AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 20, 2003
REGISTRATION NO. 333-102395
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2 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 MARCH 20, 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 17.
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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 .............................................. 17
FORWARD-LOOKING STATEMENTS ................................ 30
MARKET AND INDUSTRY DATA .................................. 30
THE EXCHANGE OFFER ........................................ 32
USE OF PROCEEDS ........................................... 40
CAPITALIZATION ............................................ 41
SELECTED HISTORICAL FINANCIAL DATA ........................ 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................ 44
BUSINESS .................................................. 61
THE TRANSACTIONS .......................................... 76
MANAGEMENT ................................................ 86
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ............................................... 94
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............ 96
DESCRIPTION OF SENIOR EXCHANGE NOTES ...................... 101
DESCRIPTION OF SENIOR SUBORDINATED EXCHANGE NOTES ......... 141
BOOK-ENTRY; DELIVERY AND FORM ............................. 183
MATERIAL FEDERAL INCOME TAX CONSEQUENCES .................. 185
PLAN OF DISTRIBUTION....................................... 190
LEGAL MATTERS ............................................. 190
EXPERTS ................................................... 190
WHERE YOU CAN FIND MORE INFORMATION ....................... 190
INDEX TO CONSOLIDATED 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 Communications International Inc. 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
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 consolidated
financial statements and related notes thereto appearing elsewhere in this
prospectus.
In this prospectus:
o "We," "our" or "us" refers to our predecessor, Dex East, for periods
prior to November 8, 2002, and refers to Dex Media East LLC (formerly
known as SGN LLC), a co-issuer of the notes, for periods after November
8, 2002. In addition, where the context so requires, "we" "our" or "us"
refers to Dex Media East and Dex East collectively;
o "Dex East" and "Predecessor" refer to the historical operations of Qwest
Dex Holdings, Inc. and its subsidiary in Colorado, Iowa, Minnesota,
Nebraska, New Mexico, North Dakota and South Dakota and the standard
metropolitan statistical area of El Paso, Texas prior to November 8,
2002, the date that Dex Media East acquired Dex East;
o "Dex West" refers to the historical and current operations of Qwest Dex
Holdings, Inc. and its subsidiary in Arizona, Idaho, Montana, Oregon,
Utah, Washington and Wyoming;
o "Dex Media West" refers to the successor to Dex West, assuming that the
acquisition of Dex West is consummated;
o "Issuers" refers to Dex Media East and Dex Media East Finance;
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;
o "Qwest LEC" refers to Qwest Corporation, the local exchange carrier
subsidiary of Qwest;
o "Predecessor Period" refers to the period from January 1, 2002 through
November 8, 2002;
o "Successor Period" refers to the period from November 9, 2002 through
December 31, 2002;
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;
o "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; and
1
o "notes" refers to the outstanding notes and the exchange notes.
BACKGROUND INFORMATION
On August 19, 2002, Dex Holdings LLC, 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 are
referred to as the Dex West States. We expect the second phase to be
consummated in the second half 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 East. The historical information, including the
historical financial data, included in this prospectus for periods prior to
November 8, 2002 is that of our predecessor, Dex East.
We have operated as a stand-alone company since the acquisition of Dex East
on November 8, 2002. The acquisition has been accounted for under the purchase
method of accounting. Under this method, the pre-acquisition deferred revenue
and related deferred costs associated with directories that were published prior
to the acquisition date were not carried over to Dex Media East's balance sheet.
The effect of this accounting treatment is to reduce revenue and related costs
that would otherwise have been recognized during the twelve months subsequent to
the acquisition date. The unaudited pro forma financial information included in
Note 5 to our consolidated financial statements included elsewhere in this
prospectus eliminates the effects of these adjustments to deferred revenue and
related deferred expenses at the acquisition date. This pro forma financial
information presents the results of operations for the years ended December 31,
2002 and 2001 as if the acquisition of Dex East had occurred on January 1st for
each of the years presented. Pro forma financial information in this prospectus
has been derived from this information. For purposes of comparison in this
prospectus, we have also provided the combined results of the Predecessor Period
and Successor Period, which include the effects of purchase accounting, to
provide additional information about our results.
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 2002, 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, 2002, we had a total of
2
approximately 201,000 local advertising customers consisting primarily of small
and medium-sized businesses and approximately 5,200 national advertisers. We
also provide related services, including an internet-based directory and direct
marketing services. For the combined Successor Period and Predecessor Period,
we generated $648 million in revenues. On a pro forma basis for the years ended
December 31, 2002 and 2001, we generated $689 million and $666 million in
revenues, respectively. Approximately 97% of our total revenues for the
combined Successor Period and Predecessor Period were generated from the
publication of print directories. On a pro forma basis for the year ended
December 31, 2002, 97% of our total revenues were generated from the
publication of print directories. Approximately 96% of the revenues for these
periods came from the sale of advertising in our yellow pages directories, and
4% of the revenues for these periods 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. See "Business."
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
December 31, 2002, we had approximately 463 sales representatives in 23 local
offices who average nine years of employment with us.
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. The firms 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 East.
3
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 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.
THE TRANSACTIONS
The transactions summarized below, pursuant to which we became a
stand-alone company, include the acquisition of Dex East, the acquisition of
Dex Media International (currently the only guarantor of the outstanding
notes), the issuance of the outstanding notes, borrowings under our new credit
facilities and the equity contribution by the Sponsors and their assignees and
designees. We collectively refer to these transactions in this prospectus as
the transactions related to the acquisition of Dex East. 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
4
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).
In the second phase, which is expected to be consummated in 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 2002, Qwest Dex's
business in the Dex West States published 121 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, 2002, Qwest Dex's
businesses in the Dex West States had a total of 225,000 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 will begin incurring 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 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 West is
consummated, we will not incur any of these second category costs. Therefore,
we believe that we will benefit from net synergies if the acquisition of Dex
West is consummated. See "Management's Discussion and
Analysis--Overview--Stand-Alone Company."
In the event that the acquisition of Dex West is consummated, we will fund
$210 million of the purchase price for Dex 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 West. Dex Media, Inc. will
use the funds to pay a portion of the purchase price for Dex West to Qwest. We
expect to fund that portion of the Dex 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 West is not consummated. There can be no assurances that the
acquisition of Dex West will be consummated or that the anticipated synergies
will be realized. See "The Transactions--Synergies with Dex Media West."
5
Assuming the consummation of the acquisition of Dex 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."
6
SOURCES AND USES OF FUNDS
The following table sets forth the sources and uses of funds relating to
the acquisition of Dex East.
(DOLLARS IN MILLIONS)
SOURCES USES
- ----------------------------------------- ----------------------------
Revolving credit facility(1) ............ $ 50 Purchase price ............. $2,754
Tranche A term loan facility(2) ......... 530 Working capital ............ 16
Tranche B term loan facility ............ 700 Fees and expenses .......... 140
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 East. As of December 31, 2002, the $50 million
borrowed to fund the acquisition of Dex East had been repaid and
approximately $99 million was available for borrowing (approximately $1
million was committed under a stand-by letter of credit and accordingly
not available for borrowing).
(2) In addition, the tranche A term loan facility includes a $160 million
delayed draw commitment, which will terminate if the acquisition of Dex
West is not consummated.
(3) Represents the equity contribution from the Sponsors and their assignees
and designees. If the acquisition of Dex 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 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 West. See
"The Transactions--Synergies with Dex Media West."
7
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
Media East 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.
8
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 97/8% 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;
9
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.
10
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 December 31, 2002, the senior exchange notes would
have ranked (1) effectively subordinated to approximately
$1,232 million of secured indebtedness under our new credit
facilities (excluding approximately $99 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:
o rank junior in right of payment to all existing and future
senior indebtedness of the Issuers and the guarantors;
11
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 December 31, 2002, the senior subordinated exchange
notes would have ranked junior to approximately $1,682 million
of indebtedness (excluding approximately $99 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."
12
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 (see "Description of Senior Exchange
Notes--Certain Definitions--Unrestricted Subsidiary" and
"Description of Senior Subordinated Exchange Notes--Certain
Definitions--Unrestricted Subsidiary")) 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."
13
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary historical financial data as of and for the years ended
December 31, 2000 and 2001, as of December 31, 2002 and for the Predecessor
Period and Successor Period have been derived from our consolidated financial
statements, included elsewhere in this prospectus, which have been audited by
KPMG LLP, independent auditors.
The pro forma financial information included below and in Note 5 to our
consolidated financial statements included elsewhere in this prospectus
eliminates the effects on our revenue and cost of revenue of the adjustments to
deferred revenue and related deferred expenses at the acquisition date and
presents our pro forma results of operations for the years ended December 31,
2002 and 2001 as if the acquisition of Dex East had occurred on January 1st for
each of the years presented.
While we have been a stand-alone company since the consummation of the
transactions related to the acquisition of Dex East on November 8, 2002, our
Predecessor 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 East, we expect that our cost
structure will change significantly from that reflected in our Predecessor's
summary historical operating results and our pro forma operating results. As a
result, our Predecessor's summary historical results of operations, financial
position and cash flows and our 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 East actually
been consummated on January 1, 2001 and do not purport to indicate 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", "The Transactions" and
our consolidated financial statements and related notes thereto, included
elsewhere in this prospectus.
