures governing the outstanding notes provide that, even if we
are not subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, we will file with the SEC (unless
the SEC will not accept such a filing because we are not subject to any
reporting requirements at the time) and provide the trustee for the notes,
holders of the notes and prospective holders of the notes (upon request) within
15 days after we file (or would be required to file) them with the SEC, copies
of our annual report and the information, documents and other reports that are
specified in Sections 13 and 15(d) of the Exchange Act. Upon consummation of
the Exchange Offer, we will become subject to the periodic reporting and to the
informational requirements of the Exchange Act.
You may read and copy any document we file with the SEC at the SEC's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
room. Our SEC filings are also available to the public at the SEC's web site at
http://www.sec.gov.
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INDEX TO COMBINED FINANCIAL STATEMENTS
DEX EAST AUDITED COMBINED FINANCIAL STATEMENTS
Independent Auditors' Report ............................................................. F-2
Combined Balance Sheets at December 31, 2001 and 2000 .................................... F-3
Combined Statements of Income for the three years in the period ended
December 31, 2001 ....................................................................... F-4
Combined Statements of Cash Flows for the three years in the period ended December 31,
2001 .................................................................................... F-5
Combined Statements of Changes in Owner's Deficit for the three years in the period
ended December 31, 2001 ................................................................. F-6
Notes to Combined Financial Statements ................................................... F-7
DEX EAST UNAUDITED INTERIM COMBINED FINANCIAL STATEMENTS
Combined Balance Sheets at September 30, 2002 and December 31, 2001 ...................... F-26
Combined Statements of Income for the three and nine months ended September 30,
2002 and 2001 ........................................................................... F-27
Combined Statements of Cash Flows for the nine months ended September 30, 2002 and 2001... F-28
Notes to Combined Financial Statements ................................................... F-29
Dex Media East LLC had not been formed at December 31, 2001, and had no
assets or operations as of September 30, 2002. The accompanying combined
financial statements of Dex East, the predecessor to Dex Media East LLC,
include the attributed assets, liabilities and operations of Qwest Dex
Holdings, Inc. and its subsidiary for business conducted in the states of
Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota.
See Note 2 to the audited combined financial statements.
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors,
Qwest Communications International Inc.:
We have audited the accompanying combined balance sheets of the operations
of Qwest Dex Holdings, Inc. and subsidiary ("Dex") in the states of Colorado,
Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota,
hereinafter referred to as Dex East (as more fully described in Note 1) as of
December 31, 2001 and 2000, and the related combined statements of income,
owner's deficit and cash flows for each of the years in the three-year period
ended December 31, 2001. These combined financial statements are the
responsibility of Dex's management. Our responsibility is to express an opinion
on these combined financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the combined
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall combined financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2a, the financial statement items of Dex related to
the operations of Dex East are included in the accompanying combined financial
statements. As discussed in Notes 2c and 12a, the combined results of
operations of Dex East for each of the years in the three-year period ended
December 31, 2001 were previously included in the consolidated financial
statements of Qwest Communications International Inc., a public company, using
the point of publication method for directory advertising revenue and cost
recognition. These combined financial statements of Dex East present directory
advertising revenue and costs under the deferral and amortization method for
all periods presented.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of Dex East as
of December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2001,
in conformity with accounting principles generally accepted in the United
States of America.
/s/ KPMG LLP
Denver, Colorado
September 25, 2002
F-2
DEX EAST
COMBINED BALANCE SHEETS
DECEMBER 31,
------------------------
(DOLLARS IN MILLIONS) 2001 2000
- ------------------------------------------------------------------------ ---------- -----------
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 55 $ --
Accounts receivable, net .............................................. 76 77
Deferred directory costs .............................................. 124 127
Current deferred taxes ................................................ 27 26
Other current assets .................................................. 4 1
-------- --------
Total current assets ................................................ 286 231
Investments ........................................................... -- 7
Property, plant and equipment, net .................................... 31 43
Prepaid benefit obligations and other assets .......................... 31 32
-------- --------
Total assets ........................................................... $ 348 $ 313
======== ========
LIABILITIES AND OWNER'S DEFICIT
Current liabilities:
Short-term borrowings from affiliate .................................. $ 1,391 $ 1,603
Accounts payable ...................................................... 14 22
Amounts due to related parties ........................................ 26 9
Employee compensation ................................................. 11 14
Deferred revenue and customer deposits ................................ 94 92
Merger-related reserves ............................................... -- 2
Other accrued liabilities ............................................. 17 8
-------- --------
Total current liabilities ........................................... 1,553 1,750
Deferred income taxes ................................................. 10 1
Post-retirement and other post-employment benefit obligations ......... 35 53
Other liabilities ..................................................... -- 2
-------- --------
Total liabilities ................................................... 1,598 1,806
-------- --------
Commitments and contingencies (Note 8)
Owner's deficit ....................................................... (1,250) (1,493)
-------- --------
Total liabilities and owner's deficit ............................... $ 348 $ 313
======== ========
See accompanying notes to combined financial statements.
F-3
DEX EAST
COMBINED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
--------------------------------
(DOLLARS IN MILLIONS) 2001 2000 1999
- -------------------------------------------------- ---------- ---------- ----------
Revenues:
Directory services revenues .................. $ 647 $ 619 $ 587
Directory services revenues, affiliates ...... 6 5 5
Internet yellow pages revenues ............... 9 6 2
Other revenues ............................... 4 8 7
----- ----- -----
Total revenues ............................. 666 638 601
----- ----- -----
Operating Expenses:
Cost of revenues ............................. 209 238 232
General and administrative expense ........... 32 35 76
Bad debt expense ............................. 16 14 11
Depreciation and amortization expense ........ 12 15 14
Merger-related expenses ...................... 4 6 --
Impairment charges ........................... 7 -- --
----- ----- -----
Total operating expense .................... 280 308 333
----- ----- -----
Operating income ........................... 386 330 268
Other (income) expense:
Interest income .............................. (4) (1) (3)
Interest expense ............................. 114 124 127
Other expense (income)--net .................. 7 (14) --
----- ----- -----
Income before income taxes ................. 269 221 144
Provision for income taxes .................... 108 91 58
----- ----- -----
Net income ................................. $ 161 $ 130 $ 86
===== ===== =====
See accompanying notes to combined financial statements.
F-4
DEX EAST
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------
(DOLLARS IN MILLIONS) 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Operating activities:
Net income ........................................................ $ 161 $ 130 $ 86
Adjustments to net income:
Depreciation and amortization ................................... 12 15 14
Employee benefit credit ......................................... (9) (9) --
Write down of investments ....................................... 7 -- --
Asset impairment charges ........................................ 7 -- --
Other post-retirement benefit curtailment gain .................. -- (6) --
Deferred tax provision .......................................... 8 (1) 9
Provision for bad debts ......................................... 16 14 11
Gain on sale of investments ..................................... -- (16) --
Changes in operating assets and liabilities:
Accounts receivable ............................................. (15) (32) (16)
Deferred directory costs ........................................ 3 -- (7)
Other current assets ............................................ (3) 2 (2)
Deferred revenue and customer deposits .......................... 2 10 8
Accounts payable and other liabilities .......................... 13 13 9
Employee benefit plan obligations and other, net ................ (10) 1 9
----- ----- -----
Cash provided by operating activities ........................... 192 121 121
----- ----- -----
Investing activities:
Expenditures for property, plant and equipment .................... -- (6) (11)
Capitalized software development costs ............................ (7) (9) (7)
Proceeds from sale of investments ................................. -- 17 --
Purchase of investments ........................................... -- (7) (1)
----- ----- -----
Cash used for investing activities .............................. (7) (5) (19)
----- ----- -----
Financing activities:
Short-term (payments to)/borrowings from affiliates ............... (212) (138) 130
Dividends paid .................................................... -- (29) (166)
Contributions from (distributions to) Qwest in lieu of income taxes 88 (44) (66)
(Distributions to) infusions from Qwest ........................... (6) 95 --
----- ----- -----
Cash used for financing activities .............................. (130) (116) (102)
----- ----- -----
Cash and cash equivalents:
Increase .......................................................... 55 -- --
Beginning balance ................................................. -- -- --
----- ----- -----
Ending balance .................................................... $ 55 $ -- $ --
===== ===== =====
See accompanying notes to combined financial statements.
F-5
DEX EAST
COMBINED STATEMENTS OF CHANGES IN OWNER'S DEFICIT
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
------------------------------------------------------------
OTHER
OWNER'S COMPREHENSIVE COMPREHENSIVE
(DOLLARS IN MILLIONS) DEFICIT INCOME (LOSS) TOTAL INCOME
- --------------------------------------------------- -------------- --------------- -------------- --------------
Balance, December 31, 1998 ........................ $(1,542) $ -- $(1,542)
Net income ....................................... 86 -- 86 $ 86
Other comprehensive income ....................... -- 10 10 10
-----
Comprehensive income ............................. $ 96
-----
Distribution to Qwest in lieu of taxes ........... (66) -- (66)
Dividends declared to Qwest ...................... (151) -- (151)
------- ----- -------
Balance, December 31, 1999 ........................ (1,673) 10 (1,663)
Net income ....................................... 130 -- 130 $ 130
Other comprehensive loss ......................... -- (10) (10) (10)
-----
Comprehensive income ............................. $ 120
-----
Distribution to Qwest in lieu of taxes ........... (44) -- (44)
Forfeiture of Qwest restricted stock ............. (1) -- (1)
Equity infusion from Qwest ....................... 95 -- 95
--------- ----- ---------
Balance, December 31, 2000 ........................ (1,493) -- (1,493)
Net income ....................................... 161 -- 161 $ 161
Other comprehensive income ....................... -- -- -- --
-----
Comprehensive income ............................. $ 161
-----
Contribution from Qwest in lieu of taxes ......... 88 -- 88
Distribution to Qwest ............................ (6) -- (6)
---------- ----- ----------
Balance, December 31, 2001 ........................ $(1,250) $ -- $(1,250)
========= ===== =========
See accompanying notes to combined financial statements.
F-6
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
1. DESCRIPTION OF BUSINESS
Organization and Operations. The combined financial statements of Dex East
represent a component of Qwest Dex Holdings, Inc. and its wholly-owned
subsidiary Qwest Dex, Inc. (collectively "Dex") and include the assets,
obligations and operating activities of Dex for the states of Colorado, Iowa,
Minnesota, Nebraska, New Mexico, North Dakota and South Dakota. Dex East and
Dex West (as defined below) are not separate legal entities but represent the
business of Dex in or attributable to the applicable states.
Dex is wholly-owned by Qwest Communications International Inc. ("Qwest").
Dex is the largest telephone directory publisher of White and Yellow Pages
directories to businesses and residents in Arizona, Colorado, Idaho, Iowa,
Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota,
Utah, Washington and Wyoming (the "local service area"). Virtually all of Dex's
revenues are derived from the sale of advertising in its various directories.
Dex also provides ancillary directory-related services, including
Internet-based directory and database marketing services. Dex distributes its
published directories to residents and businesses in the local service area
through a third-party vendor.
Prior to June 12, 1998, Dex was aligned with US WEST Media Group (the
"Media Group"), a targeted stock of US WEST, Inc. ("US WEST"), which included
the multimedia and directory businesses of US WEST. On June 12, 1998, the Media
Group was separated from US WEST and Dex was re-aligned with US WEST
Communications Group (the "Communications Group"), another targeted stock of US
WEST. The Communications Group (including Dex) assumed the name of its former
parent, US WEST. In connection with the separation and the alignment of Dex
with the Communications Group, the Communications Group assumed and refinanced
approximately $3.9 billion of debt formerly allocated to the Media Group. In
1999, Qwest Capital Funding, Inc. ("QCF") ascribed this $3.9 billion in debt to
Qwest Dex, Inc. through the line of credit borrowing arrangement discussed in
Note 4.
On June 30, 2000, Qwest completed its acquisition (the "Merger") of US
WEST. US WEST was deemed the accounting acquirer and its historical financial
statements, including those of its wholly-owned subsidiaries, were carried
forward as those of the newly combined company.
Sale of Dex. On August 19, 2002, Qwest entered into concurrent purchase
agreements (the "Dex East Purchase Agreement" and the "Dex West Purchase
Agreement") to sell the business of Dex to Dex Holdings LLC (the "Dex Buyer"),
a new entity formed by the private equity firms of The Carlyle Group and Welsh,
Carson, Anderson and Stowe (together, the "Sponsors"). The total sales price is
estimated to be $7.05 billion. The transaction involves the sale of the Dex
business in two stages, the first of which is expected to close in the fourth
quarter of 2002, with the second stage expected to close in 2003. The first
stage, as contained in the Dex East Purchase Agreement, will primarily
represent Dex's directory and publishing business conducted in the states of
Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota
("Dex East"). The second stage as contained in the Dex West Purchase Agreement
will primarily represent Dex's directory and publishing business in the
remaining seven states of Arizona, Idaho, Montana, Oregon, Utah, Washington and
Wyoming ("Dex West").
In accordance with the Dex East Purchase Agreement, Dex will contribute
certain assets and liabilities of Dex East into a newly formed company, SGN LLC
("SGN"). Subsequent to the transfer, the Dex Buyer will purchase from Dex all
of the outstanding equity interests in SGN for approximately $2.75 billion. In
the second stage of the transaction, Dex will contribute certain assets and
liabilities of Dex West as identified in the Dex West Purchase Agreement to
another newly
F-7
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
formed company, Dex West LLC. Subsequent to this transfer, the Dex Buyer will
purchase from Dex all the outstanding equity interests in Dex West LLC for
approximately $4.3 billion. Each purchase agreement is exclusive of the other
such that one sale may be completed without the other.
In addition, as part of the Dex East and Dex West Purchase Agreements, the
Dex Buyer has agreed to fulfill Qwest's obligations to publish and deliver
listings of certain residential and business customers pursuant to (i)
interconnection agreements with competitive local exchange carriers, local
exchange carriers and resellers of telecommunications services, (ii) tariffs
and (iii) laws, rules, regulations and orders of certain governmental entities.
The term of this agreement is 50 years commencing with the close of the sale.
The sales have been approved by the Board of Directors of each of the
parties to the agreements and are subject to certain conditions, including
financing conditions for the Dex Buyer and various regulatory approvals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The accompanying combined financial statements include the assets,
obligations and activities of Dex for business conducted in the states of
Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota.
To prepare these financial statements, management of Dex either specifically
identified, assigned or apportioned all assets, liabilities, revenues and
expenses of Dex to either Dex East or Dex West. Management believes such
specific identifications, assignments or apportionments are reasonable;
however, the resulting amounts could differ from amounts that would be
determined if Dex East and Dex West operated on a stand-alone basis. Because of
Dex East's and Dex West's relationship with Dex as well as Qwest and its other
affiliates, the assets, liabilities, revenues and expenses are not necessarily
indicative of what they would be had Dex East and Dex West operated without the
shared resources of Qwest and its affiliates. Accordingly, these combined
financial statements are not necessarily indicative of future financial
position or results of operations.