14
PREDECESSOR DEX MEDIA EAST LLC
-------------------------------------- ----------------------------------------------
PERIOD FROM PERIOD FROM UNAUDITED PRO FORMA UNAUDITED PRO FORMA
YEAR ENDED DECEMBER 31, JANUARY 1 TO NOVEMBER 9 YEAR ENDED YEAR ENDED
NOVEMBER 8, TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
(DOLLARS IN MILLIONS, OTHER THAN ----------------------- -------------- ----------------- ------------------ -------------------
PRINTED REVENUES PER
ADVERTISER (LOCAL)) 2000 2001 2002 2002 2001 2002
- ----------------------------------- ----------- ----------- -------------- ----------------- ------------------ --------------------
STATEMENT OF INCOME DATA:
Total revenues(a) ................. $ 638 $ 666 $ 590 $ 58 $666 $689
Cost of revenues ................. 238 209 178 20 209 209
General and administrative
expense ......................... 49 48 49 21 50 72
Depreciation and
amortization expense ............ 15 12 9 33 231 229
Merger-related expenses(b) ....... 6 4 -- -- 4 --
Impairment charges(c) ............ -- 7 -- -- 7 --
Total operating expenses ........ 308 280 236 74 501 510
Operating income (loss) .......... 330 386 354 (16) 165 179
Interest expense, net(d) ......... 123 110 86 28 211 194
OTHER FINANCIAL DATA:
Capital expenditures ............. 15 7 14 3
Cash interest expense ............ 1
Ratio of earnings to fixed
charges(e) ...................... 2.7x 3.3x 4.0x --
OTHER OPERATIONAL DATA:
Number of local advertisers
(at period end) ................. 211,087 205,715 n/a 201,044
Printed revenues per
advertiser (local) .............. $ 2,450 $ 2,622 n/a $ 2,661
Local advertiser renewal rate..... 94% 93% n/a 92%
Number of directories
published ....................... 152 150 130 20
BALANCE SHEET DATA (AT PERIOD
END):
Total cash and cash
equivalents ..................... -- $ 55 n/a $ 38
Working capital (deficit)(f) ..... $ (1,519) (1,267) n/a 32
Total assets ..................... 313 348 n/a 3,022
Total senior debt ................ 1,682
Total debt(g) .................... 1,603 1,391 n/a 2,207
Owner's (deficit) equity ......... (1,493) (1,250) n/a 623
- ---------------
(a) We estimate that our revenues and expenses for the twelve months following
the consummation of the transactions related to the acquisition of Dex
East will be approximately $83 million and $22 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 the purchase method of accounting the deferred
revenue and deferred directory costs associated with directories that had
previously been published are not carried over to our balance sheet. 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 impact on cash flows.
(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.
(d) Interest expense, net in Predecessor periods includes interest on that
portion of a Qwest Dex line of credit borrowing arrangement with an
affiliate of Qwest which was apportioned to the Predecessor. Note 8 to our
consolidated financial statements included in this prospectus sets forth
additional information regarding this apportionment. Successor Period
interest expense gives effect to the transactions related to the
acquisition of Dex East and includes $2 million of non-cash charges for
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 the interest within rental expense. For
the period from November 9, 2002 to December 31, 2002, earnings were
inadequate to cover fixed charges. The deficiency was $47 million.
15
(f) Working capital is defined as current assets less current liabilities. For
Predecessor periods, working capital includes cash and short term
borrowings from affiliates that were not acquired or assumed by Dex Media
East from its Predecessor. These short-term borrowings were eliminated
after the consummation of the transactions related to the acquisition of
Dex East. The following table summarizes the effects of these items on net
working capital for the periods indicated:
PREDECESSOR DEX MEDIA EAST LLC
--------------------------- ------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------- ------------------------
(DOLLARS IN MILLIONS) 2000 2001 2002
- ------------------------------------ ------------ ------------ ------------------------
Working capital (deficit) .......... $ (1,519) $ (1,267) $ 32
-----
Adjustments to working capital:
Cash and cash equivalents .......... -- (55)
Short term borrowings .............. 1,603 1,391
-------- --------
Working capital, excluding cash
and short-term borrowings ......... $ 84 $ 69
-------- --------
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) Total debt in Predecessor periods consists of that portion of a Qwest Dex
line of credit borrowing arrangement with an affiliate of Qwest which was
apportioned to the Predecessor. Note 8 to our combined financial
statements included in this prospectus sets forth additional information
regarding this apportionment. Dex Media East's total debt at December 31,
2002 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.
16
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 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. For the combined
Predecessor Period and Successor Period and on a pro forma basis for the year
ended December 31, 2002, Qwest LEC billed approximately 49% of our local
customer billings 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 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
17
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.
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
18
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.
WE COULD BE MATERIALLY ADVERSELY AFFECTED BY DECLINING USAGE OF PRINTED YELLOW
PAGES DIRECTORIES.
Based on industry sources, 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 documents 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
19
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 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 consolidated 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 consolidated 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
consolidated 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 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
20
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.
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. For the combined
Predecessor Period and Successor Period, paper costs incurred comprised 3.8% of
our revenues and 12.4% of our cost of revenues. On a pro forma basis for the
year ended December 31, 2002, paper costs incurred would have been 3.6% and
11.8% of our revenues and cost of revenues, respectively. Approximately 98% 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
West or a maximum of 120 days after the termination of the Dex 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,
21
effort and resources between Qwest Dex and us. In addition, upon consummation
of the acquisition of Dex 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.
WE MAY BE MATERIALLY ADVERSELY AFFECTED BY OUR PRACTICE OF EXTENDING CREDIT TO
SMALL AND MEDIUM-SIZED BUSINESSES.
For the combined Predecessor Period and Successor Period, approximately
82% 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, 2002, we had
approximately 193,000 customers to which we extended credit with an average
amount due per customer of approximately $2,960. Full collection of delinquent
accounts can take many months or may never occur. For the combined Predecessor
Period and Successor Period, bad debt expense for our customers amounted to $17
million, or approximately 2.6% of our revenue. On a pro forma basis for the
year ended December 31, 2002, bad debt expense would have been approximately
2.5% 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 16% of our revenues for the combined Predecessor Period and
Successor Period 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 160 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 for the combined Predecessor Period and
Successor Period. 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 December 31, 2002, approximately 65% 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.
22
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) resulting from new governmental
legal requirements, and this obligation expires seven years after the
consummation of the transactions related to the acquisition of Dex 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 December 31, 2002, we had $2,207
million of outstanding indebtedness, including approximately $1,232 million of
indebtedness under our new credit facilities, $450 million of senior notes and
$525 million of senior subordinated notes. Our ratio of total indebtedness to
owner's equity at December 31, 2002 was 3.5 to 1.0. 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;
23
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
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 December 31, 2002, we had approximately $99
million available for additional borrowing under our new revolving credit
facility. In addition, if the acquisition of Dex 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.
24
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 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 December 31, 2002, the aggregate amount of the Issuers' secured
indebtedness was $1,232 million, and approximately $99 million was available
for additional borrowing under our new revolving credit facility. As of
December 31, 2002, Dex Media International (the only guarantor as of the
consummation of the transactions) had no secured indebtedness, other than its
guarantee of our new credit facilities. In addition, if the acquisition of Dex
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
25
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.
As of December 31, 2002, the senior subordinated exchange notes would have
been subordinated to $1,682 million of senior indebtedness. As of December 31,
2002, approximately $99 million was available for borrowing as additional
senior indebtedness under our new revolving credit facility. In addition, if
the acquisition of Dex 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,
26
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
"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:
27
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
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.
28
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
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.
29
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
30
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.
31
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
32
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.
33
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.
34
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
35
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, promptly 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
36
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
37
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.
38
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.
39
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 East, pay related fees and
expenses and for working capital purposes.
40
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2002,
The information in this table should be read in conjunction with "The
Transactions," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and related
notes thereto included elsewhere in this prospectus.
DECEMBER 31, 2002
------------------
(IN MILLIONS)
- ----------------------------------------------------
Cash and cash equivalents ....................... $ 38
======
Total debt:
New credit facilities:
Revolving credit facility(1) ................. $ 0
Tranche A term loan facility(2) .............. 530
Tranche B term loan facility ................. 702
Outstanding senior notes ...................... 450
Outstanding senior subordinated notes ......... 525
------
Total debt ................................ $2,207
Total owner's equity(3) ......................... 623
------
Total capitalization ...................... $2,830
======
- --------------
(1) Total availability of $100 million, of which approximately $99 million was
available at December 31, 2002 (approximately $1 milion was committed
under a stand-by letter of credit and accordingly not available for
borrowing).
(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 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 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 West. See
"The Transactions--Synergies with Dex Media West."
41
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data as of and for each of the years
ended December 31, 2000 and 2001, as of December 31, 2002 and for the
Predecessor Period and Successor Period in 2002 have been derived from our
consolidated financial statements, included elsewhere in this prospectus, which
have been audited by KPMG LLP, independent auditors. The selected historical
data as of and for the years ended December 31, 1999 has been derived from our
audited consolidated financial statements. The selected historical data as of
and for the year ended December 31, 1998 has been derived from our unaudited
consolidated financial statements. The following data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated 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 East on November 8, 2002, our
Predecessor 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 East, we expect our cost
structure to change significantly from that reflected in our Predecessor's
historical operating results. As a result, our Predecessor's 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."
DEX MEDIA
PREDECESSOR EAST LLC
-------------------------------------------------------------------- --------------
PERIOD FROM PERIOD FROM
(DOLLARS IN MILLIONS, OTHER THAN PRINTED) JANUARY 1 TO NOVEMBER 9 TO
REVENUES PER ADVERTISER (LOCAL) YEAR ENDED DECEMBER 31, NOVEMBER 8, DECEMBER 31,
- --------------------------------------------- ----------------------------------------------------- -------------- --------------
1998 1999 2000 2001 2002 2002
------------- ------------- ------------- ----------- -------------- --------------
STATEMENT OF INCOME DATA:
Total revenues .............................. $ 561 $ 601 $ 638 $ 666 $ 590 $ 58
Cost of revenues ............................ 223 232 238 209 178 20
General and administrative expense .......... 76 87 49 48 49 21
Depreciation and amortization expense........ 14 14 15 12 9 33
Merger-related expenses(a) .................. -- -- 6 4 -- --
Impairment charges(b) ....................... -- -- -- 7 -- --
--------- --------- --------- -------- ------ --------
Total operating expenses .................... 313 333 308 280 236 74
--------- --------- --------- -------- ------ --------
Operating income ............................ 248 268 330 386 354 (16)
--------- --------- --------- -------- ------ --------
Net income (loss) ........................... $ 145 $ 86 $ 130 $ 161 $ 157 $ (28)
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges(c) ....... 62.8x 2.1x 2.7x 3.3x 4.0x --
OTHER OPERATIONAL DATA:
Number of local advertisers (at period
end) ....................................... 220,131 215,294 211,087 205,715 n/a 201,044
Printed revenues per advertiser (local) ..... $ 2,108 $ 2,293 $ 2,450 $ 2,622 n/a $ 2,661
Local advertiser renewal rate ............... 94% 94% 94% 93% n/a 92%
Number of directories published ............. 154 153 152 150 n/a 150
BALANCE SHEET DATA (AT PERIOD END):
Total cash and cash equivalents ............. -- -- -- $ 55 n/a $ 38
Working capital (deficit)(d) ................ $ (1,559) $ (1,687) $ (1,519) (1,267) n/a 32
Total assets ................................ 265 299 313 348 n/a 3,022
Total debt(e) ............................... 1,611 1,741 1,603 1,391 n/a 2,207
Owner's equity (deficit) .................... (1,542) (1,673) (1,493) (1,250) n/a 623
- ----------------
(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.
42
(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. For the
period from November 9, 2002 to December 31, 2002, earnings were
inadequate to cover fixed charges. The deficiency was $47 million. 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. For
the Predecessor periods, working capital includes cash and short-term
borrowings from affilates that were not acquired or assumed by Dex Media
East from its Predecessor. These short-term borrowings were eliminated
after the consummation of the transactions related to the acquisition of
Dex East. The following table summarizes the effects of these items on
adjusted net working capital for the periods indicated:
DEX MEDIA
PREDECESSOR EAST LLC
--------------------------------------------------------- -------------
YEAR
ENDED
(DOLLARS IN MILLIONS) YEAR ENDED DECEMBER 31, DECEMBER 31,
- ----------------------------------------- --------------------------------------------------------- -------------
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ -------------
Working capital .................... $ (1,559) $ (1,687) $ (1,519) $ (1,267) $32
Adjustments to working capital:
Cash and cash equivalents ......... -- -- -- (55)
Short term borrowings ............. 1,611 1,741 1,603 1,391
-------- -------- -------- --------
Working capital, excluding cash and
short-term borrowings ............. $ 52 $ 54 $ 84 $ 69
-------- -------- -------- --------
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) For the Predecessor periods, total debt consists of that portion of a Qwest
Dex line of credit borrowing arrangement with an affiliate of Qwest which
was apportioned to the Predecessor. Note 8 to our combined financial
statements included in this prospectus sets forth additional information
regarding this apportionment. For the Successor period ended December 31,
2002, total debt includes $40 million of current maturities.
43
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 and subsequent to the consummation
of the transactions related to the acquisition of Dex East. In this section,
references to "Dex East" or "Predecessor" refer to the historical operations of
Qwest Dex Holdings, Inc. and its subsidiary in Colorado, Iowa, Minnesota,
Nebraska, New Mexico, North Dakota and South Dakota and the standard
metropolitan statistical area of El Paso, Texas prior to November 8, 2002, the
date that Dex Media East acquired Dex East. References to "we," "our" or "us"
refer to Dex Media East, the successor to Dex East. We have operated as a
stand-alone company since the acquisition of Dex East on November 8, 2002. The
acquisition has been accounted for under the purchase method of accounting.
Under this method, the pre-acquisition deferred revenue and related deferred
costs associated with directories that were published prior to the acquisition
date were not carried over to Dex Media East's balance sheet. The effect of
this accounting treatment is to reduce revenue and related costs that would
otherwise have been recognized during the twelve months subsequent to the
acquisition date. The pro forma financial information included in Note 5 to our
consolidated financial statements included elsewhere in this prospectus
eliminates the effects of these adjustments to deferred revenue and related
deferred expenses at the acquisition date and presents the results of
operations for the years ended December 31, 2002 and 2001 as if the acquisition
of Dex East had occurred on January 1, 2001. Pro forma financial information in
this prospectus has been derived from this informaiton. For purposes of
comparison in this prospectus, we have also provided the combined results of
the Predecessor Period and Successor Period, which include the effects of
purchase accounting, to provide additional information about our results.
The discussion and analysis of historical predecessor 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," "Selected Historical Financial Data," "--Liquidity and Capital
Resources" and our consolidated financial statements and related notes thereto
included elsewhere in this prospectus.
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 2002, 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, 2002, we had a total of approximately 201,000
local advertising customers consisting primarily of small and medium-sized
businesses and approximately 5,200 national advertisers. We also provide
related services, including an internet-based directory and direct marketing
services. For the combined Successor Period and Predecessor Period, we
generated $648 million in revenues. On a pro forma basis for the years ended
December 31, 2002 and 2001, we generated $689 million and $666 million in
revenues, respectively. Approximately 98% of our total revenues for the
combined Successor Period and Predecessor Period were generated from the
publication of print directories. On a pro forma basis for the year ended
December 31, 2002, 98% of our total revenues would have been generated from the
publication of print directories. Approximately 96% of the revenue for these
periods came from the sale of advertising in our yellow pages directories, and
4% of the revenue for these periods came from the sale of advertising in our
white pages directories.
44
STAND-ALONE COMPANY
Our Predecessor historically operated as the print and internet directory
businesses of Qwest Dex, Inc. in our region and not as a stand-alone company.
The consolidated financial statements included in this prospectus for periods
prior to November 8, 2002 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 consolidated 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 the Predecessor's
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. These specific
identifications, assignments and apportionments are believed to be reasonable;
however, the resulting amounts could differ from amounts that would be
determined if the Predecesssor had operated on a stand-alone basis. Note 3(v)
to our consolidated financial statements included in this prospectus sets forth
additional information regarding such identifications, assignments and
apportionments. Because of the Predecessor's relationship with Qwest Dex
Holdings and Qwest Dex as well as Qwest and its other affiliates, the
Predecessor's historical results of operations, financial position and cash
flows are not indicative of what they would be had the Predecessor operated
without the shared resources of Qwest and its affiliates. Accordingly, the
consolidated financial statements for periods prior to November 8, 2002 are not
indicative of our future results of operations, financial position and cash
flows. See "--Sensitivity Analysis Relating to EBITDA" and the consolidated
financial statements and related notes thereto included in this prospectus.
Historically, the Predecessor 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 East. Such fully distributed employee costs were paid by
Qwest Dex through shared payroll and benefit systems as incurred. Other
affiliate service costs were paid by Qwest Dex based upon presentation of
periodic billings from Qwest or affiliates of Qwest. For more detail regarding
how the Predecessor historically reimbursed Qwest for services Qwest and its
affiliates provided to the Predecessor, see Note 16 to our consolidated
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 the
Predecessor 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 the Predecessor, 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, the Predecessor historically operated the
print and internet directory businesses of Qwest Dex, Inc. in our region prior
to the acquisition of Dex East. We will begin incurring incremental costs
associated with operating as a stand-alone company. We have identified two
broad
45
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 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 West is consummated, we do not expect to incur any of these
second category costs. Therefore, we believe that we will benefit from net
synergies if the acquisition of Dex West is consummated.
We will fund $210 million of the purchase price for Dex West to be paid by
Dex Media to Qwest in connection with the acquisition of Dex 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 West. Dex Media will use the funds to
pay a portion of the purchase price for Dex West to Qwest. We expect to fund
that portion of the Dex 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 and designees. The commitment under the delayed draw portion of
the tranche A term loan facility terminates if the acquisition of Dex 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 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 West will be consummated or that the anticipated
synergies will be realized.
Historically, the Predecessor has been included in the consolidated
federal income tax returns filed by Qwest. The Predecessor had an informal
agreement with Qwest pursuant to which it was required to compute its 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 East was
treated as an asset purchase and, immediately after the consummation of the
acquisition of Dex 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 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.
In connection with the transactions related to the acquisition of Dex
East, we incurred substantial indebtedness, interest expense and repayment
obligations. As of December 31, 2002 we had outstanding $2,207 million in
aggregate indebtedness, excluding unused commitments, with an additional $99
million of additional borrowing capacity available under our new credit
facilities. Assuming we had incurred this level of borrowings on January 1,
2001, for the year ended December 31, 2002, our pro forma interest expense
would have been $210 million. 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." 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 East and information technology consulting fees) of
approximately $140 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
46
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 revenues and expenses for the twelve months following the
consummation of the transactions related to the acquisition of Dex East will be
lower than they would have been had the transactions not occurred because the
transactions have been accounted for under the purchase method of accounting.
Under the purchase method of accounting deferred revenue and related deferred
directory costs associated with directories that had previously been published
and distributed are not carried over to our balance sheet. The effect of this
accounting treatment is to reduce revenue and related costs that would
otherwise have been recognized in the twelve months subsequent to the
acquisition. The purchase method of accounting will not affect our revenues and
directory costs in periods subsequent to 2003. This purchase accounting
adjustment is non-recurring and has no impact on cash flows.
Our consolidated 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 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, and employee costs relating to each of the foregoing. 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.
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, 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 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."
47
PERIOD ENDING DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
DEX MEDIA EAST LLC PREDECESSOR
------------------------------------------- ------------------------------
UNAUDITED PRO FORMA PERIOD PERIOD FROM
YEAR ENDED NOVEMBER 9 JANUARY 1 TO YEAR ENDED
DECEMBER 31, TO DECEMBER 31, NOVEMBER 8, DECEMBER 31,
2002 2001 2002 2002 2001
(DOLLARS IN MILLIONS) ---------- ---------- ----------------- -------------- -------------
Total Revenues ............................. $ 689 $ 666 $ 58 $ 590 $ 666
Cost of revenues ........................... 209 209 20 178 209
------- ------- ------- ------- -------
Gross profit .............................. 480 457 38 412 457
Gross margin .............................. 69.7% 68.6% 65.5% 69.8% 68.6%
------- ------- ------- ------- -------
General and administrative expense ......... $ 72 $ 50 $ 21 $ 49 $ 48
REVENUES
Revenues decreased by $18 million, or 2.7%, to $648 million for the
combined Predecessor Period and Successor Period from $666 million in 2001. On
a pro forma basis, revenues for the year ended December 31, 2002 would have
been $689 million, a $23 million or 3.5% increase compared to the year ending
December 31, 2001. Included in total pro forma revenues were $670 million in
directory services revenues and $19 million from directory services revenues,
affiliates and all other products.