In order to divide the Dex consolidated financial statements between Dex
East and Dex West, it was necessary for management to make certain assignments
and apportionments. Wherever possible, account balances and specific amounts
that directly related to Dex East or Dex West were assigned directly to Dex
East or Dex West, as appropriate and as discussed in further detail below. When
no direct assignment was feasible, account balances were apportioned using a
variety of factors based on a cost causative relationship to the account
balance being apportioned. The following is a more detailed description of the
primary bases for these assignments and apportionments of Dex accounts between
Dex East and Dex West.
BALANCE SHEETS:
Cash and cash-equivalents--As the balances of cash and cash equivalents as
of January 1, 1999 was $0 in the Dex consolidated financial statements, such $0
balance was assigned to both Dex East and Dex West at that date. Changes in
cash and cash equivalents during 2001, 2000 and 1999 and the resulting ending
balances as of December 31, 2001, 2000 and 1999 were determined based on
operating activities within the specified Dex East states.
Accounts receivable, net--(i) the majority of accounts receivable were
specifically identified as related to the customers within the states included
in Dex East's stated geographic area and (ii) for accounts receivable that were
not state-specific, the balances were apportioned based on relative revenues of
Dex East and Dex West.
Deferred directory costs--specifically identified by state and by
directory.
F-8
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
Current deferred taxes--specifically identified based on tax computations
using temporary differences based on the difference between the book and tax
bases of state specific assets and liabilities.
Other current assets--apportioned based upon total current assets
excluding other current assets relative to total Dex current assets excluding
other current assets.
Investments--apportioned based upon relative EBITDA for each respective
year presented.
Property, plant and equipment, net--The majority of the property, plant
and equipment were specifically identified based on the location and use of
such property, plant and equipment. Capitalized software was apportioned based
upon relative expense amounts recorded in employee-related cost of revenues and
general and administrative expenses for the years presented.
Prepaid benefit obligations and other assets and Post-retirement and other
post-employment benefit obligations--apportioned based on relative payroll and
related costs specifically associated with those employees who work in the
specified states. These payroll and related costs by state were determined
using demographic employee information as of June 2002.
Short-term borrowings from affiliate--As discussed in Notes 1 and 4, Dex
has outstanding debt due to QCF that was ascribed to Dex in 1999. As the
initial amount of this debt was determined based on the fair value of the Dex
business derived using an EBITDA multiple at that time, Dex's management
believes that the 1999 EBITDA of Dex East and Dex West is the best measure by
which this debt should be apportioned between Dex East and Dex West. Debt
incurred by Dex on or after January 1, 2000 was apportioned between Dex East
and Dex West based upon the relative relationship of their EBITDA for the year
in which such debt was incurred. Repayments were based on Dex East's and Dex
West's proportionate share of income generated that was used to repay the
outstanding borrowings. Accrued interest has been apportioned consistent with
the related interest expense as discussed below.
Accounts payable--apportioned based upon relative expense amounts recorded
in cost of revenues and general and administrative expenses for the years
presented, excluding employee-related costs.
Amounts due to related parties--apportioned based upon relative expense
amounts recorded in cost of revenues and general and administrative expenses
for the years presented.
Employee compensation--apportioned based upon relative employee-related
expense amounts recorded in cost of revenues and general and administrative
expenses for the years presented.
Deferred revenue and customer deposits--specifically identified by state
and by directory.
Merger-related reserves--Apportioned based upon relative employee-related
expense amounts recorded in cost of revenues and general and administrative
expenses for the years presented. Contractual settlement accruals were
specifically identified and rebranding costs were apportioned based upon
relative expense amounts recorded in cost of revenues.
Other accrued liabilities--apportioned based upon relative expense amounts
recorded in cost of revenues and general and administrative expenses for the
years presented.
Other liabilities--(i) specifically identified based upon the location of
the underlying property and (ii) apportioned based upon relative expense
amounts recorded in cost of revenues and general and administrative expenses
for the years presented.
F-9
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
STATEMENTS OF INCOME:
Directory services revenues--specifically identified by state and by
directory.
Directory services revenues, affiliates--specifically identified by state
and by directory.
Internet yellow pages revenues--specifically identified by state and by
directory.
Other revenues--(i) specifically identified by state and by directory and
(ii) for other revenues that were not state-specific, amounts were apportioned
based upon the relative percentage of Dex's directory services revenues for the
respective years presented.
Cost of revenues--specifically identified by state and by directory.
General and administrative expense--(i) bad debt expenses were
specifically identified based on customer specific information and association
with a specific state and directory and (ii) other general and administrative
expenses were apportioned primarily based upon relative cost of revenues.
Depreciation and amortization expense--Computed using historical
depreciation rates applied to property, plant and equipment balances.
Merger-related expenses--apportioned on the same basis as the
Merger-related reserves.
Impairment charges--specifically apportioned based upon the state that the
impaired asset was intended to benefit.
Interest income--apportioned based upon relative cash and cash
equivalents.
Interest expense--computed using historical interest rates and average
apportioned outstanding short-term borrowings from affiliate balances.
Other expense (income)--apportioned based upon relative EBITDA (for gains
and losses on investments) and relative property, plant and equipment balances
(for losses on sales of equipment) for the appropriate years.
Provision for income taxes--specifically determined using the overall
effective tax rate considering the states included in Dex East's stated
geographic area for each year.
All significant intercompany amounts and transactions have been
eliminated.
(B) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts and disclosures reported in
these combined financial statements and accompanying notes. Actual results
could differ from those estimates.
(C) REVENUE RECOGNITION
The sale of advertising in telephone directories published by Dex in the
Dex East states is the primary source of revenue. Dex East recognizes revenues
ratably over the life of each directory using the deferral and amortization
method, with revenue recognition commencing in the month of delivery.
Prior to 1999, Dex recognized revenues and expenses related to publishing
directories using the deferral and amortization method, under which revenues
and expenses were recognized over the lives of the directories, which up to
that time were typically 12 months. Effective as of the first quarter of 1999,
Dex changed to the point of publication method of accounting, under which Dex
recognized revenues and expenses at the time the directory was published.
F-10
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
In August 2002, as discussed in Note 12a, Dex reassessed this method and
concluded that, based on that reassessment, comments received from the
Securities and Exchange Commission ("SEC") and its current practices, that the
point of publication method of accounting was not appropriate under its
circumstances. The accompanying combined financial statements reflect revenues
and expenses related to publishing directories under the deferral and
amortization method of accounting for all periods presented. During 2001, 2000
and 1999, Dex published 150, 152 and 153 white and yellow pages directories,
respectively in the Dex East states. The lives of the directories vary from 11
to 13 months as follows:
NUMBER OF DIRECTORIES PUBLISHED BY
LIFE OF DIRECTORY
----------------------------------
11 MONTHS 12 MONTHS 13 MONTHS
----------- ----------- ----------
2001 ............ 3 129 18
2000 ............ 1 151 --
1999 ............ -- 153 --
Revenues from Internet advertisements are recognized ratably over the
twelve-month period Dex commits to carry the advertisement.
Revenue recognized for advertising exchanged in barter transactions, where
Dex advertising is promoted by the customer during the same period that Dex
carries the customer's advertisement, was $2 million, $2 million and $1 million
in 2001, 2000 and 1999, respectively. Equally offsetting amounts were
recognized in cost of revenues.
(D) COST OF REVENUES
Direct costs related to the sales and production of directories are
recognized ratably over the life of each directory under the deferral and
amortization method, with cost recognition commencing in the month of delivery.
Direct costs include sales commissions, graphics costs and the costs of
printing, publishing and distribution.
(E) DEFERRED REVENUE
Deferred revenue represents amounts billed and advance payments from
customers that have not yet been recognized as revenue.
(F) DEFERRED DIRECTORY COSTS
Deferred directory costs relate to the production of directories incurred
prior to publication. These costs are amortized ratably to cost of revenues
over the life of each directory beginning in the month of delivery.
(G) ADVERTISING COSTS
Costs related to advertising are expensed as incurred. Advertising
expenses of $8 million, $16 million and $20 million in 2001, 2000 and 1999,
respectively, are primarily included in general and administrative expense in
the combined statements of income.
(H) CASH AND CASH EQUIVALENTS
Dex utilizes the cash management services of Qwest. Qwest manages Dex's
cash in accordance with its cash investment policy, which restricts investments
to ensure preservation of principal and maintenance of liquidity. Although cash
and cash equivalents balances are generally unsecured, Dex's balances are
maintained with financial institutions that Qwest and Dex believe are
creditworthy.
F-11
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
Qwest and Dex consider cash on hand, deposits in banks and investments
purchased with original maturities of three months or less to be cash and cash
equivalents. Dex considers all obligations to affiliates not settled on a
quarterly basis to be financing activities for purposes of the statement of
cash flows.
Dex accounts for its bank overdrafts as a liability on its consolidated
balance sheets. The amount of bank overdrafts included in Dex East accounts
payable as of December 31, 2001 and 2000 were $0 and $6 million, respectively.
These amounts were apportioned to Dex East based on the balances in cash and
cash equivalents for the respective years presented.
(I) RECEIVABLES
The following table presents a breakdown of accounts receivable balances
as of December 31:
(DOLLARS IN MILLIONS) 2001 2000
--------------------- ---- ----
Trade accounts receivable ...................... $54 $51
Accounts receivable purchased by QC ............ 24 25
Amounts due from related parties ............... 6 8
Less: allowance for doubtful accounts .......... (8) (7)
Accounts receivable, net ....................... $76 $77
Dex has a billing and collection agreement with Qwest Corporation ("QC"),
a wholly-owned subsidiary of Qwest. Under that agreement, certain receivables
are billed and collected by QC on behalf of Dex for common customers within the
local service area. QC purchases these accounts receivable from Dex on a full
recourse basis and as such, Dex East continues to include its portion of the
QC-billed receivables and any related reserves in its combined balance sheets.
(J) VALUATION OF LONG-LIVED ASSETS
The impairment of long-lived assets is assessed whenever events or changes
in circumstances indicate that their carrying value may not be recoverable
through expected future undiscounted cash flows. If the total expected future
undiscounted cash flows are less than the carrying value of the asset, the
asset is written down to its estimated fair value.
(K) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost and is depreciated using
the straight-line method over the estimated useful lives of the assets. The
cost of additions and improvements are capitalized and expenditures for repairs
and maintenance are expensed as incurred. When property, plant and equipment
are sold or retired, the related cost and accumulated depreciation are removed
from the accounts and any gain or loss is included in other expense (income).
(L) COMPUTER SOFTWARE
Internally used software, whether purchased or internally developed, is
capitalized and amortized using the straight-line method over an estimated
useful life of 18 months to 5 years. In accordance with Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," certain costs associated with internally developed software such
as payroll costs of employees devoting time to the projects and external direct
costs for materials and services are capitalized. Subsequent additions,
modifications or upgrades to internal-use software are capitalized only to the
extent that those modifications enable the software to perform tasks that it
was previously incapable of performing. Software maintenance and training costs
are expensed in the period in which they are incurred. Gross computer software
costs of $24 million and $24 million at December 31, 2001 and 2000,
respectively, are included in property, plant and equipment.
F-12
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
Amortization of capitalized computer software costs totaled $3 million, $2
million and $1 million in 2001, 2000 and 1999, respectively. During December
2001, $7 million of capitalized computer software costs were written off due to
the abandonment of a sales automation project and various system enhancements.
See Note 10b for an additional discussion of the asset impairment.
(M) INVESTMENTS
Investments in marketable equity securities are accounted for under
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Accordingly, investments
with a readily determinable fair market value have been classified as
available-for-sale securities. All investments in marketable securities are
reported at fair market value as of the balance sheet date. Unrealized gains
and losses with respect to available for sale securities are recorded as
adjustments to other comprehensive income (loss) until realized upon sale or
other disposition of the securities. Realized gains and losses, including
"other than temporary" declines in value, are reclassified from other
comprehensive income (loss) and are included in the determination of net
income.
During 1999, Dex purchased shares of common stock in a publicly traded
company for $3 million. This investment was marked-to-market through other
comprehensive income (loss) on a monthly basis. Dex sold all shares of stock in
this investment during 2000 and recorded a gain on sale of $37 million,
reported in other expense (income). Dex's management apportioned these amounts
to Dex East based on relative EBITDA, resulting in a recorded gain on sale in
2000 of $16 million, as reported in other expense (income).
During 2000, Dex purchased shares of common stock in two early stage
e-commerce companies for approximately $15 million. These investments did not
have readily determinable fair market values and were carried at cost in the
combined balance sheets, subject to periodic review for impairment. Dex East's
apportioned cost of these investments was $7 million.
Dex reviews its portfolio of equity securities on a quarterly basis to
determine if an other than temporary decline in value has occurred. Many
factors are considered in assessing whether a decline in value is other than
temporary, including, as may be appropriate:
o Earnings trends and asset quality
o Near term prospects and financial condition of the issuer
o Financial condition and prospects of the issuer's region and industry
o The cause and severity of the decline in market price
o Analysts' recommendations and stock price projections
o The length of time market value was less than the carrying value
o Stock price volatility and near term potential for recovery
o Dex's intent and ability to retain the investment
During 2001, Dex reviewed its investments in the e-commerce companies and
determined that the fair value of these investments was zero. Accordingly, in
2001 an other than temporary decline in value of these investments of $7
million was apportioned to Dex East. This charge was reported in other (income)
expense.
F-13
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
(N) STOCK OPTIONS
Dex employees participate in the Qwest employee stock incentive plans. The
Qwest stock incentive plans are accounted for using the intrinsic value method
under which no compensation expense is recognized for options granted to
employees when the strike price of those options equals or exceeds the value of
the underlying security on the measurement date.
(O) COMPREHENSIVE INCOME (LOSS)
Dex follows the provisions of SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and disclosure of
comprehensive income (loss) and its components. In addition to net income,
comprehensive income (loss) includes all changes in net assets during a period,
except those resulting from equity contributions and distributions. For the
years ended December 31, 2001, 2000 and 1999, comprehensive income (loss)
included the following components:
YEAR ENDED DECEMBER 31,
-----------------------------
(DOLLARS IN MILLIONS) 2001 2000 1999
- --------------------- ------ ---------- -------
Unrealized gains on marketable equity securities, net of tax ............. $ -- $ -- $ 10
Reclassification adjustment for gains included in net income, net of tax . -- (10) --
---- ------ ----
Other comprehensive (loss) income ........................................ $ -- $ (10) $ 10
(P) INCOME TAX PROVISION
Dex is included in the Qwest federal consolidated income tax return group
and combined state income tax returns. Dex and Dex East provide income taxes as
if they were separate taxpayers. Neither Dex nor Dex East have a formal
tax-sharing arrangement with Qwest. Consequently, for financial reporting
purposes, Dex East has reflected in its combined statements of changes in
owner's deficit, contributions and distributions in lieu of recording
receivables and payables for income taxes. Prior to July 1, 2000, Dex's results
of operations were included in the US WEST consolidated return.
(Q) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include cash, cash equivalents, accounts receivable,
accounts payable and short-term borrowings. The carrying values of cash, cash
equivalents, accounts receivable, accounts payable and short-term borrowings
approximate their fair values because of their short-term nature.