Total pro forma directory services revenues, which consist of local and
national directory services revenues, increased by $23 million, or 3.6%, to
$670 million from $ 647 million in 2001. Local pro forma directory services
revenues increased by $23 million, or 4.3%, to $562 million from $539 million
in 2001. Local pro forma directory services revenues accounted for 81.6% of
revenues as compared to 80.9% in 2001. While the number of local advertisers
declined by 2.3%, the average annual pro forma revenues per local advertiser
increased 6.6%, to $2,795 from $2,622 in 2001. Growth in the average pro forma
revenues per local advertiser for the year ended December 31, 2002 resulted
from price increases and additional revenues from premium products, such as
color advertisements and awareness products. Pro forma sales to national
advertisers increased by $2 million, or 2.0%, to $103 million accounting for
14.9% of revenues in 2002 as compared to 15.2% in 2001. Other directory
services revenues decreased by $2 million.
COST OF REVENUES
Cost of revenues recognized decreased by $11 million, or 5.3%, to $198
million for the combined Predecessor Period and Successor Period from $209
million in 2001. On a pro forma basis, cost of revenues for the year ended
December 31, 2002 would have been $209 million, or a $0 million increase
compared to the year ended December 31, 2001. Pro forma cost of revenues
represented 30.3% of pro forma revenues in 2002 compared to 31.4% of pro forma
revenues in 2001.
On a pro forma basis for the years ended December 31, 2002 and 2001, we
incurred employee costs, direct costs of publishing, commissions, services from
affiliates and other costs of $206 million and $207 million, respectively.
Under the deferral and amortization method, costs of revenues recognized in
2002 exceeded incurred costs by $3 million. Costs of revenues recognized
exceeded incurred costs by $2 million in 2001.
On a pro forma basis, employee costs incurred increased by $6 million, or
7.6%%, to $85 million for the year ended December 31, 2002 from $79 million in
2001. The increase relates to annual wage increases and higher commission
payments associated with revenue growth.
Direct costs of publishing incurred during the period, which include
paper, printing and distribution, decreased $1 million, or 1.3%, to $76 million
on a pro forma basis for the year ended December 31, 2002 from $77 million in
2001. The cost of printing and paper decreased by $3 million, or 4.7%, to $61
million on a pro forma basis, for the year ended December 31, 2002 from $64
million in 2001. The decrease was due in part to a reduction in the number of
copies printed resulting from increased demand for CD-Rom versions of our
directories.
48
Services from affiliates incurred during the period decreased by $5
million, or 45.5%, to $6 million for the year ended December 31, 2002 from $11
million in 2001. 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, which include sales commissions and
professional services, was $39 million and $40 million for the years ended
December 31, 2002 and 2001, respectively.
GROSS PROFIT
Our gross profit decreased by $7 million, or 1.5%, to $450 million for the
combined Predecessor Period and Successor Period from $457 million in 2001 as a
result of decreased revenues and decreased cost of revenues. On a pro forma
basis, gross profit for the year ended December 31, 2002 would have been $480
million, or a $23 million (5.0%) increase compared to the year ending December
31, 2001. Gross margin on a pro forma basis increased to 69.7% for the year
ended December 31, 2002 from 68.6% in 2001.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense, excluding depreciation and
amortization, increased by $22 million, or 45.8%, to $70 million for the
combined Predecessor Period and Successor Period from $48 million in 2001. The
increase relates primarily to reductions in pension credits, expense associated
with non-capitalized software and one-time fees related to the acquisition of
Dex East.
Employee costs increased $22 million to $15 million for the combined
Predecessor Period and Successor Period from $(7) million in 2001. Included in
employee costs are pension credits which decreased $10 million during the
combined Predecessor Period and Successor Period when compared to 2001. Also
included in employee costs in the Successor Period are one-time fees of $5
million related to the acquisition of Dex East and a $5 million increase in
expense related to non-capitalized system costs.
Advertising and promotion expense decreased by $4 million, or 57.1%, to $3
million for the combined Predecessor Period and Successor Period from $7
million in 2001. The decrease related primarily to reduced advertising media
purchases due to cost containment initiatives.
Bad debt expense increased by $1 million, or 6.3%, to $17 million for the
combined Predecessor Period and Successor Period from $16 million in 2001. Bad
debt expense as a percentage of total revenues was 2.6% for the combined
Predecessor Period and Successor Period compared to 2.4% in 2001. On a pro
forma basis for the year ended December 31, 2002, bad debt expense as a
percentage of total revenue would have been 2.5%.
Services from affiliates increased by $3 million, or 10.7%, to $31 million
for the combined Predecessor Period and Successor Period from $28 million in
2001. The increase relates to higher administration allocations resulting from
the acquisition of Dex East and a one-time fee to acquire listings for our
distribution database.
All other general and administrative expense was $2 million for both of the
years ended December 31, 2002 and 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)%
------- ------- ------ -----
49
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.
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.
50
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.
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 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 $75 million for the Successor Period,
$137 million for the Predecessor Period and $192 million for the year ended
December 31, 2001. Changes in working capital from 2001 to 2002 relate primarily
to changes in accounts receivable and accounts payable, and an increase in
deferred revenue. Net accounts receivable decreased by $9 million, or 11.8%, to
$67 million at December 31, 2002 from $76 million at December 31, 2001. Accounts
payable increased by $32 million, or 228.6%, to $46 million at December 31, 2002
from $14 million at December 31, 2001. Changes in working capital from 2000 to
2001 relate primarily to changes in accounts receivable and accounts payable.
Net cash used for investing activities was $2.801 billion for the
Successor Period, $14 million for the Predecessor Period and $7 million for the
year ended December 31, 2001. The principal use of cash for investing
activities in the Successor Period was related to the acquisition of Dex East,
related acquisition expenses and expenditures for property, plant and equipment
and capitalized software development costs. Net cash used for investing
activities of $1 million for the Predecessor Period and $7 million for the year
ended December 30, 2001 was principally used for software development costs.
Net cash provided by (used for) financing activities was $2.764 billion
for the Successor Period, $(88) million for the Predecessor Period and $(130)
million for the year ended December 31, 2001. The Successor Period includes
proceeds from the issuance of long-term debt of $2.255 billion and capital
contributed by Dex Media East, Inc. of $655 million. In addition, $96 million
of debt issuance costs and $50 million relating to repayment of long-term debt
represented uses of cash for financing activities during the Successor Period.
The principal use of cash for financing activities during the Predecessor
Period was
51
to pay $498 million to Qwest relating to short-term borrowing from a Qwest
affiliate. For the year ended December 31, 2001 the principal use of cash for
financing activities was to pay $212 million to Qwest relating to short-term
borrowings from affiliates. Financing activities also include contributions
received from Qwest in lieu of income taxes of $88 million for the year ended
December 31, 2001. 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.
POST-TRANSACTIONS
Following the transactions related to the acquisition of Dex 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
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 2002, Qwest LEC billed 49% of our local customer billings on our
behalf, and we billed the remaining 51% 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 West is consummated, we will incur 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 West is not
consummated, we will be obligated to pay up to $24 million in fees to various
financial institutions that have made financing commitments relating to the
acquisition of Dex West.
We are significantly leveraged. As of December 31, 2002, we had
outstanding $2,207 million in aggregate indebtedness, excluding unused
commitments, with approximately $99 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. Assuming we had incurred this level of borrowings on
January 1, 2002, our pro forma interest expense for the year ended December 31,
2002 would have been $194 million.
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 East with the remainder available for general corporate
purposes, subject to certain conditions. Upon consummation of the transactions
related to the acquisition of Dex East, we had approximately $50 million
available under our new revolving credit facility. As of December 31, 2002, the
$50 million borrowed to fund the acquisition of Dex East had been repaid and
approximately $99 million was available for borrowing (approximately $1 million
was committed under a stand-by letter of credit and accordingly not available
for borrowing). The term loan facilities consist of a tranche A term loan
facility in a total principal amount of $530 million and a tranche
52
B term loan facility in a total principal amount of $702 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 East. In addition, in the event that the acquisition of Dex
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.
The following table sets forth, as of the date of the transactions related
to the acquisition of Dex East, debt, lease and employment agreement
obligations for the next several years:
2008 AND
(DOLLARS IN MILLIONS) 2003 2004 2005 2006 2007 THEREAFTER TOTAL
- ------------------------------------------ ------ ------ -------- -------- ------ ------------ ---------
Debt/Lease Obligations:
Long-Term Debt(1) ........................ $ 40 $ 89 $ 108 $ 134 $139 $1,697 $2,207
Operating Leases ......................... 8 7 7 6 5 4 37
Employment Agreements(2) ................. 3 3 3 -- -- -- 9
---- ---- ----- ----- ---- ------ ------
Total Debt, Lease and Employment Agreement
Obligations ............................. $ 51 $ 99 $ 118 $ 140 $144 $1,701 $2,253
==== ==== ===== ===== ==== ====== ======
- ----------------
(1) In connection with the acquisition of Dex 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."
53
We expect to incur approximately $32 million in capital expenditures in
2003. This estimate includes amounts relating to an agreement we entered into
relating to the upgrading of our existing software system to enhance its
functionality. This upgrade will 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 West is not consummated, will be limited to $40 million.
We paid approximately $2 million of such costs upon the closing of the
acquisition of Dex East, and believe that any remaining obligation will be paid
during the next year. The consummation of the acquisition of Dex West is
subject to a number of conditions described in "The Transactions." There can be
no assurances that the acquisition of Dex 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 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
This "Sensitivity Analysis Relating to EBITDA" is different than the pro
forma financial information included in Note 5 to our consolidated financial
statements included in this prospectus. This sensitivity analysis sets forth
management's view of what EBITDA would have looked like had Dex Media East
operated as a stand-alone entity using the assumptions and estimates described
below and assuming that the acquisition of Dex West is not consummated. In
contrast, the pro forma financial information is based on historical
adjustments based on the predecessor to Dex Media East, Dex East's, prior
relationship with Qwest Dex Holdings, Qwest Dex and Qwest. We have provided
this sensitivity analysis because the rules and regulations of the SEC relating
to the preparation of Management's Discussion and Analysis of Financial
Condition and Results of Operations require us to provide information that
management believes to be necessary to an understanding of our financial
condition, changes in financial condition and results of operations. Management
believes that the sensitivity analysis provides management's view of EBITDA, as
so adjusted, as well as information necessary for analyzing both those
historical expenses and charges that management believes are not likely to
recur and the
54
significant 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 East. Accordingly, we
have provided the tabular analysis below setting forth the historical expenses
and charges that management believes are not likely to recur and management's
best estimates of the impact of the significant changes management expects to
our cost structure on our historical results.