(R) NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142, "Goodwill and Other Intangible Assets." This statement addresses
financial accounting and reporting for intangible assets (excluding goodwill)
acquired individually or with a group of other assets at the time of their
acquisition. It also addresses financial accounting and reporting for goodwill
and other intangible assets subsequent to their acquisition. Intangible assets
(excluding goodwill) acquired outside of a business combination will be
initially recorded at their estimated fair value. If the intangible asset has a
finite useful life, it will be amortized over that life. Intangible assets with
an indefinite life are not amortized. Goodwill will be treated similar to an
intangible asset with an indefinite life. Goodwill and indefinite life
intangible assets will be reviewed annually for impairment and a loss recorded
when the asset's carrying value exceeds its estimated fair value. SFAS No. 142
is effective for fiscal years beginning after December 15, 2001. Dex does not
believe the adoption of this new standard will have an impact on its financial
statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement deals with the costs of closing
facilities and removing assets. SFAS No. 143 requires entities to record the
fair value of a legal liability for an asset retirement obligation in the
period it is
F-14
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
incurred. This cost is initially capitalized and amortized over the remaining
life of the underlying asset. Once the obligation is ultimately settled, any
difference between the final cost and the recorded liability is recognized as a
gain or loss on disposition. SFAS No. 143 is effective for years beginning
after June 15, 2002. Dex is currently evaluating the impact this pronouncement
will have on its future financial results.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This pronouncement addresses how
to account for and report impairments or disposals of long-lived assets. Under
SFAS No. 144, an impairment loss is to be recorded on long-lived assets being
held or used when the carrying amount of the asset is not recoverable from its
expected future undiscounted cash flows. The impairment loss is equal to the
difference between the asset's carrying amount and estimated fair value.
Long-lived assets to be disposed of by other than a sale for cash are to be
accounted for and reported like assets being held or used, except the
impairment loss is recognized at the time of the disposition. Long-lived assets
to be disposed of by sale are to be recorded at the lower of their carrying
amount or estimated fair value (less costs to sell) at the time the plan of
disposition has been approved and committed to by the appropriate company
management. In addition, depreciation is to cease at the same time. SFAS No.
144 is effective for fiscal years beginning after December 15, 2001. Dex does
not believe the adoption of SFAS No. 144 will have a material impact on its
results of operations.
In June, 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This pronouncement addresses the
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Under SFAS No. 146, liabilities for costs associated with an
exit or disposal activity are to be recognized when the liability is incurred.
Under EITF Issue No. 94-3, liabilities related to exit or disposal activities
were recognized when an entity committed to an exit plan. In addition, SFAS No.
146 establishes that the objective for the initial measurement of the liability
is fair value. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002. Dex is currently evaluating the impact this
pronouncement will have on its future financial results but does not believe it
will be material.
3. PROPERTY, PLANT AND EQUIPMENT
The following table presents the composition of property, plant and
equipment as of December 31.
(DOLLARS IN MILLIONS) ESTIMATED LIVES 2001 2000
- --------------------- ------------------- ------ -------
Computers and equipment ........................ 3-7 years $ 76 $ 75
Leasehold improvements ......................... 5 years 9 9
Capitalized software ........................... 18 months-5 years 24 24
Furniture and fixtures ......................... 7 years 7 7
Construction in progress ....................... N/A -- 1
---- ----
Gross property, plant and equipment ............ 116 116
Less: accumulated depreciation ................ 85 73
---- ----
Net property, plant and equipment .......... $ 31 $ 43
Depreciation and amortization expense for the years ended December 31,
2001, 2000 and 1999 was $12 million, $15 million and $14 million, respectively.
As part of the Dex East Purchase Agreement, Dex will enter into an
arrangement with a third party whereby, prior to the contribution of assets and
liabilities, certain information technology assets (such as servers and desktop
computers) will be sold by Dex to the third party and then leased back to Dex
East.
F-15
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
4. SHORT-TERM BORROWINGS
Dex has a line of credit borrowing arrangement with QCF, an affiliate of
Qwest, under which Dex can borrow up to approximately $4.3 billion at an annual
interest rate of 7.5%. Borrowings under this arrangement are due on demand and
the maturity date of this arrangement is January 15, 2003. As of December 31,
2001 and 2000, amounts outstanding under this line of credit, as apportioned to
Dex East based upon the methodologies discussed in Note 2a, were $1.391 billion
and $1.603 billion, respectively, including accrued interest of $9 million and
$10 million, respectively. Dex intends and Qwest expects that the outstanding
borrowings under this arrangement will be either repaid or renegotiated on an
annual basis.
In September 2002, Dex formalized the apportionment of outstanding
borrowings due to QCF between Dex East and Dex West, in accordance with the
methodology disclosed in Note 2a.
5. OWNER'S DEFICIT
(A) CAPITALIZATION AND DIVIDENDS
Qwest Dex Holdings, Inc. has one no par value share authorized, issued and
outstanding, which is held by Qwest Services Corporation ("QSC"), a subsidiary
of Qwest. There are no authorized, issued or outstanding shares of stock of Dex
East.
(B) STOCK OPTIONS
Dex's employees participate in the Qwest employee stock incentive plans.
Prior to the Merger, U S WEST adopted stock plans under which it could grant
awards in the form of stock options, stock appreciation rights, restricted
stock and phantom units, as well as substitute stock options and restricted
stock awards. In connection with the Merger, all outstanding options of US WEST
issued prior to the Merger announcement were immediately vested. Options
granted after the Merger announcement date continue to vest according to the
vesting requirements in the plan.
On June 23, 1997, Qwest adopted the Equity Incentive Plan, which was
amended and restated on June 1, 1998. This plan permits the grant of
nonqualified stock options, incentive stock options, stock appreciation rights,
restricted stock, stock units and other stock grants. The maximum number of
shares of common stock that may be issued under the Equity Incentive Plan at
any time pursuant to awards is equal to 10% of the aggregate number of common
shares issued and outstanding (determined as of the close of trading on the New
York Stock Exchange on the preceding trading day). As of December 31, 2001, the
maximum number of shares available for grant was 166 million. No specific
amounts have been reserved for Dex employees.
Qwest's Compensation Committee determines the exercise price for each
option; however, all stock options have an exercise price that is at least
equal to the fair market value of the common stock on the date the stock option
was granted, subject to certain restrictions. Stock option awards generally
vest in equal increments (over a four- or five-year period), and awards granted
under the Equity Incentive Plan will immediately vest upon any change in
control of Qwest, as defined, unless provided otherwise by Qwest's Compensation
Committee at the time of grant. Options granted in 2001, 2000 and 1999 have
terms ranging from six to ten years.
F-16
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
On October 31, 2001, Qwest announced a voluntary stock option exchange.
Under the terms of the offer and subject to certain restrictions, Qwest
employees could exchange all or a portion of their stock options with an
exercise price of $35 or more until the offer expired on November 30, 2001. The
offer was available only to Qwest full-time, non-union employees (excluding 15
senior executives), for options granted by Qwest or US WEST. Options
surrendered by an employee were canceled on November 30, 2001 and new options
were granted on June 3, 2002. The exercise price on the new options is $5.10,
which was the closing market price of Qwest common stock on June 3, 2002. The
new options will vest ratably over a four-year period commencing on June 3,
2002. At the expiration of the exchange offer, 264 Dex employees had exchanged
311 grants totaling 230,062 shares.
Summarized below is information regarding the Qwest plans as it relates to
Dex employees. All amounts have been adjusted to reflect the conversion rate of
1.72932 Qwest shares for every US WEST share, to give effect to the Merger:
AS OF DECEMBER 31
------------------------------------
2001 2000 1999
----------- ----------- --------
Options outstanding ......... 1,205,919 1,302,572 623,585
Options exercisable ......... 567,870 427,584 173,901
Had Qwest and Dex accounted for employee stock option grants under the
fair value method prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation," the pro forma results of Dex East would have been as follows:
YEAR ENDED DECEMBER 31,
-----------------------
(DOLLARS IN MILLIONS) 2001 2000 1999
- ----------------------- ------ ------ -----
Net Income:
As reported .......... $161 $130 $86
Pro forma ............ 160 129 86
Following are the weighted average assumptions used with the Black-Scholes
option-pricing model to estimate the fair value of options granted to Dex
employees during 2001, 2000 and 1999:
YEAR ENDED DECEMBER 31,
------------------------------------------
2001 2000 1999
------------- ------------ -----------
Risk-free interest rate ........................ 4.2% 6.0% 5.6%
Expected dividend yield ........................ 0.1% 1.0% 0.0%
Expected option life (years) ................... 5.5 4.7 4.0
Expected stock price volatility ................ 64.0% 52.6% 57.0%
Weighted average grant date fair value ......... $ 15.58 $ 23.03 $ 27.87
Options granted to Dex employees ............... $ 369,940 761,317 287,350
Approximately 62 million options for Qwest common stock were available for
grant at December 31, 2001. No specific amounts have been reserved for Dex
employees.
The Dex East Purchase Agreement does not contemplate, and the Dex Buyer
does not intend, that the options for Qwest common stock will be transferred or
otherwise converted to options to purchase shares of the Dex Buyer or any of
its affiliates. The Qwest options generally expire 90 days after the
termination of the applicable employee's employment with Qwest in accordance
with the Qwest Communications International Inc. Equity Incentive Plan and
related option agreements. Consequently, for Qwest employees who become
employees of the Dex Buyer or any of its affiliates, the Qwest options will
generally terminate 90 days after the consummation of the sale of the Dex
business.
F-17
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
6. INCOME TAXES
The composition of the provision for income taxes follows:
YEAR ENDED DECEMBER 31,
---------------------------
(DOLLARS IN MILLIONS) 2001 2000 1999
- --------------------- -------- ------ -------
Federal:
Current .................................... $ 79 $ 69 $ 38
Deferred ................................... 7 2 8
----- ---- ----
Total Federal ............................ 86 71 46
----- ---- ----
State and Local:
Current .................................... 21 17 11
Deferred ................................... 1 3 1
----- ---- ----
Total Federal ............................ 22 20 12
----- ---- ----
Total provision for income taxes ......... $ 108 $ 91 $ 58
The effective tax rate differs from the statutory tax rate as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
(DOLLARS IN MILLIONS) 2001 2000 1999
- --------------------- ---------- ---------- ----------
Federal statutory rate .......... 35.0% 35.0% 35.0%
State income taxes, net ......... 5.2 5.2 5.2
Other ........................... -- 1.0 0.1
---- ---- ----
Effective tax rate ............. 40.2% 41.2% 40.3%
Dex is included in the Qwest consolidated income tax return group and
combined state income tax returns. Dex and Dex East provide income taxes as if
they were separate taxpayers. Neither Dex nor Dex East have a formal
tax-sharing arrangement with Qwest. Consequently, for financial reporting
purposes, Dex East has reflected in its combined statements of changes in
owner's deficit, contributions and distributions in lieu of recording
receivables and payables for income taxes.
Dex made net payments of income taxes to third parties and QSC of which
$29 million, $129 million and $110 million in 2001, 2000 and 1999 were
apportioned to Dex East, respectively.
The components of the net deferred tax assets and liabilities were as
follows:
YEAR ENDED
DECEMBER 31,
------------------------
(DOLLARS IN MILLIONS) 2001 2000
- --------------------- ----------- ----------
Current:
Revenue currently taxable, not yet recognizable ......... $ 29 $ 29
Expenses not currently deductible ....................... (2) (3)
-------- -------
Net noncurrent deferred tax assets ..................... $ 27 $ 26
------- ------
Noncurrent:
Post-employment benefits, including pension ............. $ 7 $ 9
Depreciation and amortization ........................... (6) (4)
Other ................................................... (11) (6)
------- -------
Net noncurrent deferred tax liabilities ................ $ (10) $ (1)
Dex believes it is more likely than not that the net deferred tax asset
will be realized. Therefore, a valuation allowance is not provided.
F-18
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
7. EMPLOYEE BENEFIT PLANS
(A) PENSION, POST-RETIREMENT AND OTHER POST-EMPLOYMENT BENEFITS
Dex employees participate in the Qwest pension, post-retirement and other
post-employment benefit plans. The amounts contributed by Dex are not
segregated or restricted to pay amounts due to Dex employees and may be used to
provide benefits to other employees of Qwest or its affiliates. The cost of
pension and post-retirement health care and life insurance benefits and
required contributions are apportioned to Dex East based upon demographic
information provided by the plan administrator.
The noncontributory defined benefit pension plan includes substantially
all management and occupational (union) employees. Post-retirement healthcare
and life insurance plans provide medical, dental, vision and life insurance
benefits for certain retirees. Qwest also provides postemployment benefits to
certain former employees.
Effective January 1, 2001, Qwest modified the pension plan benefits for
all former US WEST management employees who did not have 20 years of service by
December 31, 2000, or who would not be service pension eligible by December 31,
2003. For employees who did not meet these criteria, no additional years of
service will be credited under the defined lump sum formula for years worked
after December 31, 2000. These employee pension benefits will only be adjusted
for changes in the employee future compensation level. Future benefits will
equal 3% of pay per year, plus a return as defined in the plan. The minimum
return an employee can earn on an account in a given year is based upon U. S.
treasury rates and the employee's account balance at the beginning of the year.
All management employees, other than those who remain eligible under the
previous formulas, will be eligible to participate in the 3%-of-pay plan.
In conjunction with the Merger, Qwest made the following changes to the
employee benefit plans for management employees only. Effective September 7,
2000, employees were not eligible to receive retiree medical and life benefits
unless they had either at least 20 years of service by December 31, 2000, or
would be service pension eligible by December 31, 2003. The elimination was
accounted for as a plan curtailment, resulting in a one-time gain of
approximately $6 million apportioned to Dex East based on the actuarially
determined demographic information. This gain was recorded as an offset to
Merger-related expenses. Employees who retained the benefits will begin paying
contributions in 2004 except for those employees who retired prior to September
7, 2000.
Pension benefits for management employees before January 1, 2001, were
based upon their salary and years of service while occupational (union)
employee benefits were generally based upon job classification and years of
service.
Effective August 11, 2000, the Pension Plan was amended to provide
additional pension benefits to plan participants who were involuntarily
separated from Qwest between August 11, 2000, and June 30, 2001 as a result of
the Merger. The amount of the additional pension benefit is based on years of
service and ranges from a minimum of four months to a maximum of one year of an
employee's base salary.
Pension credits and post-retirement costs are recognized over the period
in which the employee renders services and becomes eligible to receive benefits
as determined by using the projected unit credit method. Qwest's funding policy
is to make contributions with the objective of accumulating sufficient assets
to pay all benefits when due. No pension funding was required for Qwest or Dex
in 2001, 2000 or 1999 and neither Qwest nor Dex made any contributions to the
post-retirement benefit plan in 2001, 2000 or 1999.
F-19
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
Dex East was apportioned pension credits for 2001, 2000 and 1999 of $10
million, $10 million and $6 million respectively. Dex East's apportioned
post-retirement benefit costs (excluding the curtailment gain of $6 million in
2000) for 2001, 2000 and 1999 were $1 million, $1 million and $6 million,
respectively. These amounts represent Dex East's apportioned share of the
pension credits and post-retirement benefit costs of Qwest, based on employee
demographic information as more fully discussed in Note 2a.
(B) 401(K) PLAN
Qwest currently sponsors two defined contribution benefit plans covering
substantially all management and occupational employees, including employees of
Dex. Both plans were established prior to the Merger; one by pre-Merger Qwest
(the Qwest Plan) and one by US WEST (the US WEST Plan). Under both plans,
employees may contribute a percentage of their annual compensation to the Plans
up to a maximum percentage identified in the plans. The annual dollar
contribution by the employees is limited to a maximum amount determined by the
Internal Revenue Service. Dex matches a percentage of employee contributions,
and those matching contributions are invested in Qwest common stock. Dex East
was apportioned its share of matching contributions to the plans amounting to
$2 million, $3 million and $3 million for 2001, 2000 and 1999, respectively.
Effective January 1, 2002, Qwest merged the Qwest Plan into the US WEST Plan
which was renamed the Qwest Savings & Investment Plan ("QSIP").
(C) EMPLOYEE STOCK PURCHASE PLAN
Qwest has an Employee Stock Purchase Plan ("ESPP") in which Dex employees
are permitted to participate. Qwest is authorized to issue approximately 7
million shares of Qwest common stock to eligible employees. Under the terms of
the ESPP, eligible employees may authorize payroll deductions of up to 15% of
their base compensation, as defined, to purchase Qwest common stock at a price
of 85% of the fair market value of the Qwest common stock on the last trading
day of the month in which the Qwest common stock is purchased.
8. COMMITMENTS AND CONTINGENCIES
(A) LEASE COMMITMENTS
Dex has entered into operating leases for office facilities and equipment
with terms ranging up to 15 years. All lease payments are due to Qwest Business
Resources, Inc. ("BRI"), an affiliate of Qwest. Minimum future lease payments
for the operating leases associated with the properties used by Dex East
(excluding those payments associated with the lease that terminated in 2002 as
discussed in the following paragraphs) as of December 31, 2001, are as follows:
(DOLLARS IN MILLIONS)
---------------------
2002 ....................... $ 6
2003 ....................... 5
2004 ....................... 4
2005 ....................... 3
2006 ....................... 3
Thereafter ................. 4
----
$ 25
====
F-20
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
Dex East recorded rent expense under operating leases of $11 million, $9
million and $10 million for 2001, 2000 and 1999, respectively. Rent expense was
specifically identified to Dex East based upon the actual rent on properties
Dex leased in the states included within Dex East's combined financial
statements.
During 2000, Dex entered into an operating lease arrangement ("synthetic
lease") under which it had the option to purchase the leased real estate
property at any time during the lease term. This synthetic lease facility had
certain financial covenants, including a debt-to-EBITDA ratio of 3.50-to-1. In
March 2002, Dex paid the full amount necessary to acquire the property subject
to a synthetic lease agreement and terminated that agreement. See also the
discussion on subsequent events related to the synthetic lease facility in Note
12b to these combined financial statements.
As part of the Dex East Purchase Agreement, the Dex Buyer will be required
to lease its headquarters' building (located at 198 Inverness Drive West in
Englewood, Colorado) from Dex on terms and conditions that are reasonably
acceptable to the Dex Buyer.
(B) LITIGATION
Dex is involved in litigation arising in the normal course of business.
The outcome of this litigation is not expected to have a material adverse
impact on Dex or Dex East.
Qwest is involved in various legal matters that are more fully disclosed
in recent publicly available filings. If Qwest or any of its subsidiaries
suffers a judgment in excess of $100 million, which remains unsatisfied for a
period of 60 days (an appeal would typically stay such a judgment), such an
event would constitute an event of default under the existing syndicated senior
credit facility and the proposed new senior credit facility. Such an event of
default would entitle the lenders to accelerate the debt and/or foreclose on
the expected security interest in Dex assets and stock referred to in Note 12b.
9. TRANSACTIONS WITH QWEST AND AFFILIATES
(A) SHARED SERVICES
Qwest and its affiliates provide services to Dex for which reimbursement
is determined based upon either (1) tariffed or negotiated contract rates, (2)
prevailing third party market prices or (3) fully distributed costs ("FDC").
Qwest's cost allocation policies are consistent with the cost allocation
guidelines established for reporting to its regulators. Pursuant to the Dex
East Purchase Agreement, Qwest will continue to provide these services to Dex
East for a period of up to 18 months after the completion of the sale. These
services include:
Billing and Collection--As discussed in Note 2i above, Dex has a billing
and collection agreement with QC under which revenues and related receivables
are billed and collected by QC on behalf of Dex for common customers within the
local service area. The amounts paid to QC are based on tariffed or
contractually negotiated rates, as applicable, for these billing and collection
services.
Property Management--BRI provides property management services to Dex for
which BRI is reimbursed either at prevailing third party market prices or at
FDC. These services include the lease of office space, property management and
real estate consultation services.
Information Technology--Beginning in 2000, information technology services
are provided to Dex by Qwest for software development and other related
projects, which are billed to Dex, based upon prevailing third party market
prices, determined on a service-by-service basis.
General and Administrative--QSC provides legal, financial management and
certain human resources services to Dex. These services are billed to Dex using
FDC.
F-21
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
Telephony and Data Services--Telephony and data services are provided to
Dex by QC, primarily at tariffed or negotiated contract rates, based upon a
master services agreement.
Customer Lists--Pursuant to a listing services agreement between Dex and
QC, Dex acquires a listing of all business and residential customers annually
from QC. The amount charged to Dex is consistent with the prevailing third
party market prices charged by QC to nonaffiliated purchasers of these same
customer lists.
Other--Dex also purchases various products and services from certain other
Qwest affiliates at prevailing third party market prices or FDC.
Included in cost of revenues is the following shared service:
YEAR ENDED DECEMBER 31,
-----------------------
(DOLLARS IN MILLIONS) 2001 2000 1999
- --------------------- ------ ------ -----
Information technology ......... $11 $20 $18
Included in general and administrative expenses are the following shared
services:
YEAR ENDED DECEMBER 31,
-----------------------
(DOLLARS IN MILLIONS) 2001 2000 1999
- --------------------- ------ ------ -----
Billing and collection costs ......... $ 1 $ 3 $ 2
Property management .................. 10 11 12
Information technology ............... 1 3 7
General and administrative ........... 12 11 16
Telephony and data services .......... 3 4 4
Customer lists ....................... 1 1 3
Other ................................ 0 0 0
--- --- ---
Total ............................... $28 $33 $44
=== === ===
(B) SERVICES PROVIDED BY DEX TO QWEST AND ITS AFFILIATES
Rates charged for advertising services provided by Dex to Qwest and its
affiliates are determined based upon prevailing third party market prices.
As part of the Dex East Purchase Agreement, Qwest has agreed to purchase
from Dex East, under a take-or-pay arrangement, $20 million annually in
advertising services from Dex East over a 15-year period beginning with the
date of sale.
(c) Due from (to) Qwest and Affiliates
Amounts due from (to) Qwest and its affiliates in the accompanying Dex
East combined financial statements include the following:
DECEMBER 31,
---------------------------
(DOLLARS IN MILLIONS) 2001 2000
- --------------------- ----------- -------------
Accounts receivable purchased by QC ......... $ 24 $ 25
Amounts due from related parties ............ 6 8
Amounts due to related parties .............. (26) (9)
Short-term borrowings from QCF .............. (1,391) (1,603)
F-22
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
10. MERGER-RELATED EXPENSES AND IMPAIRMENT CHARGES
(A) MERGER-RELATED EXPENSES
In connection with the Merger, Qwest's management undertook several
activities to align the companies, eliminate redundancies and exit certain
business activities. Certain of these actions affected Dex, principally the
involuntary separation of 359 employees. Qwest and Dex considered only those
costs that were incremental and directly related to the Merger to be
"Merger-related."
Dex East recorded Merger-related charges as follows:
YEAR ENDED DECEMBER 31,
-------------------------
(DOLLARS IN MILLIONS) 2001 2000 1999
- --------------------- ------ ------ -------
Contractual settlements ......................... $ 1 $ 3 $ --
Severance and employee-related expenses ......... 2 3 --
Rebranding ...................................... 1 -- --
--- --- ----
Total Merger-related expenses .................. $ 4 $ 6 $ --
=== === ====
Contractual settlements were incurred to cancel various commitments no
longer deemed necessary as a result of the Merger.
In connection with the Merger, Dex reduced employee levels by 359 people.
These employees were terminated prior to December 31, 2001. Included in the
above severance and employee-related expenses were costs associated with
payments to employees who involuntarily left the business since the
consummation of the Merger.
Included in the severance and employee-related merger costs above in 2000
is an offset of a $6 million post-retirement benefit plan curtailment gain. As
discussed in Note 7a, the gain resulted from the post-Merger termination of
retiree medical benefits for all former US WEST employees who did not have 20
years of service by December 31, 2000, or would not be service pension eligible
by December 31, 2003.
A summary of Merger-related costs accrued and subsequent charges against
those accruals follows:
JANUARY 1, DECEMBER 31,
2000 2000 2000 2000
(DOLLARS IN MILLIONS) BALANCE PROVISION UTILIZATION BALANCE
- --------------------- ------------ ----------- ------------- -------------
Contractual settlements ......................... $ -- $ 3 $ 3 $ --
Severance and employee-related expenses ......... -- 9 7 2
---- --- ---- ----
Total .......................................... $ -- 12 $ 10 $ 2
==== === ==== ====
OPEB curtailment gain ........................... (6)
---
Total Merger expense ........................... $ 6
===
JANUARY 1, DECEMBER 31,
2001 2001 2001 2001
(DOLLARS IN MILLIONS) BALANCE PROVISION UTILIZATION BALANCE
- --------------------- ------------ ----------- ------------- -------------
Contractual settlements ......................... $ -- $ 1 $ 1 $ --
Severance and employee-related expenses ......... 2 2 4 --
Rebranding ...................................... -- 1 1 --
---- --- --- ----
Total .......................................... $ 2 $ 4 $ 6 $ --
==== === === ====
F-23
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
(B) IMPAIRMENT CHARGES
In December 2001, Dex reviewed all internal software projects in process.
At that time, management decided that certain projects should no longer be
pursued as other systems with greater long-term utility had become available.
Because the projects were incomplete and abandoned, the fair value of such
software was determined to be zero. Capitalized software costs of $7 million
were written off in December 2001. The abandoned projects included a sales
automation project as well as various system enhancements.
(11) SEGMENT INFORMATION
Dex East operates in two principal segments: Directory Publishing and
Internet Yellow Pages. Following is a breakout of those segments. The
accounting principles used are the same as those used in the consolidated
financial statements of Dex and the combined financial statements of Dex East.
The "other" category includes new ventures not yet aligned with a segment.
DIRECTORY INTEREST RECONCILING
(DOLLARS IN MILLIONS) PUBLISHING YELLOW PAGES OTHER SUBTOTAL ITEMS(1) COMBINED
- --------------------------------- ------------ -------------- --------- ---------- ------------ ---------
2001:
Revenues ....................... $ 647 $ 9 $ 4 $ 660 $ 6 $ 666
Cost of revenues ............... 186 3 2 191 18 209
General and administrative ..... 34 5 -- 39 9 48
Adjusted EBITDA(2) ............. 427 1 2 430 (21) 409
2000:
Revenues ....................... 619 6 8 633 5 638
Cost of revenues ............... 206 9 6 221 17 238
General and administrative ..... 20 7 1 28 21 49
Adjusted EBITDA(2) ............. 393 (10) 1 384 (33) 351
1999:
Revenues ....................... 587 2 7 596 5 601
Cost of revenues ............... 219 8 5 232 -- 232
General and administrative ..... 72 9 6 87 -- 87
Adjusted EBITDA(2) ............. 296 (15) (4) 277 5 282
- ----------------
(1) Reconciling items primarily represent transactions with Qwest or other
Qwest affiliates. Prior to 2000, management did not separately report
affiliate transaction costs for segment reporting purposes.
(2) Adjusted earnings before interest, income taxes, depreciation and
amortization ("Adjusted EBITDA") does not include nonrecurring and
nonoperating items such as impairment charges, Merger-related expenses,
investment write-downs, gains (losses) on the sale of investments and
gains (losses) on sales of fixed assets. Dex uses Adjusted EBITDA as an
alternative measure of its operating performance. Adjusted EBITDA does not
represent cash flow for periods presented and should not be considered as
an alternative to net income as an indicator of Dex East's operating
performance or as an alternative to cash flows as a source of liquidity.
Adjusted EBITDA as defined by Dex East may not be comparable with EBITDA
or Adjusted EBITDA as defined by other companies. Adjusted EBITDA is
provided as a complement to the financial results reported in accordance
with generally accepted accounting principles and is presented to provide
additional information concerning Dex East's operations.
A reconciliation from Segment Adjusted EBITDA to pre-tax income follows:
YEAR ENDED DECEMBER 31,
-----------------------------
(DOLLARS IN MILLIONS) 2001 2000 1999
- ------------------------------------------------ -------- -------- -------
Segment Adjusted EBITDA ........................ $ 409 $ 351 $ 282
Less:
Depreciation and amortization ................. 12 15 14
Merger-related and impairment charges ......... 11 6 --
Interest and other expense--net ............... 117 109 124
----- ----- -----
Income before income taxes .................. $ 269 $ 221 $ 144
===== ===== =====
F-24
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
(12) SUBSEQUENT EVENTS
(A) SEC INQUIRY
On March 8, 2002, Qwest received a request from the Denver regional office
of the SEC to voluntarily produce documents and information in an informal
inquiry into certain of Qwest's accounting practices and disclosures. This
informal inquiry was subsequently changed to a formal investigation on April 3,
2002. The accounting practices and disclosures under investigation include
accounting for directory publication revenues. Qwest and Dex are cooperating
fully with the SEC investigation.
Prior to 1999, Dex recognized revenues and expenses related to publishing
directories using the deferral and amortization method, under which revenues
and expenses were recognized over the lives of the directories, which up to
that time were typically 12 months. Effective as of the first quarter of 1999,
Dex changed to the point of publication method of accounting, under which Dex
recognized revenues and expenses at the time the directory was published.
In August 2002, Dex reassessed this method and concluded that, based on
that reassessment, comments received from the SEC and its current practices,
the point of publication method of accounting was not appropriate under its
circumstances. The accompanying Dex East combined financial statements reflect
revenues and expenses related to publishing directories under the deferral and
amortization method of accounting for all periods presented.
(B) OTHER
In March 2002, Dex paid the full amount necessary to acquire its corporate
headquarters, which was subject to a synthetic lease agreement, thereby
terminating that agreement. The purchase price of the building was
approximately $25 million. As a result of the purchase, related loan
commitments were terminated and Dex is no longer liable for its residual value
guarantees of up to $69 million that were applicable if Dex did not renew the
lease or purchase the building at the end of its lease term. The purchase price
and residual value guarantees apportioned to Dex East were $11 million and $29
million, respectively, and were apportioned based upon relative
employee-related expense amounts recorded in cost of revenues and general and
administrative expenses for the year ended December 31, 2001.
As a result of Qwest's failure to file its June 30, 2002 Form 10-Q, Qwest
temporarily suspended exercises of stock options to purchase Qwest stock and
purchases of Qwest stock under the QSIP. Qwest also announced the suspension of
its ESPP.
As discussed in Note l, on August 19, 2002, Qwest agreed to sell the
business of Dex to a new entity formed by the Sponsors for $7.05 billion. The
transaction involves the sale of the entire business in two stages, the first
of which (Dex East) is expected to close in the fourth quarter of 2002, with
the second stage (Dex West) expected to close in 2003. See Note 1 for further
discussion.