The pro forma financial information included in Note 5 to our consolidated
financial statements included in this prospectus gives effect to the
transactions related to the acquisition of Dex East as if the transactions were
consummated as of January 1, 2001. Except for the adjustment described in
footnote (5), the adjustments set forth in the table below are not included in
the pro forma financial information included in Note 5 to our consolidated
financial statements included in this prospectus because these adjustments are
not permitted under Article 11 of Regulation S-X, which requires that pro forma
adjustments give effect only to those events that are: (i) directly
attributable to the transaction, (ii) expected to have a continuing impact on
the company and (iii) factually supportable. We are not permitted to include
the adjustments described in footnotes (1) through (4) to the table below in
the pro forma financial information because these expenses and charges relate
to historical events not "directly attributable" to the acquisition of Dex
East. With respect to the adjustments described in footnotes (6) through (10)
to the table below, each of the adjustments reflects management's best estimate
of the impact that the anticipated changes in our cost structure would have had
on our historical results of operations. Although these adjustments represent
management's best estimate of the effects that these anticipated changes in our
cost structure would have had on our Predecessor's historical results, these
adjustments are considered projections and are not "factually supportable"
within the meaning of Article 11 of Regulation S-X because the actual amount by
which our historical results would have been impacted may have been greater or
less than the estimated amount. Accordingly, we are not permitted to include
the adjustments described in footnotes (6) through (10) to the table below in
the pro forma financial information. Please refer to the footnotes to the table
for additional detail regarding the adjustments and "Forward-Looking
Statements."
While we have been a stand-alone company since the consummation of the
transactions on November 8, 2002, our Predecessor historically operated as the
print and internet directory businesses of Qwest Dex, Inc. in our region prior
to the acquisition of Dex East. The consolidated financial statements included
in this prospectus have been derived from the historical consolidated financial
statements of Dex Media East's Successor Period and 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. 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 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 East compared to prior to the acquisition of Dex 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) by providing sensitivity adjustments to EBITDA
to arrive at 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
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 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
55
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 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 "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 income, expenses and charges that we believe are not
likely to recur; adjustments that represent our estimates of the effect
operating as a stand-alone company from Qwest would have had on our
Predecessor's historical results of operations; the additional costs that we
expect to result from operating Dex Media East as a separate entity from Qwest
Dex, assuming the acquisition of Dex West is not consummated; and the
incremental EBITDA from the $20 million commitment to purchase advertising made
by Qwest and Qwest LEC in the advertising agreement, all $20 million of which
will be purchased from us if the acquisition of Dex West is not consummated.
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:
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 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 West is
not consummated. These include those costs that will result from
operating Dex Media East as a separate entity from Qwest Dex.
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 East are
projections and 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," "Forward-Looking
Statements", "--Stand-Alone Company" and our consolidated financial statements
(including the accompanying notes thereto).
The information in the table that follows assumes that the acquisition of
Dex West is not consummated. If the acquisition of Dex West is consummated,
Adjusted EBITDA would be different than that presented below as the additional
costs of operating Dex Media East as a separate entity from Qwest Dex would not
be incurred and we may not receive all, or any, of the advertising revenue from
Qwest and Qwest LEC pursuant to the advertising agreement.
56
The following table presents data relating to EBITDA and Adjusted EBITDA
for the periods indicated:
PREDECESSOR
--------------------------------------------------------
PERIOD FROM
JANUARY 1 TO
DOLLARS IN MILLIONS) YEAR ENDED DECEMBER 31, NOVEMBER 8,
- ---------------------------------------------- ----------------------------------------- --------------
1998 1999 2000 2001 2002
------ ---------- ----------- ----------- --------------
Net income (loss) ............................ $145 $ 86 $130 $161 $157
Adjustments to net income:
Income taxes ............................... 102 58 91 108 107
Interest expense, net ...................... 1 124 123 110 86
Depreciation and
amortization expense ...................... 14 14 15 12 9
EBITDA ....................................... $262 $282 $359 $391 $359
Adjustments to EBITDA:
Other (income) expense(1) ................... -- (14) 7 4
Merger-related expenses(2) .................. -- 6 4 --
Impairment charges(3) ....................... -- -- 7 --
Change in publication cycle(4) .............. -- -- (3) (3)
Management fees(5) .......................... (2) (2) (2) (2)
Qwest related stand-alone costs(6) .......... (2) (2) (8) (7)
Additional pension and benefit costs(7) ..... (12) (19) (19) (16)
Unsustainable cost savings(8) ............... -- (1) (1) (1)
Incremental Dex Media East
stand-alone costs(9) ....................... (24) (32) (39) (33)
Incremental EBITDA from
advertising agreement(10) .................. 13 13 12 10
Adjusted EBITDA ............................. $255 $308 $349 $311
DEX MEDIA
EAST LLC
------------------------------------
PERIOD FROM UNAUDITED PRO FORMA
NOVEMBER 9 YEAR ENDED
DOLLARS IN MILLIONS) TO DECEMBER 31 DECEMBER 31,
- ---------------------------------------------- ---------------- -------------------
2002 2002
---------------- -------------
Net income (loss) ............................ $ (28) $(14)
Adjustments to net income:
Income taxes ............................... (19) (8)
Interest expense, net ...................... 28 194
Depreciation and
amortization expense ...................... 33 229
EBITDA ....................................... $ 14 $401
Adjustments to EBITDA:
Other (income) expense(1) ................... 7
Merger-related expenses(2) .................. --
Impairment charges(3) ....................... --
Change in publication cycle(4) .............. --
Management fees(5) .......................... (3)
Qwest related stand-alone costs(6) .......... (7)
Additional pension and benefit costs(7) ..... (16)
Unsustainable cost savings(8) ............... (1)
Incremental Dex Media East
stand-alone costs(9) ....................... (33)
Incremental EBITDA from
advertising agreement(10) .................. 10
Adjusted EBITDA ............................. $356
- ----------------
The adjustments to EBITDA presented above generally fall into three
categories: "Non-recurring events relating to Dex East (predecessor);"
"Stand-alone and other related effects associated with operating Qwest's print
and internet directory businesses as a separate entity from Qwest" and
"Stand-alone effects assuming the acquisition of Dex West is not consummated."
Non-recurring events relating to Dex East (predecessor)
(1) In 2000, other (income) expense represents a gain on sale of investment of
$16 net of losses on asset sales. In 2001, other (income) expense
represents an impairment charge as a result of an other than temporary
decline in the value of investments. Dex Media East did not acquire any of
these investments in the acquisition of Dex East. In addition, as of
November 8, 2002, Dex Media East does not have any investments that would
be subject to a decline or appreciation in value and accordingly we do not
expect similar impairment charges or gains to occur in the next two years.
(2) During 2000 and 2001, Dex East incurred expenses in connection with Qwest's
acquisition of U S WEST on June 30, 2000, including contractual
settlements incurred to cancel commitments no longer deemed necessary as a
result of the merger, severance and employee related expenses, net of a
post-retirement benefit plan curtailment gain, and rebranding expenses.
Such cancelled commitments relate to Dex East's decision at the time of
the merger to abandon a website services product offering and to abandon
the digital video library project. These expenses do not relate to the
acquisition of Dex East or our ongoing business and we do not expect
similar expenses to occur in the next two years.
(3) During 2001, Dex East recorded impairment charges reflecting capitalized
software costs that were written off as a result of a review of internal
software projects in process. At that time, management decided that
software projects for the development of a sales automation system and
processes to change information technology platforms should no longer be
pursued, as other systems with greater long-term utility had become
available. We have accounted for internally developed software acquired in
the acquisition of Dex East at fair value and have reassessed the related
estimated useful lives of these assets. We expect these assets will be
utilized over their useful lives. Accordingly, we do not expect similar
impairment charges to occur in the next two years.
(4) In 2000, Qwest Dex changed the publication cycle of certain directories
from 12 months to either 13 or 11 months. In 2000, Qwest Dex changed the
publication cycle of these same directories back to 12 months. Under the
deferral method of accounting, costs related to the publication of
directories are amortized over the life of the directory. The amount in
the table above 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.
57
Stand-alone costs and other related effects associated with operating Qwest's
print and internet directory businesses as a separate entity from Qwest
(5) Represents a $2 million annual fee expected to be paid to the Sponsors
under the management agreements. See "Certain Relationships and Related
Transactions--Management Consulting Agreements."
(6) Represents management's best estimates of ongoing incremental stand-alone
costs for services that were performed by Qwest prior to the acquisition
of Dex East, which estimates may vary depending on the nature, extent and
timing of replacing such services previously provided by Qwest. The costs
consist of personnel and information technology costs. The additional
personnel will provide those services historically provided by Qwest
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.
(7) Represents management's best estimate of incremental pension and benefit
costs to be 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. While the
incremental benefit costs represent management's best estimate of
additional costs, various factors, including interest rates and the
elections of future participants in our pension and other benefits plans,
may affect our actual cost.
(8) Represents costs relating to management's best estimate of the number of
additional employees we anticipate hiring and the amount of advertising we
anticipate purchasing, each of which were reduced by Qwest as part of its
cost-cutting efforts. Management believes that such additional employees
and additional advertising are necessary to effectively operate our
business. We anticipate hiring additional employees in positions relating
primarily to local sales, operations, public relations and strategy
functions. Additional advertising costs relate to advertising we expect to
purchase in various television, radio and print media. These estimated
costs may vary depending on the actual number of employees hired and the
timing of the hiring. In addition, the additional cost relating to the
amount of advertising we purchase may vary depending on factors such as
the advertising rates we ultimately negotiate.
Stand-alone effects assuming the acquisition of Dex West is not consummated
(9) Represents management's best estimate of additional costs resulting from
operating Dex Media East as a separate entity from Qwest Dex, assuming the
acquisition of Dex West is not consummated. Historically, Qwest Dex
operated Dex East and Dex West as a single business with centralized
personnel and systems supporting both Dex East and Dex West. Operating Dex
Media East as a separate entity from Qwest Dex eliminates certain
economies of scale that previously existed when Dex East and Dex West
operated as a single business because various centralized personnel and
support systems must be duplicated. These economies of scale relate to
business support functions (including information technology, legal,
finance, treasury, tax, human resources), marketing and sales support, and
operations and central services support (including field operations, book
manufacturing, creative publishing, listings management, printing and
distribution) that were historically shared by Dex East and Dex West.
Assuming the acquisition of Dex West is not consummated, Dex Media East
will be required to duplicate these support functions currently shared
with Dex West. These additional costs relate primarily to the hiring of
additional employees in the information technology, operations, human
resources and legal areas. In the case of information technology, the
additional costs also relate to expenditures on information technology
systems that were previously shared with Dex West. If the acquisition of
Dex West is consummated, we do not expect to incur any of these costs.
(10) Represents management's best estimate of the incremental EBITDA from the
advertising agreement with Qwest, assuming the acquisition of Dex 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. This estimate of incremental EBITDA
represents incremental revenue above that which has historically been
recorded in Dex East's operating results, net of sales commissions. Dex
East's historical revenue from Qwest affiliates was $8 million, $6
million, $5 million and $5 million for 2002, 2001, 2000 and 1999,
respectively.
While we anticipate that the acquisition of Dex West will occur by the end
of 2003, the acquisition is subject to a number of conditions and therefore
no assurance can be given that the acquisition will be consummated. Thus,
this sensitivity analysis assumes that the acquisition of Dex West does not
occur. However, under the terms of the advertising agreement, if the
acquisition of Dex 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 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."
58
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
As of December 31, 2002, we had no debt outstanding under our new
revolving credit facility (although approximately $1 million was committed
under a stand by letter of credit), $530 million of debt outstanding under our
tranche A term loan facility and $702 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 we had
incurred this level of borrowings on January 1, 2002 at variable rates and
assuming a one percentage point increase in the average interest rate under
these borrowings, our pro forma interest expense for the combined Predecessor
Period and Successor Period would have been $12.3 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 December 31, 2002, we had approximately -40 million outstanding
under the Euro-denominated portion of our tranche B term loan facility. 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 limit the financial impact of fluctuations
between the two currencies, and the related effects on earnings or cash flows.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
BASIS OF ALLOCATION
To prepare the Predecessor's 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, the Predecessor's combined financial statements are not
necessarily indicative of future financial position or results of operations.
In order to divide the Qwest Dex Holdings Predecessor combined financial
statements between Dex East and Dex West, it was necessary for management of
Qwest Dex 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 the Predecessor's revenue and cost of revenue 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 3(v) to our consolidated financial statements included
in this prospectus.
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.
59
COST OF REVENUE
Direct costs related to the sales, production and distribution 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 2.2% in 2000 to 2.6% for the combined
Predecessor Period and Successor Period. On a pro forma basis for the year
ended December 31, 2002, bad debt expense as a percentage of revenue would have
been 2.5%.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standard Board, or FASB, issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement
concerns 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 do not believe
the adoption of this pronouncement will have a material effect on our financial
statements.
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. We do not believe the adoption of
this pronouncement will have a material effect on our financial statements.
Financial Accounting Standards Board Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued in November 2002. The
interpretation provides guidance on the guarantor's accounting and disclosure
requirements for guarantees, including indirect guarantees of indebtedness of
others. We have adopted the disclosure requirements of the interpretation as of
December 31, 2002. The accounting guidelines are applicable to guarantees
issued after December 31, 2002 and require that we record a liability for the
fair value of such guarantees in the balance sheet.
60
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 2002, 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, 2002, we had a total of approximately 201,000
local advertising customers consisting primarily of small and medium-sized
businesses and approximately 5,200 national advertisers. We also provide
related services, including an internet-based directory and direct marketing
services. For the combined Successor Period and Predecessor Period, we
generated $648 million in revenues. On a pro forma basis for the years ended
December 31, 2002 and 2001, we generated $689 million and $666 million in
revenues, respectively.
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. We believe that our value proposition
to our target advertisers is reflected in the 6.8% compound annual growth rate
in our revenue per local advertiser from 1999 to 2002.
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
December 31, 2002, we had approximately 463 sales representatives in 23 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 allowed us to achieve a customer renewal rate of
61
92%, 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 $638 million in 2000 to $648
million for the combined Predecessor Period and Successor Period, resulting in
a compounded annual growth rate of .8%. On a pro forma basis for year ended
December 31, 2002, we generated $689 million in revenue resulting in a compound
annual growth rate of 3.9%. Our capital expenditure requirements over the last
three years (including the combined Predecessor Period and Successor Period)
averaged $13 million per year, or 2.0% of average total revenues over the last
three years. On a pro forma basis for year ended December 31, 2002, we would
have generated $692 million in revenue and our capital expenditure requirements
would have been 2.0% of average total revenues. 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, 2002, we
had a total of approximately 201,000 local advertising customers, consisting
primarily of small and medium-sized businesses, and approximately 5,200
national advertisers across a wide range of markets, from small rural markets
to large metropolitan markets. For the combined Predecessor Period and
Successor Period, 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 4.0%
of total revenues in 2002, with the top 10 directory headings accounting for
approximately 17.0% 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 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.
62
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. 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 6.1%, 4.6% and 5.5% compound annual growth rate in the
periods 1996 to 2001, 1991 to 2001 and 1986 to 2001, 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 and on a pro forma basis in 2002,
local advertising made up 83.3% and 84.0%, respectively, 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%
63
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 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 ............... n/a 5.6% 5.3%
Independent
publishers ............ 0.7 6.2% 0.7 6.4% 0.9
% growth
yearly ............... n/a 8.7% 20.7%
------- ------- -------
Total .................. $ 10.7 100.0% $ 11.4 100.0% $ 12.1
------- ----- ------- ----- -------
% growth
yearly ............... n/a 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.
64
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 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.
65
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 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 2002, 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 directory services
revenues and other data for our directories in each state in which we operate
for the combined Predecessor Period and Successor Period:
(DOLLARS IN THOUSANDS) PERCENTAGE OF
- ------------------------ DIRECTORY SERVICES DIRECTORY SERVICES PUBLISHED
STATE REVENUES(1) REVENUES(1) DIRECTORIES TOTAL CIRCULATION
- ------------------------ -------------------- -------------------- ------------- ------------------
Colorado ............... $269,181 39.7% 38 5,901,000
Minnesota .............. 194,055 28.6% 40 5,896,000
New Mexico(2) .......... 77,592 11.4% 18 2,062,000
Iowa ................... 66,500 9.8% 29 2,305,000
Nebraska ............... 40,247 5.9 10 1,369,000
South Dakota ........... 17,486 2.6% 7 665,000
North Dakota ........... 13,770 2.0% 8 536,000
-------- ----- -- ---------
Total .................. $678,831 100.0% 150 18,734,000
======== ===== === ==========
- ----------------
(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 for the
combined Predecessor Period and Successor Period:
(DOLLARS IN THOUSANDS) PERCENTAGE OF
- ------------------------------------ DIRECTORY SERVICES DIRECTORY SERVICES PUBLISHED
MARKET REVENUES(1) REVENUES(1) DIRECTORIES TOTAL CIRCULATION
- ------------------------------------ -------------------- -------------------- ------------- ------------------
Minneapolis/St. Paul,
Minnesota ......................... $160,480 23.7% 13 4,601,000
Denver, Colorado ................... 147,217 21.7% 9 3,764,000
Albuquerque, New Mexico ............ 47,913 7.1% 3 1,251,000
Colorado Springs, Colorado ......... 35,187 5.2% 1 447,000
Omaha, Nebraska .................... 33,083 4.9% 3 941,000
Des Moines, Iowa ................... 22,486 3.3% 2 516,000
Boulder, Colorado .................. 14,464 2.1% 1 155,000
Ft. Collins, Colorado .............. 12,964 1.9% 1 150,000
Santa Fe, New Mexico ............... 9,773 1.4% 1 138,000
Quad Cities, Iowa .................. 7,031 1.0% 1 239,000
-------- ---- -- ---------
Total .............................. $490,598 72.4% 35 12,202,000
======== ==== == ==========
- ----------------
(1) Excludes non-print related directory services revenues and includes
revenues from affiliates.
66
PRODUCTS
Our main product is printed directories, which generated approximately 98%
of our total revenues for the combined Predecessor Period and Successor Period.
On a pro forma basis for the year ended December 31, 2002, revenues from print
directories would have been 98% of our total revenues. We also operate an
internet-based directory and provide direct and database marketing services.
PRINTED DIRECTORIES
In 2002, 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.
For the combined Predecessor Period and Successor Period, 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
67
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:
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.
For the combined Predecessor Period and Successor Period, 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 2003, 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. For the combined Predecessor Period and Successor
Period, our internet-based directory services generated $10 million in
revenues, accounted for approximately 1.5% of our total revenues and had an
average of approximately 6.7 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 6% 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
68
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
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.
For the combined Predecessor Period and Successor Period, 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 December 31, 2002, our locally-based sales force was comprised of
approximately 463 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 189 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.
69
o Telephone sales representatives. Our 184 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 90 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 23 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.
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 2002, we experienced only 13% 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
70
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 160 CMRs and employ six
national sales managers to manage our selling efforts to national customers.
CUSTOMERS
In 2002, approximately 201,000 local businesses purchased advertising in
our directories. Approximately 82% of our revenues for the combined Predecessor
Period and Successor Period were generated by the sale of our advertising to
local businesses, which are generally small and medium-sized enterprises.