In September 2002, Qwest Dex, Inc. issued $750 million in debt with a
two-year maturity. The loan consists of a fixed interest rate component, at a
rate of 14% per annum, and a floating interest rate component, at a rate of
London Interbank Offered Rates plus 11.50%. The loan is guaranteed by Qwest Dex
Holdings, Inc. and Qwest Services Corporation, and the obligations are secured
by a first priority pledge of the stock of Qwest Dex Holdings, Inc. and Qwest
Dex, Inc., a first priority pledge of certain assets of Qwest Dex, Inc. and a
second priority pledge of the stock of Qwest Corporation. In addition, Qwest
granted a secondary priority pledge in the stock of Qwest Dex Holdings, Inc.
and Qwest Dex, Inc. and certain assets of Qwest Dex, Inc. to its banks in
connection with an amendment of its credit facility. Upon completion of the
sale of Dex West, the entire $750 million debt balance must be paid from the
sale proceeds.
F-25
DEX EAST
COMBINED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
(DOLLARS IN MILLIONS) 2002 2001
- ----------------------------------------------------------------------- --------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 62 $ 55
Accounts receivable, net ............................................. 52 76
Deferred directory costs ............................................. 104 124
Current deferred taxes ............................................... 48 27
Other current assets ................................................. 2 4
------ --------
Total current assets ............................................... 268 286
Property, plant and equipment, net .................................... 25 31
Prepaid benefit obligations and other assets .......................... 63 31
------ --------
Total assets ....................................................... $ 356 $ 348
------ --------
LIABILITIES AND OWNER'S DEFICIT
Current liabilities:
Short-term borrowings ................................................ $ 329 $ --
Short-term borrowings -- affiliate ................................... 849 1,391
Accounts payable ..................................................... 13 14
Amounts due to related parties ....................................... 25 26
Employee compensation ................................................ 12 11
Deferred revenue and customer deposits ............................... 77 94
Other accrued liabilities ............................................ 8 17
------ --------
Total current liabilities .......................................... 1,313 1,553
Deferred income taxes ................................................. 7 10
Post-retirement and other post-employment benefit obligations ......... 34 35
------ --------
Total liabilities .................................................. 1,354 1,598
Commitments and contingencies (Note 6)
Owner's deficit ...................................................... (998) (1,250)
------ --------
Total liabilities and owner's deficit .............................. $ 356 $ 348
====== ========
See accompanying notes to combined financial statements.
F-26
DEX EAST
COMBINED STATEMENTS OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
- -------------------------------------------------- ----------- ----------- ----------- -----------
(UNAUDITED)
Revenues:
Directory services revenues ..................... $ 169 $ 162 $ 500 $ 483
Directory services revenues, affiliates ......... 1 1 5 4
Internet yellow pages revenues .................. 2 2 7 6
Other revenues .................................. 2 3 4 5
----- ----- ----- -----
Total revenues ................................ 174 168 516 498
----- ----- ----- -----
Operating Expenses:
Cost of revenues ................................ 52 52 156 156
General and administrative expense .............. 13 10 28 29
Bad debt expense ................................ 5 4 14 12
Depreciation and amortization expense ........... 2 3 8 10
Merger-related expenses ......................... -- -- -- 4
Total operating expenses ...................... 72 69 206 211
----- ----- ----- -----
Operating income .............................. 102 99 310 287
Other (income) expense:
Interest income ................................. (1) (1) (1) (2)
Interest expense ................................ 25 28 73 86
------ ------ ------ ------
Income before income taxes .................... 78 72 238 203
Provision for income taxes ....................... 31 29 96 82
------ ------ ------ ------
Net income ...................................... $ 47 $ 43 $ 142 $ 121
====== ====== ====== ======
See accompanying notes to combined financial statements.
F-27
DEX EAST
COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
(DOLLARS IN MILLIONS) 2002 2001
- ------------------------------------------------------------- ----------- -----------
(UNAUDITED)
Operating activities:
Net income ................................................. $ 142 $ 121
Adjustments to net income:
Depreciation and amortization ............................ 8 10
Employee benefit credit .................................. (1) (6)
Deferred tax provision ................................... (24) 6
Provision for bad debts .................................. 14 12
Changes in operating assets and liabilities:
Accounts receivable ...................................... 10 12
Deferred directory costs ................................. 20 22
Other current assets ..................................... 2 (3)
Deferred revenue and customer deposits ................... (17) (19)
Accounts payable and other liabilities ................... (10) 70
Employee benefit plan obligations and other, net ......... (10) --
------- -------
Cash provided by operating activities ................... 134 225
------- -------
Investing activities:
Expenditures for property, plant and equipment ............. (12) --
Capitalized software development costs ..................... (1) (6)
-------- --------
Cash used for investing activities ...................... (13) (6)
------- --------
Financing activities:
Short-term borrowings ...................................... 329 --
Short-term borrowings repayments to affiliates ............. (542) (143)
Debt issuance costs ........................................ (22) --
Contributions from Qwest in lieu of income taxes ........... 121 76
Distributions to Qwest ..................................... -- (4)
------- --------
Cash used for financing activities ...................... (114) (71)
------- -------
Cash and cash equivalents:
Increase ................................................... 7 148
Beginning balance .......................................... 55 --
------- -------
Ending balance ............................................. 62 148
======= =======
See accompanying notes to combined financial statements.
F-28
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
THREE AND NINE-MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED)
(1) DESCRIPTION OF BUSINESS
Organization and operations. The combined financial statements of Dex East
represent a component of Qwest Dex Holdings, Inc. and its wholly-owned
subsidiary Qwest Dex, Inc. (collectively "Dex") and include the assets,
obligations and operating activities of Dex for the states of Colorado, Iowa,
Minnesota, Nebraska, New Mexico, North Dakota and South Dakota. Dex East and
Dex West (as defined below) are not separate legal entities but represent the
business of Dex in or attributable to the applicable states.
Dex is wholly-owned by Qwest Communications International Inc. ("Qwest").
Dex is the largest telephone directory publisher of White and Yellow Pages
directories to businesses and residents in Arizona, Colorado, Idaho, Iowa,
Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota,
Utah, Washington and Wyoming (the "local service area"). Virtually all of Dex's
revenues are derived from the sale of advertising in its various directories.
Dex also provides ancillary directory-related services, including
Internet-based directory and database marketing services. Dex distributes its
published directories to residents and businesses in the local service area
through a third-party vendor.
Prior to June 12, 1998, Dex was aligned with US WEST Media Group (the
"Media Group"), a targeted stock of US WEST, Inc. ("US WEST"), which included
the multimedia and directory businesses of US WEST. On June 12, 1998, the Media
Group was separated from US WEST and Dex was re-aligned with US WEST
Communications Group (the "Communications Group"), another targeted stock of US
WEST. The Communications Group (including Dex) assumed the name of its former
parent, US WEST. In connection with the separation and the alignment of Dex
with the Communications Group, the Communications Group assumed and refinanced
approximately $3.9 billion of debt formerly allocated to the Media Group. In
1999, Qwest Capital Funding, Inc. ("QCF") ascribed this $3.9 billion in debt to
Qwest Dex, Inc. through the line of credit borrowing arrangement discussed in
Note 5.
On June 30, 2000, Qwest completed its acquisition (the "Merger") of US
WEST. US WEST was deemed the accounting acquirer and its historical financial
statements, including those of its wholly-owned subsidiaries, were carried
forward as those of the newly combined company.
Sale of Dex. On August 19, 2002, Qwest entered into concurrent purchase
agreements (the "Dex East Purchase Agreement" and the "Dex West Purchase
Agreement") to sell the business of Dex to Dex Holdings LLC (the "Dex Buyer"),
a new entity formed by the private equity firms of The Carlyle Group and Welsh,
Carson, Anderson & Stowe (together, the "Sponsors"). The total sales price is
$7.05 billion (subject to certain post-closing adjustments). The transaction
involves the sale of the Dex business in two stages, the first of which closed
November 8, 2002, with the second stage expected to close in 2003. The first
stage, as contained in the Dex East Purchase Agreement, primarily represents
Dex's directory and publishing business conducted in the states of Colorado,
Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota ("Dex
East"). The second stage as contained in the Dex West Purchase Agreement
primarily represents Dex's directory and publishing business in the remaining
seven states of Arizona, Idaho, Montana, Oregon, Utah, Washington and Wyoming
("Dex West").
In accordance with the Dex East Purchase Agreement, Dex contributed
certain assets and liabilities of Dex East into a newly formed company, SGN LLC
("SGN"). Subsequent to the transfer, Dex Media East LLC, a new entity formed by
the Sponsors to which the Dex Buyer assigned its rights to purchase Dex East,
purchased from Dex all of the outstanding equity interests in SGN for
approximately $2.75 billion. The accompanying combined financial statements do
not give effect to the purchase of Dex East by Dex Media East LLC.
F-29
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
THREE AND NINE-MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED) --
(CONTINUED)
In the second stage of the transaction, Dex will contribute certain assets
and liabilities of Dex West as identified in the Dex West Purchase Agreement to
another newly formed company, Dex West LLC. Subsequent to this transfer, the
Dex Buyer will purchase from Dex all the outstanding equity interests in Dex
West LLC for approximately $4.3 billion. Because each purchase agreement is
exclusive of the other, there is no assurance that the Dex West sale will be
consummated. See Note 10 for additional information regarding the purchase of
Dex East.
In addition, as part of the Dex East and Dex West Purchase Agreements, the
Dex Buyer has agreed to fulfill Qwest's obligations to publish and deliver
listings of certain residential and business customers pursuant to (i)
interconnection agreements with competitive local exchange carriers, local
exchange carriers and resellers of telecommunications services, (ii) tariffs
and (iii) laws, rules, regulations and orders of certain governmental entities.
The term of this agreement is 50 years commencing with the close of the Dex
East sale.
The Dex West sale is subject to certain conditions, including financing
conditions for the Dex Buyer and various regulatory approvals.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The combined interim financial statements are unaudited. In compliance
with the Securities and Exchange Commission's ("SEC") instructions for interim
financial statements, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles in the United States have been omitted. In Dex
management's opinion, all adjustments (which consist of normal recurring
adjustments) necessary to fairly present the combined results of operations,
financial position and cash flows of Dex East as of September 30, 2002 and 2001
and for all periods presented were made. These combined financial statements
should be read in conjunction with the audited combined financial statements of
Dex East as of December 31, 2001 and 2000 and for the three years ended
December 31, 2001. The combined results of operations for the three and nine
months ended September 30, 2002 are not necessarily indicative of the results
expected for the full year.
The accompanying combined financial statements include the assets,
obligations and activities of Dex for business conducted in the states of
Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota.
To prepare these combined financial statements, management of Dex either
specifically identified, assigned or apportioned all assets, liabilities,
revenues and expenses of Dex to either Dex East or Dex West. Management
believes such specific identifications, assignments or apportionments are
reasonable; however, the resulting amounts could differ from amounts that would
be determined if Dex East and Dex West operated on a stand-alone basis. Because
of Dex East's and Dex West's relationship with Dex as well as Qwest and its
other affiliates, the assets, liabilities, revenues and expenses are not
necessarily indicative of what they would be had Dex East and Dex West operated
without the shared resources of Qwest and its affiliates. Accordingly, these
combined financial statements are not necessarily indicative of future
financial position or results of operations.
In order to divide the Dex consolidated financial statements between Dex
East and Dex West, it was necessary for management to make certain assignments
and apportionments. Wherever possible, account balances and specific amounts
that directly related to Dex East or Dex West were assigned directly to Dex
East or Dex West, as appropriate and as discussed in further detail below. When
no direct assignment was feasible, account balances were apportioned using a
variety of factors based on a cost causative relationship to the account
balance being apportioned. The following is a more detailed description of the
primary bases for these assignments and apportionments of Dex accounts between
Dex East and Dex West.
F-30
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
THREE AND NINE-MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED) --
(CONTINUED)
BALANCE SHEET:
Cash and cash equivalents--As the balances of cash and cash equivalents as
of January 1, 1999 was $0 in the Dex consolidated financial statements, such $0
balance was assigned to both Dex East and Dex West at that date. Changes in
cash and cash equivalents during the nine months ended September 30, 2002 and
2001 and the ending balances as of September 30, 2002 and December 31, 2001
were determined based on operating activities within the specified Dex East
states.
Accounts receivable, net--(i) the majority of accounts receivable were
specifically identified as related to the customers within the states included
in Dex East's stated geographic area and (ii) for accounts receivable that were
not state-specific, the balances were apportioned based on relative revenues of
Dex East and Dex West.
Deferred directory costs--specifically identified by state and by
directory.
Current deferred taxes--specifically identified based on tax computations
using temporary differences based on the difference between the book and tax
bases of state specific assets and liabilities.
Other current assets--apportioned based upon total current assets
excluding other current assets relative to total Dex current assets excluding
other current assets.
Property, plant and equipment, net--The majority of the property, plant
and equipment was specifically identified based on the location and use of such
property, plant and equipment. Capitalized software was apportioned based upon
relative expense amounts recorded in employee-related cost of revenues and
general and administrative expenses for the periods presented.
Prepaid benefit obligations and other assets and Post-retirement and other
post-employment benefit obligations--apportioned based on relative payroll and
related costs specifically associated with those employees who work in the
specified states. These payroll and related costs by state were determined
using demographic employee information as of June 2002.
Accounts payable--apportioned based upon relative expense amounts recorded
in cost of revenues and general and administrative expenses for the periods
presented, excluding employee-related costs.
Short-term borrowings--As discussed in Note 5, Dex has outstanding debt
due to a note issued in September 2002. This liability is apportioned between
Dex East and Dex West based upon the earnings before interest, income taxes,
depreciation and amortization ("EBITDA") of Dex East and Dex West for the nine
months ended September 30, 2002.
Short-term borrowings--affiliate--As discussed in Notes 1 and 5, Dex has
outstanding debt due to QCF that was ascribed to Dex in 1999. As the initial
amount of this debt was determined based on the fair value of the Dex business
derived using an EBITDA multiple at that time, Dex's management believes that
the 1999 EBITDA of Dex East and Dex West is the best measure by which this debt
should be apportioned between Dex East and Dex West. Debt incurred by Dex on or
after January 1, 2000 was apportioned between Dex East and Dex West based upon
the relative relationship of their EBITDA for the year in which such debt was
incurred. Repayments were based on Dex East's and Dex West's proportionate
share of income generated that was used to repay the outstanding borrowings.
Accrued interest has been apportioned consistent with the related interest
expense as discussed below.
Amounts due to related parties--apportioned based upon relative expense
amounts recorded in cost of revenues and general and administrative expenses
for the periods presented.
F-31
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
THREE AND NINE-MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED) --
(CONTINUED)
Employee compensation--apportioned based upon relative employee-related
expense amounts recorded in cost of revenues and general and administrative
expenses for the periods presented.
Deferred revenue and customer deposits--specifically identified by state
and by directory.
Merger-related reserves--Apportioned based upon relative employee-related
expense amounts recorded in cost of revenues and general and administrative
expenses for the periods presented. Contractual settlement accruals were
specifically identified and rebranding costs were apportioned based upon
relative expense amounts recorded in cost of revenues.
Other accrued liabilities--apportioned based upon relative expense amounts
recorded in cost of revenues and general and administrative expenses for the
periods presented.
Other liabilities--(i) specifically identified based upon the location of
the underlying property and (ii) apportioned based upon relative expense
amounts recorded in cost of revenues and general and administrative expenses
for the periods presented.
STATEMENT OF INCOME
Directory services revenues--specifically identified by state and by
directory.
Directory services revenues, affiliates--specifically identified by state
and by directory.
Internet yellow pages revenues--specifically identified by state and by
customer.
Other revenues--(i) specifically identified by state and by directory and
(ii) for other revenues that were not state-specific, amounts were apportioned
based upon the relative percentage of Dex's directory services revenues for the
respective periods presented.
Cost of revenues--specifically identified by state and by directory.
General and administrative expense--(i) bad debt expenses were
specifically identified based on customer specific information and association
with a specific state and directory and (ii) other general and administrative
expenses were apportioned primarily based upon relative cost of revenues.
Depreciation and amortization expense--Computed using historical
depreciation rates applied to property, plant and equipment balances.
Merger-related expenses--apportioned on the same basis as the
Merger-related reserves.
Interest income--apportioned based upon relative cash and cash
equivalents.
Interest expense--computed using historical interest rates and average
apportioned outstanding short-term borrowings from affiliate balances.
Other expense (income)--apportioned based upon relative EBITDA (for gains
and losses on investments) and relative property, plant and equipment balances
(for losses on sales of equipment) for the appropriate periods.
Provision for income taxes--specifically determined using the overall
effective tax rate considering the states included in Dex East's stated
geographic area for each period.
All significant intercompany amounts and transactions have been
eliminated.
F-32
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
THREE AND NINE-MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED) --
(CONTINUED)
(B) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts and
disclosures reported in these combined financial statements and accompanying
notes. Actual results could differ significantly from those estimates.
(C) REVENUE RECOGNITION
The sale of advertising in telephone directories published by Dex in the
Dex East states is the primary source of revenue. Dex East recognizes revenues
ratably over the life of each directory using the deferral and amortization
method, with revenue recognition commencing in the month of delivery.
Prior to 1999, Dex recognized revenues and expenses related to publishing
directories using the deferral and amortization method, under which revenues
and expenses were recognized over the lives of the directories, which up to
that time were typically 12 months. Effective as of the first quarter of 1999,
Dex changed to the point of publication method of accounting, under which Dex
recognized revenues and expenses at the time the directory was published.
On March 8, 2002, Qwest received a request from the Denver regional office
of the SEC to voluntarily produce documents and information in an informal
inquiry into certain of Qwest's accounting practices and disclosures. This
informal inquiry was subsequently changed to a formal investigation on April 3,
2002. The accounting practices and disclosures under investigation include
accounting for directory publication revenues. Qwest and Dex are cooperating
fully with the SEC investigation.
In August 2002, Dex reassessed the point of publication method of
accounting and concluded, based on that reassessment, comments received from
the SEC and its current practices, that the point of publication method of
accounting was not appropriate under its circumstances. The accompanying
combined financial statements reflect revenues and expenses related to
publishing directories under the deferral and amortization method of accounting
for all periods presented. During the three months ended September 30, 2002 and
2001, Dex published 26 white and yellow pages directories in each period in the
Dex East states. During the nine months ended September 30, 2002 and 2001, Dex
published 112 white and yellow pages directories in each period in the Dex East
states. All directories published in 2002 had 12 month lives. The lives of the
directories in 2001 vary from 11 to 13 months as follows:
NUMBER OF DIRECTORIES PUBLISHED BY LIFE
OF DIRECTORY
--------------------------------------
11 MONTHS 12 MONTHS 13 MONTHS
----------- ----------- ----------
Three months ended September 30, 2001 ......... -- 21 5
Nine months ended September 30, 2001 .......... 3 92 17
Revenues from Internet advertisements are recognized ratably over the
twelve-month period Dex commits to carry the advertisement.
Revenue recognized for advertising exchanged in barter transactions, where
Dex advertising is promoted by the customer during the same period that Dex
carries the customer's advertisement, was less than $1 million for each of the
three-month periods ended September 30, 2002 and 2001 and less than $1 million
and $2 million for the nine months ended September 30, 2002 and 2001,
respectively. Equally offsetting amounts were recognized in cost of revenues.
F-33
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
THREE AND NINE-MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED) --
(CONTINUED)
(D) COST OF REVENUES
Direct costs related to the sales and production of directories are
recognized ratably over the life of each directory under the deferral and
amortization method, with cost recognition commencing in the month of delivery.
Direct costs include sales commissions, graphics costs and the costs of
printing, publishing and distribution.
(E) COMPUTER SOFTWARE
Internally used software, whether purchased or internally developed, is
capitalized and amortized using the straight-line method over an estimated
useful life of 18 months to 5 years. In accordance with Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," certain costs associated with internally developed software such
as payroll costs of employees devoting time to the projects and external direct
costs for materials and services are capitalized. Subsequent additions,
modifications or upgrades to internal-use software are capitalized only to the
extent that those modifications enable the software to perform tasks that it
was previously incapable of performing. Software maintenance and training costs
are expensed in the period in which they are incurred. Gross computer software
costs of $26 million and $24 million at September 30, 2002 and December 31,
2001, respectively, are included in property, plant and equipment. Amortization
of capitalized computer software costs totaled $1 million for each of the
three-month periods ended September 30, 2002 and 2001, respectively, and $2
million for each of the nine-month periods ended September 30, 2002 and 2001.
F-34
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
(3) COMPREHENSIVE INCOME (LOSS)
Dex follows the provisions of Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards
for reporting and disclosure of comprehensive income (loss) and its components.
In addition to net income, comprehensive income (loss) includes all changes in
net assets during a period, except those resulting from equity contributions
and distributions. Dex did not record any adjustments to comprehensive income
(loss) during the three- and nine-month periods ending September 30, 2002 and
2001 because they did not own any marketable equity securities or other assets
that might give rise to comprehensive income.
(4) NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142, "Goodwill and Other Intangible Assets." This statement addresses
financial accounting and reporting for intangible assets (excluding goodwill)
acquired individually or with a group of other assets at the time of their
acquisition. It also addresses financial accounting and reporting for goodwill
and other intangible assets subsequent to their acquisition. Intangible assets
(excluding goodwill) acquired outside of a business combination will be
initially recorded at their estimated fair value. If the intangible asset has a
finite useful life, it will be amortized over that life. Intangible assets with
an indefinite life are not amortized. Goodwill will be treated similar to an
intangible asset with an indefinite life. Goodwill and indefinite life
intangible assets will be reviewed annually for impairment and a loss recorded
when the asset's carrying value exceeds its estimated fair value. SFAS No. 142
is effective for fiscal years beginning after December 15, 2001. Dex does not
believe the adoption of this new standard will have an impact on its financial
statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement deals with the costs of closing
facilities and removing assets. SFAS No. 143 requires entities to record the
fair value of a legal liability for an asset retirement obligation in the
period it is incurred. This cost is initially capitalized and amortized over
the remaining life of the underlying asset. Once the obligation is ultimately
settled, any difference between the final cost and the recorded liability is
recognized as a gain or loss on disposition. SFAS No. 143 is effective for
years beginning after June 15, 2002. Dex is currently evaluating the impact
this pronouncement will have on its future financial results.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This pronouncement addresses how
to account for and report impairments or disposals of long-lived assets. Under
SFAS No. 144, an impairment loss is to be recorded on long-lived assets being
held or used when the carrying amount of the asset is not recoverable from its
expected future undiscounted cash flows. The impairment loss is equal to the
difference between the asset's carrying amount and estimated fair value.
Long-lived assets to be disposed of by other than a sale for cash are to be
accounted for and reported like assets being held or used, except the
impairment loss is recognized at the time of the disposition. Long-lived assets
to be disposed of by sale are to be recorded at the lower of their carrying
amount or estimated fair value (less costs to sell) at the time the plan of
disposition has been approved and committed to by the appropriate company
management. In addition, depreciation is to cease at the same time. SFAS No.
144 is effective for fiscal years beginning after December 15, 2001. Dex does
not believe the adoption of SFAS No. 144 will have a material impact on its
results of operations.
In June, 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This pronouncement addresses the
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit
F-35
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
an Activity (including Certain Costs Incurred in a Restructuring)." Under SFAS
No. 146, liabilities for costs associated with an exit or disposal activity are
to be recognized when the liability is incurred. Under EITF Issue No. 94-3,
liabilities related to exit or disposal activities were recognized when an
entity committed to an exit plan. In addition, SFAS No. 146 establishes that
the objective for the initial measurement of the liability is fair value. SFAS
No. 146 is effective for exit or disposal activities initiated after December
31, 2002. Dex is currently evaluating the impact this pronouncement will have
on its future financial results but does not believe it will be material.
(5) SHORT-TERM BORROWINGS
In September 2002, Qwest Dex, Inc. issued $750 million in debt with a
two-year maturity. The loan has a fixed interest rate component, at a rate of
14% per annum, and a floating interest rate component, at a rate of London
Interbank Offered Rates plus 11.50%. The loan is guaranteed by Qwest Dex
Holdings, Inc. and Qwest Services Corporation, and the obligations are secured
by a first priority pledge of the stock of Qwest Dex Holdings, Inc. and Qwest
Dex, Inc., a first priority pledge of certain assets of Qwest Dex, Inc. and a
second priority pledge of the stock of Qwest Corporation. In addition, Qwest
granted a secondary priority pledge in the stock of Qwest Dex Holdings, Inc.
and Qwest Dex, Inc. and certain assets of Qwest Dex, Inc. to its banks in
connection with an amendment of its credit facility. Upon completion of the
sale of Dex West, the entire $750 million debt balance must be paid from the
sale proceeds. Because the Dex West sale is expected to be completed within the
next year, the obligation is considered to be short-term. The amount
apportioned to Dex East under this loan was $329 million in accordance with the
methodology described in Note 2(a). These proceeds were used to repay part of
Dex East's outstanding balance of the credit borrowing arrangement with QCF
previously discussed. See Note 10 for additional information.
Dex has a line of credit borrowing arrangement with QCF, an affiliate of
Qwest, under which Dex can borrow up to approximately $4.3 billion at an annual
interest rate of 7.5%. Borrowings under this arrangement are due on demand and
the maturity date of this arrangement is January 15, 2003. As of September 30,
2002 and December 31, 2001, amounts outstanding under this line of credit, as
apportioned to Dex East based upon the methodologies discussed in Note 2a, were
$849 million and $1.391 billion, respectively, including accrued interest of $6
million and $9 million, respectively. Dex intends and Qwest expects that the
outstanding borrowings under this arrangement will be either repaid or
renegotiated on an annual basis. See Note 10 for additional information.
In September 2002, Dex formalized the apportionment of outstanding
borrowings due to QCF between Dex East and Dex West, in accordance with the
methodology disclosed in Note 2a.
(6) COMMITMENTS AND CONTINGENCIES
(A) LEASE COMMITMENTS
Dex has entered into operating leases for office facilities and equipment
with terms ranging up to 15 years. All lease payments are due to Qwest Business
Resources, Inc. ("BRI"), an affiliate of Qwest. Minimum future lease
commitments for the operating leases associated with the properties used by Dex
East (excluding those payments associated with the lease that terminated in
2002 as discussed in the following paragraphs) have not changed materially from
our minimum future lease commitments at December 31, 2001.
During 2000, Dex entered into an operating lease arrangement ("synthetic
lease") under which it had the option to purchase the leased real estate
property at any time during the lease term. This synthetic lease facility had
certain financial covenants, including a debt-to-EBITDA ratio of 3.50-to-1. In
March 2002, Dex paid the full amount necessary to acquire its corporate
headquarters, which was subject to a synthetic lease agreement, thereby
terminating that agreement. The purchase price of the
F-36
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
building was approximately $25 million. As a result of the purchase, related
loan commitments were terminated and Dex is no longer liable for its residual
value guarantees of up to $69 million that were applicable if Dex did not renew
the lease or purchase the building at the end of its lease term. The purchase
price and residual value guarantees apportioned to Dex East were $11 million
and $29 million, respectively, and were apportioned based upon relative
employee-related expense amounts recorded in cost of revenues and general and
administrative expenses for the year ended December 31, 2001. In September
2002, Dex transferred its corporate headquarters building to Qwest in
accordance with the Dex East Purchase Agreement. As a result of the transfer,
and pursuant to the terms of the Dex East Purchase Agreement, the Dex Buyer
will be required to lease its headquarters' building (located at 198 Inverness
Drive West in Englewood, Colorado) from Qwest on terms and conditions that are
reasonably acceptable to the Dex Buyer.
(B) LITIGATION
Dex is involved in litigation arising in the normal course of business.
The outcome of this litigation is not expected to have a material adverse
impact on Dex or Dex East.
Qwest is involved in various legal matters that are more fully disclosed
in recent publicly available filings. If Qwest or any of its subsidiaries
suffers a judgment in excess of $100 million, which remains unsatisfied for a
period of 60 days (an appeal would typically stay such a judgment), such an
event would constitute an event of default under Qwest's existing syndicated
senior credit facility and Qwest's proposed new senior credit facility. Such an
event of default would entitle the lenders under these facilities to accelerate
the debt and/or foreclose on the security interest in Dex West's assets and
stock referred to in Note 5.
(7) TRANSACTIONS WITH QWEST AND AFFILIATES
(A) SHARED SERVICES
Qwest and its affiliates provide services to Dex for which reimbursement
is determined based upon either (1) tariffed or negotiated contract rates, (2)
prevailing third party market prices or (3) fully distributed costs ("FDC").
Qwest's cost allocation policies are consistent with the cost allocation
guidelines established for reporting to its regulators. Pursuant to the Dex
East Purchase Agreement, Qwest will continue to provide these services to Dex
East for a period of up to 18 months after the completion of the Dex East sale.
These services include:
Billing and Collection--Dex has a billing and collection agreement with
Qwest Corporation ("QC"), a wholly-owned subsidiary of Qwest, under which
revenues and related receivables are billed and collected by QC on behalf of
Dex for common customers within the local service area. The amounts paid to QC
are based on tariffed or contractually negotiated rates, as applicable, for
these billing and collection services.
Property Management--BRI provides property management services to Dex for
which BRI is reimbursed either at prevailing third party market prices or at
FDC. These services include the lease of office space, property management and
real estate consultation services.
Information Technology--Beginning in 2000, information technology services
are provided to Dex by Qwest for software development and other related
projects, which are billed to Dex, based upon prevailing third party market
prices, determined on a service-by-service basis.
General and Administrative--Qwest Services Corporation ("QSC"), a
wholly-owned subsidiary of Qwest, provides legal, financial management and
certain human resources services to Dex. These services are billed to Dex using
FDC.
F-37
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
Telephony and Data Services--Telephony and data services are provided to
Dex by QC, primarily at tariffed or negotiated contract rates, based upon a
master services agreement.
Customer Lists--Pursuant to a listing services agreement between Dex and
QC, Dex acquires a listing of all business and residential customers annually
from QC. The amount charged to Dex is consistent with the prevailing third
party market prices charged by QC to nonaffiliated purchasers of these same
customer lists.