Approximately 14% 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. For the combined Predecessor
Period and Successor Period, no single directory heading accounted for more
than 4.0% of our total revenues, no single customer accounted for more than 1%
of our total revenues, the top 10 customers accounted for less than 2% of our
total revenues and the top 10 directory headings accounted for approximately
17% 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 information relating to our largest directory
headings for the combined Predecessor Period and Successor Period demonstrates
this diversity (dollars in thousands):
PERCENTAGE OF NUMBER OF
DIRECTORY HEADING TOTAL REVENUES ADVERTISERS
- ----------------------------------------- ---------------- ------------
Attorneys ............................... 3.2% 5,832
Insurance ............................... 2.4% 3,941
Plumbing Contractors .................... 1.9% 2,192
Dentists ................................ 1.7% 4,134
Roofing Contractors ..................... 1.4% 1,820
Glass-Auto, Plate, Window, etc. ......... 1.3% 1,168
Auto Repair & Service ................... 1.3% 4,130
Storage-Household & Commercial .......... 1.3% 1,746
Physicians & Surgeons ................... 1.1% 3,084
Heating Contractors ..................... 1.1% 2,550
---- -----
Total ................................... 16.7% 30,597
==== ======
We enjoy high customer renewal rates. From 1996 to 2002, our annual
renewal rate has remained stable at approximately 93%, which we believe
compares favorably with the renewal rates of our competitors. In 2002, we
retained approximately 92% 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 2002). 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 2002. 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.
71
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 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 combined
Predecessor Period and Successor Period, paper costs were 3.8% of revenues and
12.4% of our cost of revenues. On a pro forma basis for the year ended December
31, 2002, paper costs would have been 3.6% and 11.8% of our revenues and cost
of revenues, respectively. 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,
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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.
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. For the combined Predecessor Period and Successor Period, Qwest
LEC billed approximately 49% of our local customer billings on our behalf. In
connection with the transactions related to the acquisition of Dex 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. For the
combined Predecessor Period and Successor Period, bad debt expense for our
customers amounted to approximately 2.6% of our revenues. On a pro forma basis
for the year ended December 31, 2002, bad debt expense would have been 2.5% 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
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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 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
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
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
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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 December 31, 2002, we employed 1,505 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.
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 LLC, 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
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 East was 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 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 in 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 West, and, following that contribution, Dex
Media, Inc. will purchase all of the interests in Dex 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. The successor
to Dex West, 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
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 West. Dex
Media, Inc. will use the funds to pay a portion of the purchase price for Dex
West to Qwest. The acquisition of Dex West is expected to close in 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
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secured obligations. In 2002, Qwest Dex's business in the Dex West States
published 121 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, 2002, Qwest Dex's businesses in the Dex West States
had a total of 225,000 local advertising customers consisting primarily of
small and medium-sized businesses.
In connection with the acquisition of Dex East, we and Qwest LEC and/or
Qwest entered into the agreements described below. In addition, upon
consummation of the acquisition of Dex 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 after November 8, 2002, 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 November 8, 2002, 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 from November 8, 2002
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 after November 8,
2002 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 West or following the
termination of the Dex West purchase agreement, thirty percent of the purchase
price for the acquisition of Dex 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 West, thirty
percent of the sum of the aggregate purchase price for the acquisition of Dex
East and the acquisition of Dex 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 Qwest LEC through the remaining term of the
publishing agreement to perform, or cause another person to perform, Qwest
LEC's publishing obligation.
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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 from November 8, 2002, 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 West or, if the acquisition of Dex West is not consummated,
for a period of 40 years from November 8, 2002, 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 from November 8, 2002, 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 from
November 8, 2002. 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 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.
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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. For the combined Predecessor Period
and Successor Period, Qwest LEC billed approximately 49% of our local customer
billings 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 from November 8, 2002,
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 November 8, 2002. After the
consummation of the acquisition of Dex West, Qwest will assign the remainder of
its ownership interests to us. If the acquisition of Dex 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
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 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 East, including but not
limited to technology, research and development data and software not assigned
to us by Qwest.
We will license back to Qwest the Dex East trademarks for a period of two
years from November 8, 2002 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.
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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 November 8, 2002, 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. 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 the
acquisition of Dex West 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 West is
subject to a number of conditions described in "The Transactions." There can be
no assurances that the acquisition of Dex 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
from November 8, 2002 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
from November 8, 2002, 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 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 from November 8, 2002,
subject to automatic renewal for additional one-year terms until either Qwest
LEC or we terminate this agreement by providing six months' notice.
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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 from November 8, 2002 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 from November
8, 2002. However, if the acquisition of Dex 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 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 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 from November 8, 2002. 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 West and until the earlier of the consummation of the acquisition of Dex
West or up to 120 days after the termination of the Dex 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 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."
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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
West or one year after the termination of the Dex West purchase agreement.
We have also entered into other agreements, including a joint defense and
common interest agreement, a public pay stations agreement 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 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 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 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 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 East. It is currently contemplated that we
will enter into these agreements, other similar agreements or similar
arrangements directly with Dex West's successor, 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 West is subject to a
number of conditions described in "The Transactions." There can be no
assurances that the acquisition of Dex 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 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, 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
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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 East, we became a stand-alone company and we
will begin incurring 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 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 West is consummated, we do not
expect to incur any of these second category costs. Therefore, we believe that
we will benefit from net synergies if the acquisition of Dex West is
consummated.
We will fund $210 million of the purchase price for Dex West to be paid by
Dex Media, Inc. to Qwest in connection with the acquisition of Dex 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, the
successor to Dex 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 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 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 West is not consummated.
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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 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 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 ..................... 54 Vice President, Financial Planning and Analysis
Scott Pomeroy ...................... 41 Vice President, Finance and Treasurer
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 on 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 led 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 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.
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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 practiced for 18 years, specializing
in mergers and acquisitions and corporate finance. His experience includes
major transactions in the telecommunications, media, aerospace, defense,
information
88
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.
89
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 $11,167 of Mr. Richard's total
salary and bonus, respectively. See "--Joint Management Agreement."
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table summarized pertinent information concerning individual
grants of stock options to the Named Executive Officers during fiscal year 2002
to purchase shares of common stock of Dex Media, Inc., including a theoretical
grant date present value for each such grant. None of the Named Executive
Officers exercised any option to purchase shares of Common Stock of Dex Media,
Inc. during fiscal year 2002.
INDIVIDUAL GRANTS(1)
--------------------------------------------------------
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
NUMBER OF PERCENT OF TOTAL PRICE APPRECIATION FOR OPTION
SECURITIES OPTIONS/SARS EXERCISE OF TERM(2)
UNDERLYING GRANTED TO PRICE ------------------------------
OPTION/SARS EMPLOYEES IN PER SHARE EXPIRATION
NAME AND PRINCIPAL POSITION GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ----------------------------- ------------- ----------------- ------------ ----------- -------------- --------------
George Burnett,
President and Chief
Executive Officer .......... 58,648 37.4% $ 100 11/8/2012 $ 3,694,824 $ 9,325,032
Marilyn Neal, Chief
Operating Officer .......... 35,189 22.4% $ 100 11/8/2012 $ 2,216,907 5,595,051
Kristine Shaw,
Senior Vice President,
Sales ...................... 11,730 7.5% $ 100 11/8/2012 $ 738,990 1,865,070
Maggie Le Beau,
Senior Vice President,
Marketing .................. 11,730 7.5% $ 100 11/8/2012 $ 738,990 1,865,070
Bradley Richards,
Senior Vice President,
Operations ................. 10,264 6.5% $ 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.
91
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.
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
92
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 East and will generally
end as of the consummation of the acquisition of Dex West. If the Dex 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 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 to reflect the initial
cost of a share of Common Stock upon the consummation of the transactions
related to the acquisition of Dex 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.
95
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
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 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.
96
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 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.
AMDOCS AGREEMENT
During February 2003, we entered into a five year agreement with AMDOCS for
the complete modernization of our core production platform. WCAS, one of the
Sponsors, is a shareholder of AMDOCS. This project will result in a
comprehensive, integrated production system, from order entry through the
production and distribution of directories. We expect to incur approximately $48
million in charges relating to the agreement with AMDOCS over the next five
years.
97
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 to the registration
statement of which this prospectus is a part for a more complete understanding
and description of such agreement.
GENERAL
In connection with the transactions related to the acquisition of Dex
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
East and the remainder is available for general corporate purposes, subject to
certain conditions. As of December 31, 2002, the $50 million borrowed to fund
the acquisition of Dex East had been repaid and approximately $99 million was
available for borrowing (approximately $1 million was committed under a
stand-by letter of credit and accordingly not available for borrowing). 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 $702 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 East. In addition,
in the event that the acquisition of Dex 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.
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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.
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 the leverage ratios,
the interest expense coverage ratio and the fixed charge coverage ratio set
forth below.
o LEVERAGE RATIO
We may not permit the Leverage Ratio (as defined in our new credit
facilities) as of the last day of a fiscal quarter set forth below to exceed
the ratio set forth opposite such date:
FISCAL QUARTER ENDED RATIO
- ----------------------------- -------------
March 31, 2003 .............. 6.90 to 1.00
June 30, 2003 ............... 6.90 to 1.00
September 30, 2003 .......... 6.90 to 1.00
December 31, 2003 ........... 6.75 to 1.00
March 31, 2004 .............. 6.75 to 1.00
June 30, 2004 ............... 6.75 to 1.00
September 30, 2004 .......... 6.75 to 1.00
December 31, 2004 ........... 6.50 to 1.00
March 31, 2005 .............. 6.50 to 1.00
June 30, 2005 ............... 6.50 to 1.00
September 30, 2005 .......... 6.50 to 1.00
December 31, 2005 ........... 6.00 to 1.00
March 31, 2006 .............. 6.00 to 1.00
FISCAL QUARTER ENDED RATIO
- ----------------------------- -------------
June 30, 2006 ............... 6.00 to 1.00
September 30, 2006 .......... 6.00 to 1.00
December 31, 2006 ........... 5.25 to 1.00
March 31, 2007 .............. 5.25 to 1.00
June 30, 2007 ............... 5.25 to 1.00
September 30, 2007 .......... 5.25 to 1.00
December 31, 2007 ........... 5.00 to 1.00
March 31, 2008 .............. 5.00 to 1.00
June 30, 2008 ............... 5.00 to 1.00
September 30, 2008 .......... 5.00 to 1.00
December 31, 2008 ........... 4.75 to 1.00
March 31, 2009 .............. 4.75 to 1.00
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o INTEREST EXPENSE COVERAGE RATIO
We may not permit the ratio of (a) Adjusted Consolidated EBITDA (as
defined in our new credit facilities) to (b) Consolidated Cash Interest Expense
(as defined in our new credit facilities), in each case for any period of four
consecutive fiscal quarters ending on the last day of a fiscal quarter set
forth below, to be less than the ratio set forth below opposite such date:
FISCAL QUARTER ENDED RATIO
- ----------------------------- -------------
March 31, 2003 .............. 1.60 to 1.00
June 30, 2003 ............... 1.60 to 1.00
September 30, 2003 .......... 1.60 to 1.00
December 31, 2003 ........... 1.60 to 1.00
March 31, 2004 .............. 1.60 to 1.00
June 30, 2004 ............... 1.65 to 1.00
September 30, 2004 .......... 1.65 to 1.00
December 31, 2004 ........... 1.70 to 1.00
March 31, 2005 .............. 1.70 to 1.00
June 30, 2005 ............... 1.70 to 1.00
September 30, 2005 .......... 1.70 to 1.00
December 31, 2005 ........... 1.75 to 1.00
March 31, 2006 .............. 1.75 to 1.00
FISCAL QUARTER ENDED RATIO
- ----------------------------- -------------
June 30, 2006 ............... 1.75 to 1.00
September 30, 2006 .......... 1.75 to 1.00
December 31, 2006 ........... 2.00 to 1.00
March 31, 2007 .............. 2.00 to 1.00
June 30, 2007 ............... 2.00 to 1.00
September 30, 2007 .......... 2.00 to 1.00
December 31, 2007 ........... 2.25 to 1.00
March 31, 2008 .............. 2.25 to 1.00
June 30, 2008 ............... 2.25 to 1.00
September 30, 2008 .......... 2.25 to 1.00
December 31, 2008 ........... 2.25 to 1.00
March 31, 2009 .............. 2.25 to 1.00
o FIXED CHARGE COVERAGE RATIO
We may not permit the Fixed Charge Coverage Ratio (as defined in our new
credit facilities) for any period of four consecutive fiscal quarters ending on
or after December 31, 2003 to be less than 1.05 to 1.00.