Other--Dex also purchases various products and services from certain other
Qwest affiliates at prevailing third party market prices or FDC.
Included in cost of revenues is the following shared service:
FOR THE THREE FOR THE NINE
MONTHS MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
- -------------------------------- ------ ------ ------ -----
(UNAUDITED)
Information technology ......... $ 1 $2 $ 4 $ 8
=== == === ===
Included in general and administrative expenses are the following shared
services:
FOR THE THREE FOR THE NINE
MONTHS MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
- -------------------------------------- ------ ------ ------ ------
(UNAUDITED)
Billing and collection costs ......... $ -- $ -- $ 1 $ 1
Property management .................. 2 1 4 7
Information technology ............... 6 -- 7 --
General and administrative ........... 5 8 13 15
Telephony and data services .......... 1 -- 2 --
Customer lists ....................... -- -- -- --
Other ................................ -- -- -- --
Total ............................. $ 14 $ 9 $ 27 $ 23
==== ==== ==== ====
(B) SERVICES PROVIDED BY DEX TO QWEST AND ITS AFFILIATES
Rates charged for advertising services provided by Dex to Qwest and its
affiliates are determined based upon prevailing third party market prices.
(C) DUE FROM (TO) QWEST AND AFFILIATES
Amounts due from (to) Qwest and its affiliates in the accompanying Dex
East combined financial statements include the following:
SEPTEMBER 30, DECEMBER 31,
(DOLLARS IN MILLIONS) 2002 2001
- ---------------------------------------------- --------------- -------------
(UNAUDITED)
Accounts receivable purchased by QC ......... $ 17 $ 24
Amounts due from related parties ............ 1 6
Amounts due to related parties .............. (25) (26)
Short-term borrowings from QCF .............. (849) (1,391)
====== ========
F-38
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
(8) MERGER-RELATED EXPENSES AND IMPAIRMENT CHARGES
(A) MERGER-RELATED EXPENSES
In connection with the Merger, Qwest's management undertook several
activities to align the companies, eliminate redundancies and exit certain
business activities. Certain of these actions affected Dex, principally the
involuntary separation of 359 employees by December 31, 2001. Qwest and Dex
considered only those costs that were incremental and directly related to the
Merger to be "Merger-related."
No Merger-related charges were recorded by Dex for the three and nine
months ended September 30, 2002 or for the three months ended September 30,
2001. Dex recorded Merger-related charges for the nine months ended September
30, 2001 of which Dex East's apportioned share was as follows:
FOR THE
NINE MONTHS ENDED
(DOLLARS IN MILLIONS) SEPTEMBER 30, 2001
- ---------------------------------------------------- -------------------
(UNAUDITED)
Contractual settlements ......................... $ 1
Severance and employee-related expenses ......... 2
Rebranding ...................................... 1
---
Total Merger-related expenses ................ 4
===
Contractual settlements were incurred to cancel various commitments no
longer deemed necessary as a result of the Merger.
In connection with the Merger, Dex reduced employee levels by 359 people,
substantially all of who were terminated by June 30, 2001. All of these
employees were terminated prior to December 31, 2001. Included in the above
severance and employee-related expenses were costs associated with payments to
employees who involuntarily left the business since the consummation of the
Merger.
A summary of Merger-related costs accrued and subsequent charges against
those accruals follows:
JANUARY 1, SEPTEMBER 30,
2001 CURRENT CURRENT 2001
(DOLLARS IN MILLIONS) BALANCE PROVISION UTILIZATION BALANCE
- ------------------------------------------------- ------------ ----------- ------------- --------------
(UNAUDITED)
Contractual settlements ......................... $ -- $ 1 $ 1 $ --
Severance and employee-related expenses ......... 2 2 4 --
Rebranding ...................................... -- 1 1 --
Total ........................................... $ 2 $ 4 $ 6 $ --
==== === === ====
F-39
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
(9) SEGMENT INFORMATION
Dex East operates in two principal segments: Directory Publishing and
Internet Yellow Pages. Following is a breakout of those segments. The
accounting principles used are the same as those used in the consolidated
financial statements of Dex and the combined financial statements of Dex East.
The "other" category includes new ventures not yet aligned with a segment.
DIRECTORY INTERNET RECONCILING
(DOLLARS IN MILLIONS) PUBLISHING YELLOW PAGES OTHER SUBTOTAL ITEMS(1) COMBINED
- --------------------------------------- ------------ -------------- ------- ---------- ------------ ---------
Three months ended September 30, (UNAUDITED)
2002:
Revenues ........................... $ 169 $ 2 $ 2 $ 173 $ 1 $ 174
Cost of revenues ................... 47 -- 1 48 4 52
General and administrative ......... 13 -- -- 13 5 18
Adjusted EBITDA(2) ................. 109 2 1 112 (8) 104
2001:
Revenues ........................... 162 2 3 167 1 168
Cost of revenues ................... 47 1 -- 48 4 52
General and administrative ......... 11 1 -- 12 2 14
Adjusted EBITDA(2) ................. 104 -- 3 107 (5) 102
DIRECTORY INTERNET RECONCILING
(DOLLARS IN MILLIONS) PUBLISHING YELLOW PAGES OTHER SUBTOTAL ITEMS(1) COMBINED
- --------------------------------------- ------------ -------------- ------- ---------- ------------ ---------
Nine months ended September 30, (UNAUDITED)
2002:
Revenues ........................... $ 500 $ 7 $ 4 $ 511 $ 5 $ 516
Cost of revenues ................... 139 2 2 143 13 156
General and administrative ......... 31 -- -- 31 11 42
Adjusted EBITDA(2) ................. 330 5 2 337 (19) 318
2001:
Revenues ........................... 483 6 5 494 4 498
Cost of revenues ................... 139 2 1 142 14 156
General and administrative ......... 28 4 -- 32 9 41
Adjusted EBITDA(2) ................. 316 -- 4 320 (19) 301
- ----------------
(1) Reconciling items primarily represent transactions with Qwest or other
Qwest affiliates.
(2) Adjusted earnings before interest, income taxes, depreciation and
amortization ("Adjusted EBITDA") consists of EBITDA adjusted for
nonrecurring and nonoperating items such as impairment charges,
Merger-related expenses and other income and expense items such as
investment write-downs, gains (losses) on the sale of investments and
gains (losses) on sales of fixed assets. Dex uses Adjusted EBITDA as an
alternative measure of its operating performance. Adjusted EBITDA does not
represent cash flow for periods presented and should not be considered as
an alternative to net income as an indicator of Dex East's operating
performance or as an alternative to cash flows as a source of liquidity.
Adjusted EBITDA as defined by Dex East may not be comparable with EBITDA
or Adjusted EBITDA as defined by other companies. Adjusted EBITDA is
provided as a complement to the financial results reported in accordance
with generally accepted accounting principles and is presented to provide
additional information concerning Dex East's operations.
F-40
DEX EAST
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
A reconciliation from Segment Adjusted EBITDA to pre-tax income follows:
FOR THE THREE FOR THE NINE
MONTHS MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
- ------------------------------------ -------- -------- -------- --------
(UNAUDITED)
Segment Adjusted EBITDA ............ $ 104 $ 102 $ 318 $ 301
Less:
Depreciation and amortization ..... 2 3 8 10
Merger-related expenses ........... -- -- -- 4
Interest and other expense--net ... 24 27 72 84
----- ----- ----- -----
Income before income taxes ...... $ 78 $ 72 $ 238 $ 203
===== ===== ===== =====
(10) SUBSEQUENT EVENTS
As a result of Qwest's failure to file its June 30 and September 30, 2002
Form 10-Qs, Qwest temporarily suspended exercises of stock options to purchase
Qwest stock and purchases of Qwest stock under the Qwest Savings & Investment
Plan. Qwest also announced the suspension of its Employee Stock Purchase Plan.
On November 8, 2002, Qwest sold Dex East to Dex Media East LLC for
approximately $2.754 billion in cash. Dex used part of the proceeds to repay
the entire amount of its short-term obligation as of November 8, 2002 to QCF.
In addition, the remaining balance of the $750 million, two-year note
apportioned to Dex East was assumed by Dex West.
F-41
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DEX MEDIA EAST LLC
DEX MEDIA EAST FINANCE CO.
OFFER TO EXCHANGE
$450,000,000 PRINCIPAL AMOUNT OF THEIR 9 7/8% SERIES B SENIOR NOTES DUE 2009,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OF THEIR OUTSTANDING 9 7/8% SERIES A SENIOR NOTES DUE 2009
AND
$525,000,000 PRINCIPAL AMOUNT OF THEIR 12 1/8% SERIES B
SENIOR SUBORDINATED NOTES DUE 2012, WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT, FOR ANY AND ALL OF THEIR OUTSTANDING 12 1/8% SERIES A
SENIOR SUBORDINATED NOTES DUE 2012.
------------------
PROSPECTUS
------------------
___________________, 2003
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
We are a limited liability company organized under the laws of the State
of Delaware. Section 18-108 of the Delaware Limited Liability Company Act, or
the DLLC Act, provides that a limited liability company may, and shall have the
power to, indemnify and hold harmless any member or manager or other person
from and against any and all claims and demands whatsoever, subject to the
standards and restrictions, if any, set forth in its limited liability company
agreement.
Our amended and restated limited liability company agreement provides
that, except as limited by law, each director and officer shall be entitled to
be indemnified and held harmless on an as-incurred basis by us to the full
extent permitted under the DLLC Act, as in effect from time to time, against
all losses, liabilities and expenses (including, without limitation, attorneys'
fees and expenses) arising from or relating to proceedings in which such
director or officer, as the case may be, may be involved, as a party or
otherwise, by reason of such person being or having been a director or officer,
whether or not such person continues to be such at the time any such loss,
liability or expense is paid or incurred but only to the extent that such
person (i) acted in good faith and (ii) was neither grossly negligent nor
engaged in willful malfeasance. These rights of indemnification are in addition
to any rights to which such director or officer may otherwise be entitled by
contract or as a matter of law and shall extend to his successors and assigns.
Each director's and officer's right to indemnification for reasonable expenses
(as incurred) (including, without limitation, attorneys' fees and expenses)
incurred by such director or officer may be conditioned upon the delivery by
such director or officer to us of a written undertaking (reasonably acceptable
to our Board of Directors) to repay such amount if such director or officer is
determined pursuant to the criteria described above or adjudicated to be
ineligible for indemnification, which undertaking shall be an unlimited general
obligation but need not be secured. In addition, our amended and restated
limited liability company agreement provides that we shall, to the full extent
permitted by applicable law, indemnify and hold harmless each director and each
officer against liabilities incurred in connection with any action, suit or
proceeding to which the director or officer may be made a party or otherwise
involved or with which the director or officer shall be threatened by reason of
its being a director or officer or while acting as such on our behalf or in our
interest.
Dex Media East Finance Co. and Dex Media International, Inc. are
incorporated under the laws of the State of Delaware. Section 145 of the
Delaware General Corporation Law, or the DGCL, provides that a Delaware
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines, and
amounts paid in settlement in connection with specified actions, suits and
proceedings, whether civil, criminal, administrative or investigative (other
than action by or in the right of the corporation -- a "derivative action"), if
they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe their conduct
was unlawful. A similar standard is applicable in the case of derivative
actions, except that indemnification only extends to expenses (including
attorneys' fees) incurred in connection with the defense or settlement of such
action, and the statute requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's certificate of
incorporation, bylaws, disinterested director vote, stockholder vote,
agreement, or otherwise.
The DGCL further authorizes a Delaware corporation to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation or enterprise, against any liability asserted against him and
incurred by him in any such capacity, arising out of his status as such,
whether or not the corporation would otherwise have the power to indemnify him
under Section 145.
II-1
The certificate of incorporation and bylaws of Dex Media East Finance Co.
and the amended and restated certificate of incorporation and amended and
restated bylaws of Dex Media International, Inc. provide for the
indemnification of their respective directors and officers to the fullest
extent permitted under Delaware law.
We, Dex Media East Finance Co. and Dex Media International, Inc. have
purchased insurance on behalf of our respective directors and officers against
certain liabilities that may be asserted against, or incurred by, such persons
in their capacities as directors or officers of the registrants, or that may
arise out of their status as directors or officers of the registrants,
including liabilities under the federal and state securities laws.
We intend to enter into employment agreements with certain executive
officers and expect that such employment agreements will provide for
indemnification of such executive officers to the maximum extent permitted by
law.
ITEM 21. EXHIBITS AND FINANCIAL DATA SCHEDULES.
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------
2.1+ Agreement of Merger of Dex Media East LLC and SGN LLC, dated November
8, 2002.
2.2+ Purchase Agreement, dated as of August 19, 2002, by and between Qwest
Dex, Inc., Qwest Services Corporation, and Qwest Communications
International Inc., on the one hand, and Dex Holdings LLC, on the
other hand.
2.3+ Amendment No. 1 dated November 8, 2002 to Purchase Agreement, dated as
of August 19, 2002, by and between Qwest Dex, Inc., Qwest Services
Corporation, and Qwest Communications International Inc., on the one
hand, and Dex Holdings LLC, on the other hand.
3.1+ Certificate of Formation of Dex Media East LLC, filed October 8, 2002.
3.2+ Amended Certificate of Formation of Dex Media East LLC, filed November
12, 2002.
3.3+ Certificate of Incorporation of Dex Media East Finance Co., filed
October 8, 2002.
3.4+ Second Amended and Restated Certificate of Incorporation of LCI
International, Inc., filed December 19, 2000 (Dex Media International,
Inc.).
3.5+ Amendment No. One to the Amended and Restated Certificate of
Incorporation of LCI International, Inc. (Dex Media International,
Inc.).
3.6+ Amended and Restated Limited Liability Company Agreement of Dex Media
East LLC, dated November 8, 2002.
3.7+ By-laws of Dex Media East Finance Co.
3.8+ Amended and Restated By-laws of LCI International, Inc. (Dex Media
International, Inc.).
4.1+ Senior Note Indenture with respect to the 9 7/8% Senior Notes due
2009, among Dex Media East LLC, Dex Media East Finance Co., LCI
International, Inc., and U.S. Bank National Association, as trustee,
dated November 8, 2002.
4.2+ Form of 9 7/8% Senior Notes due 2002 (included in exhibit 4.1)
4.3+ Senior Subordinated Note Indenture with respect to the 12 1/8% Senior
Subordinated Notes due 2012, among Dex Media East LLC, Dex Media East
Finance Co., LCI International, Inc., and U.S. Bank National
Association, as trustee, dated November 8, 2002.
4.4+ Form of 12 1/8% Senior Subordinated Notes due 2012 (included in
exhibit 4.3)
II-2
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------
4.5+ Senior Note Registration Rights Agreement among Dex Media East LLC,
Dex Media East Finance Co., LCI International, Inc. and J.P. Morgan
Securities Inc., Banc of America Securities LLC, Deutsche Bank
Securities Inc., Lehman Brothers Inc., Wachovia Securities, Inc., Bear
Stearns & Co. Inc., Credit Lyonnais Securities (USA) Inc., ING
Financial Markets LLC, The Royal Bank of Scotland plc and Scotia
Capital (USA) Inc. (collectively, the "Initial Purchasers"), dated
November 8, 2002.
4.6+ Senior Subordinated Note Registration Rights Agreement among Dex
Media East LLC, Dex Media East Finance Co., LCI International, Inc.
and J.P. Morgan Securities Inc., Banc of America Securities LLC,
Deutsche Bank Securities Inc., Lehman Brothers Inc., Wachovia
Securities, Inc., Bear Stearns & Co. Inc., Credit Lyonnais Securities
(USA) Inc., ING Financial Markets LLC, The Royal Bank of Scotland plc
and Scotia Capital (USA) Inc. (collectively, the "Initial
Purchasers"), dated November 8, 2002.
5.1 Opinion of Latham & Watkins regarding the validity of the exchange
notes.
10.1+ Credit Agreement, dated November 8, 2002, by and among Dex Media,
Inc., Dex Media East, Inc., Dex Media East LLC (f/k/a SGN LLC),
JPMorgan Chase Bank, as administrative agent, J.P. Morgan Europe,
Limited, as London Agent, and Bank of America, N.A., Lehman Commercial
Paper Inc., Wachovia Bank, National Association and Deutsche Bank
Trust Company Americas, as co-syndication agents.
10.2+ Guarantee and Collateral Agreement, dated November 8, 2002, by and
among Dex Media East, Inc., Dex Media East LLC (f/k/a/ SGN LLC), Dex
Media East Finance Co., the Guarantor and JPMorgan Chase Bank, as
administrative agent.
10.3+ Billing and Collection Agreement, dated November 8, 2002, by and
between Qwest Corporation and Dex Media East LLC (f/k/a SGN LLC).
10.4+ Non-Competition and Non-Solicitation Agreement, dated November 8,
2002, by and among Dex Media East LLC (f/k/a SGN LLC), Dex Holdings
LLC and Qwest Corporation, Qwest Communications International Inc. and
Qwest Dex, Inc.
10.5+ Management Consulting Agreement among Dex Media East and The Carlyle
Group dated November 8, 2002.
10.6+ Management Consulting Agreement among Dex Media East and Welsh,
Carson, Anderson and Stowe dated November 8, 2002.
10.7+ Joint Management Agreement among SGN LLC, Dex Holdings LLC, Qwest
Dex, Inc. and Qwest Communications International Inc., dated November
8, 2002.
10.8+ Equityholders Agreement of Dex Holdings LLC among Carlyle Partners
III, L.P., CP III Coinvestment L.P., Carlyle Dex Partners II, L.P.,
Carlyle High Yield Partners, L.P., Welsh, Carson, Anderson & Stowe IX,
L.P., WD GP Associates LLC, WD Investors LLC and A.S.F. Co-Investment
Partners, L.P., dated November 8, 2002.
10.9+ Agreement Among Members (Dex Holdings LLC) among Carlyle Partners III,
L.P., Carlyle-Dex Partners L.P., Carlyle-Dex Partners II L.P., Welsh,
Carson, Anderson & Stowe IX, L.P., WD Investors LLC, Dex Holdings LLC,
Dex Media, Inc., Dex Media East, Inc. and Dex Media East LLC, dated
November 8, 2002.
10.10 Publishing Agreement by and among Dex Holdings LLC, SGN LLC, GPP LLC
and Qwest Corporation, dated November 8, 2002.
10.11 Non-Competition and Non-Solicitation Agreement by and between SGN LLC,
GPP LLC, Dex Holdings LLC, Qwest Corporation, Qwest Communications
International Inc. and Qwest Dex, Inc., dated November 8, 2002.
12.1+ Statement of Computation of Ratio of Earnings to Fixed Charges.
21.1+ List of Subsidiaries.
23.1 Consent of Latham & Watkins (included in Exhibit 5.1).
II-3
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------
23.2 Consent of KPMG LLC.
24.1+ Powers of Attorney (included in the signature pages to this
Registration Statement).
25.1+ Statement of Eligibility of Trustee with respect to the Senior Notes
Indenture and the Senior Subordinated Notes Indenture.
99.1 Form of Letter of Transmittal, with respect to the outstanding notes
and exchange notes.
99.2+ Form of Notice of Guaranteed Delivery, with respect to the outstanding
notes and exchange notes.
99.3+ Form of Letter to Registered Holder and/or Book-Entry Transfer
Facility Participant.
99.4+ Letter to Our Clients.
99.5+ Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
+ Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions, are inapplicable or not material, or the information
called for thereby is otherwise included in the financial statements and
therefore has been omitted.
ITEM 22. UNDERTAKINGS
The undersigned registrants hereby undertake:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement
(notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of a
prospectus filed with the SEC pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than
20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement); and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrants hereby undertake as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule
II-4
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
The undersigned registrants hereby undertake that every prospectus (1)
that is filed pursuant to the immediately preceding paragraph or (2) that
purports to meet the requirements of Section 10(a)(3) of the Securities Act of
1933 and is used in connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the registration statement and
will not be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrants pursuant to the foregoing provisions, or otherwise, the
registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrants in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrants will, unless
in the opinion of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by final adjudication of such issue.
The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Dex Media East
LLC has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Englewood, State of
Colorado, on February 13, 2003.
DEX MEDIA EAST LLC
By: /s/ Robert Neumeister, Jr.
-----------------------------------------
Robert Neumeister, Jr.
Chief Financial Officer and Executive
Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
SIGNATURE TITLE DATE
- -------------------------------- --------------------------------------------------- -----------------
* Chief Executive Officer, President and Director February 13, 2003
- ------------------------- (principal executive officer)
George Burnett
/s/ Robert Neumeister, Jr. Chief Financial Officer and Executive Vice President February 13, 2003
- ------------------------- (principal financial and accounting officer)
Robert Neumeister, Jr
* Co-Chairman of the Board February 13, 2003
- -------------------------
James A. Attwood, Jr.
* Co-Chairman of the Board February 13, 2003
- -------------------------
Anthony J. de Nicola
* Director February 13, 2003
- -------------------------
John Almeida, Jr.
* Director February 13, 2003
- -------------------------
William Kennard
* Director February 13, 2003
- -------------------------
Bruce Rosenblum
* Director February 13, 2003
- -------------------------
Sanjay Swani
*By: --------------------------
/s/ Robert Neumeister, Jr.
Robert Neumeister, Jr.
as Attorney-in-Fact
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Dex Media East
Finance Co. has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Englewood,
State of Colorado, on February 13, 2003.
DEX MEDIA EAST FINANCE CO.
By: /s/ Robert Neumeister, Jr.
-----------------------------------------
Robert Neumeister, Jr.
Chief Financial Officer and Executive
Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
SIGNATURE TITLE DATE
- -------------------------------- ------------------------------------------------------ ------------------
* Chief Executive Officer, President and Director February 13, 2003
- ------------------------- (principal executive officer)
George Burnett
/s/ Robert Neumeister, Jr. Chief Financial Officer and Executive Vice President February 13, 2003
- ------------------------- (principal financial and accounting officer)
Robert Neumeister, Jr.
* Co-Chairman of the Board February 13, 2003
- -------------------------
James A. Attwood, Jr.
* Co-Chairman of the Board February 13, 2003
- -------------------------
Anthony J. de Nicola
*By: /s/ Robert Neumeister, Jr.
--------------------------
Robert Neumeister, Jr.
as Attorney-in-Fact
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Dex Media
International, Inc. has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Englewood, State of Colorado, on February 13, 2003.
DEX MEDIA INTERNATIONAL , INC.
By: /s/ Robert Neumeister, Jr.
-----------------------------------------
Robert Neumeister, Jr.
Chief Financial Officer and Executive
Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
SIGNATURE TITLE DATE
- -------------------------------- ------------------------------------------------------ ------------------
* Chief Executive Officer, President and Director February 13, 2003
- ------------------------- (principal executive officer)
George Burnett
/s/ Robert Neumeister, Jr. Chief Financial Officer and Executive Vice President February 13, 2003
- ------------------------- (principal financial and accounting officer)
Robert Neumeister, Jr.
* Co-Chairman of the Board February 13, 2003
- -------------------------
James A. Attwood, Jr.
* Co-Chairman of the Board February 13, 2003
- -------------------------
Anthony J. de Nicola
*By: /s/ Robert Neumeister, Jr.
--------------------------
Robert Neumeister, Jr.
as Attorney-in-Fact
II-8
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------
2.1+ Agreement of Merger of Dex Media East LLC and SGN LLC, dated November
8, 2002.
2.2+ Purchase Agreement, dated as of August 19, 2002, by and between Qwest
Dex, Inc., Qwest Services Corporation, and Qwest Communications
International Inc., on the one hand, and Dex Holdings LLC, on the other
hand.
2.3+ Amendment No. 1 dated November 8, 2002 to Purchase Agreement, dated as
of August 19, 2002, by and between Qwest Dex, Inc., Qwest Services
Corporation, and Qwest Communications International Inc., on the one
hand, and Dex Holdings LLC, on the other hand.
3.1+ Certificate of Formation of Dex Media East LLC, filed October 8, 2002.
3.2+ Amended Certificate of Formation of Dex Media East LLC, filed November
12, 2002.
3.3+ Certificate of Incorporation of Dex Media East Finance Co., filed
October 8, 2002.
3.4+ Second Amended and Restated Certificate of Incorporation of LCI
International, Inc., filed December 19, 2000 (Dex Media International,
Inc.).
3.5+ Amendment No. One to the Amended and Restated Certificate of
Incorporation of LCI International, Inc. (Dex Media International,
Inc.).
3.6+ Amended and Restated Limited Liability Company Agreement of Dex Media
East LLC, dated November 8, 2002.
3.7+ By-laws of Dex Media East Finance Co.
3.8+ Amended and Restated By-laws of LCI International, Inc. (Dex Media
International, Inc.).
4.1+ Senior Note Indenture with respect to the 9 7/8% Senior Notes due 2009,
among Dex Media East LLC, Dex Media East Finance Co., LCI
International, Inc., and U.S. Bank National Association, as trustee,
dated November 8, 2002.
4.2+ Form of 9 7/8% Senior Notes due 2002 (included in exhibit 4.1)
4.3+ Senior Subordinated Note Indenture with respect to the 12 1/8% Senior
Subordinated Notes due 2012, among Dex Media East LLC, Dex Media East
Finance Co., LCI International, Inc., and U.S. Bank National
Association, as trustee, dated November 8, 2002.
4.4+ Form of 12 1/8% Senior Subordinated Notes due 2012 (included in exhibit
4.3)
4.5+ Senior Note Registration Rights Agreement among Dex Media East LLC, Dex
Media East Finance Co., LCI International, Inc. and J.P. Morgan
Securities Inc., Banc of America Securities LLC, Deutsche Bank
Securities Inc., Lehman Brothers Inc., Wachovia Securities, Inc., Bear
Stearns & Co. Inc., Credit Lyonnais Securities (USA) Inc., ING
Financial Markets LLC, The Royal Bank of Scotland plc and Scotia
Capital (USA) Inc. (collectively, the "Initial Purchasers"), dated
November 8, 2002.
4.6+ Senior Subordinated Note Registration Rights Agreement among Dex Media
East LLC, Dex Media East Finance Co., LCI International, Inc. and J.P.
Morgan Securities Inc., Banc of America Securities LLC, Deutsche Bank
Securities Inc., Lehman Brothers Inc., Wachovia Securities, Inc., Bear
Stearns & Co. Inc., Credit Lyonnais Securities (USA) Inc., ING
Financial Markets LLC, The Royal Bank of Scotland plc and Scotia
Capital (USA) Inc. (collectively, the "Initial Purchasers"), dated
November 8, 2002.
5.1 Opinion of Latham & Watkins regarding the validity of the exchange
notes.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------
10.1+ Credit Agreement, dated November 8, 2002, by and among Dex Media, Inc.,
Dex Media East, Inc., Dex Media East LLC (f/k/a SGN LLC), JPMorgan
Chase Bank, as administrative agent, J.P. Morgan Europe, Limited, as
London Agent, and Bank of America, N.A., Lehman Commercial Paper Inc.,
Wachovia Bank, National Association and Deutsche Bank Trust Company
Americas, as co-syndication agents.
10.2+ Guarantee and Collateral Agreement, dated November 8, 2002, by and
among Dex Media East, Inc., Dex Media East LLC (f/k/a/ SGN LLC), Dex
Media East Finance Co., the Guarantor and JPMorgan Chase Bank, as
administrative agent.
10.3+ Billing and Collection Agreement, dated November 8, 2002, by and
between Qwest Corporation and Dex Media East LLC (f/k/a SGN LLC).
10.4+ Non-Competition and Non-Solicitation Agreement, dated November 8, 2002,
by and among Dex Media East LLC (f/k/a SGN LLC), Dex Holdings LLC and
Qwest Corporation, Qwest Communications International Inc. and Qwest
Dex, Inc.
10.5+ Management Consulting Agreement among Dex Media East and The Carlyle
Group dated November 8, 2002.
10.6+ Management Consulting Agreement among Dex Media East and Welsh, Carson,
Anderson and Stowe dated November 8, 2002.
10.7+ Joint Management Agreement among SGN LLC, Dex Holdings LLC, Qwest Dex,
Inc. and Qwest Communications International Inc., dated November 8,
2002.
10.8+ Equityholders Agreement of Dex Holdings LLC among Carlyle Partners III,
L.P., CP III Coinvestment L.P., Carlyle Dex Partners II, L.P., Carlyle
High Yield Partners, L.P., Welsh, Carson, Anderson & Stowe IX, L.P., WD
GP Associates LLC, WD Investors LLC and A.S.F. Co-Investment Partners,
L.P., dated November 8, 2002.
10.9+ Agreement Among Members (Dex Holdings LLC) among Carlyle Partners III,
L.P., Carlyle-Dex Partners L.P., Carlyle-Dex Partners II L.P., Welsh,
Carson, Anderson & Stowe IX, L.P., WD Investors LLC, Dex Holdings LLC,
Dex Media, Inc., Dex Media East, Inc. and Dex Media East LLC, dated
November 8, 2002.
10.10 Publishing Agreement by and among Dex Holdings LLC, SGN LLC, GPP LLC
and Qwest Corporation, dated November 8, 2002.
10.11 Non-Competition and Non-Solicitation Agreement by and between SGN LLC,
GPP LLC, Dex Holdings LLC, Qwest Corporation, Qwest Communications
International Inc. and Qwest Dex, Inc., dated November 8, 2002.
12.1+ Statement of Computation of Ratio of Earnings to Fixed Charges.
21.1+ List of Subsidiaries.
23.1 Consent of Latham & Watkins (included in Exhibit 5.1).
23.2 Consent of KPMG LLC.
24.1+ Powers of Attorney (included in the signature pages to this
Registration Statement).
25.1+ Statement of Eligibility of Trustee with respect to the Senior Notes
Indenture and the Senior Subordinated Notes Indenture.
99.1 Form of Letter of Transmittal, with respect to the outstanding notes
and exchange notes.
99.2+ Form of Notice of Guaranteed Delivery, with respect to the outstanding
notes and exchange notes.
99.3+ Form of Letter to Registered Holder and/or Book-Entry Transfer Facility
Participant.
99.4+ Letter to Our Clients.
99.5+ Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
+ Previously filed.