These ratios are not necessarily comparable to other similarly titled
ratios of other companies, as the agreements governing the credit facilities of
other companies may calculate these ratios differently than the agreement
governing our new credit facilities. We encourage you to read the credit
agreement contained in the exhibits to the registration statement of which this
prospectus is a part for a more complete understanding and description of these
ratios. In particular, we encourage you to read the definitions of the defined
terms used above.
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;
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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 which Incurs or Guarantees any Bank Indebtedness.
The types of entities that might become future Senior Note Guarantors are
corporations, associations, partnerships or other business entities of which
more than 50% of the total voting power of shares of capital stock or other
interests entitled to vote in the election of directors, managers or trustees
thereof is (or becomes by virtue of an acquisition) owned or controlled,
directly or indirectly, by Dex Media East LLC and/or its subsidiaries. For
example, in the event that Dex Media East LLC forms or acquires a subsidiary
which Incurs or Guarantees any Bank Indebtedness, such entity would become a
Senior Note Guarantor unless designated as an Unrestricted Subsidiary in
accordance with the provisions summarized under the heading "--Certain
Definitions--Unrestricted Subsidiary."
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.
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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.
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.
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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 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.
After the Company completed the Transactions and applied the net proceeds
it received from the Transactions in the manner described under the heading
"Use of Proceeds," as of December 31, 2002, there were outstanding:
(1) $1,682 million of Senior Indebtedness of the Issuers, including the
Senior Notes, of which $1,232 million is 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
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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 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
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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);
(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;
106
(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.
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.
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:
107
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 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);
108
(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) 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.
109
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);
(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
110
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 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;
111
(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, 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%
112
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;
(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
113
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 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
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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 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.
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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,
(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,
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(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 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 Issuers are not permitted to file with the
SEC by the applicable federal securities laws) 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
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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 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
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(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.
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
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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.
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
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(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.
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,
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o provide for the assumption by a successor corporation of the
obligations of the Issuers under the Senior Note Indenture,
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,
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(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
128
(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);
131
(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
133
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
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(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
135
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.
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"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;
137
(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
138
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;
141
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 which Incurs or Guarantees
any Bank Indebtedness. The types of entities that might become future Senior
Subordinated Note Guarantors are corporations, associations, partnerships or
other business entities of which more than 50% of the total voting power of
shares of capital stock or other interests entitled to vote in the election of
directors, managers or trustees thereof is (or becomes by virtue of an
acquisition) owned or controlled, directly or indirectly, by Dex Media East LLC
and/or its subsidiaries. For example, in the event that Dex Media East LLC
forms or acquires a subsidiary which Incurs or Guarantees any Bank
Indebtedness, such entity would become a Senior Subordinated Note Guarantor
unless designated as an Unrestricted Subsidiary in accordance with the
provisions summarized under the heading "--Certain Definitions--Unrestricted
Subsidiary."
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.
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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
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.
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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
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.
After the Company completed the Transactions and applied the net proceeds
it received from the Transactions in the manner described under the heading
"Use of Proceeds," as of December 31, 2002, there were outstanding:
(1) $1,682 million of Senior Indebtedness of the Issuers, including the
Senior Notes, of which $1,232 million is 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;
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(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).
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:
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(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,
(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
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(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:
(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.
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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. 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
148
"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 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.
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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 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.
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
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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);
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(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
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(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,
155
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;
156
(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
157
(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
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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 Issuers are not permitted to file with the
SEC by the applicable federal securities laws) 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,
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(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
163
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
164
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,
165
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)
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(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.
167
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
168
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.
169
"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.
170
"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
171
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.
172
"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
173
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.
174
"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.
175
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,
176
(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;
177
(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.
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"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.
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"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,
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(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.
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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
183
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.
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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
185
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.
186
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.
187
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.
188
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.
189
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 LLP, New York, New York.
EXPERTS
The combined financial statements of the operations of Qwest Dex Holdings,
Inc. and subsidiary 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 for the period from January 1, 2002 to November 8, 2002, and for the
years ended December 31, 2001 and 2000, have been included herein 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.
The consolidated financial statements of Dex Media East LLC and
subsidiaries as of December 31, 2002, and for the period from November 9, 2002
to December 31, 2002, have been included herein 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
190
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, 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
we are not permitted to file with the SEC by the applicable federal securities
laws) 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.
191
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DEX MEDIA EAST LLC CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Reports .......................................... F-2 - F-3
Consolidated Balance Sheets at December 31, 2002 and 2001 .............. F-4
Consolidated Statements of Operations for the periods from November 9 to
December 31, 2002 and January 1 to November 8, 2002, and for the years
ended December 31, 2001 and 2000 ...................................... F-5
Consolidated Statements of Cash Flows for the periods from November 9 to
December 31, 2002 and January 1 to November 8, 2002, and for the years
ended December 31, 2001 and 2000 ...................................... F-6
Consolidated Statements of Changes in Owner Equity for the periods from
November 9 to December 31, 2002 and January 1 to November 8, 2002,
and for the years ended December 31, 2001and 2000 ..................... F-7
Notes to Consolidated Financial Statements ............................. F-8 - F-40
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Dex Media, Inc.:
We have audited the accompanying consolidated balance sheet of Dex Media
East LLC (an indirect wholly-owned subsidiary of Dex Media, Inc.) and
subsidiaries (Successor) as of December 31, 2002, and the consolidated
statements of operations, owner equity and cash flows for the period from
November 9, 2002 to December 31, 2002 (Successor period). These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit 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
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the Successor consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Dex Media East LLC and subsidiaries as of December 31, 2002, and
the results of their operations and their cash flows for the Successor period
in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1(a) to the consolidated financial statements,
effective November 8, 2002, Dex Media East LLC acquired from Qwest
Communications International, Inc. the operations of Qwest Dex Holdings, Inc.
and subsidiary in the states of Colorado, Iowa, Minnesota, Nebraska, New
Mexico, North Dakota and South Dakota (Dex East). As a result of the
acquisition, the consolidated financial information of Dex Media East LLC for
the period after the acquisition is presented on a different cost basis than
that of Dex East for the periods before the acquisition and, therefore, is not
comparable.
KPMG LLP
Denver, Colorado
March 14, 2003
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Qwest Communications International Inc.:
We have audited the accompanying combined balance sheet of the operations
of Qwest Dex Holdings, Inc. and subsidiary (Qwest 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 the related combined statements of operations, owner
deficit and cash flows for the period from January 1, 2002 to November 8, 2002,
and for the years ended December 31, 2001 and 2000. These combined financial
statements are the responsibility of Qwest 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
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Notes 2(b) and 3(v), the financial statement items of
Qwest Dex related to the operations of Dex East are included in the
accompanying combined financial statements. As discussed in Note 3(c), the
combined results of operations of Dex East for the years ended December 31,
2001 and 2000 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 the results of its operations and its cash flows for
the period from January 1, 2002 to November 8, 2002, and for the years ended
December 31, 2001 and 2000, in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Denver, Colorado
March 14, 2003
F-3
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
COMPANY PREDECESSOR
------------ ------------
(DOLLARS IN MILLIONS) 2002 2001
- ----------------------------------------------------------------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 38 $ 55
Accounts receivable, net ............................................. 67 76
Deferred directory costs ............................................. 111 124
Current deferred taxes ............................................... 1 27
Other current assets ................................................. 7 4
----- --------
Total current assets ............................................... 224 286
Property, plant and equipment, net .................................... 22 31
Goodwill and intangible assets, net ................................... 2,662 --
Deferred income taxes ................................................. 20 --
Deferred financing costs .............................................. 94 --
Prepaid benefit obligations and other assets .......................... -- 31
----- --------
Total Assets .......................................................... $3,022 $ 348
====== ========
LIABILITIES AND OWNER EQUITY
Current liabilities:
Short-term borrowings ................................................ $ -- $ 1,391
Current portion of long-term debt .................................... 40 --
Accounts payable ..................................................... 46 14
Amounts due to related parties ....................................... -- 26
Employee compensation ................................................ 10 11
Deferred revenue and customer deposits ............................... 63 94
Accrued interest payable ............................................. 25 --
Other accrued liabilities ............................................ 8 17
------ --------
Total current liabilities .......................................... 192 1,553
Long-term debt ........................................................ 2,167 --
Deferred income taxes ................................................. -- 10
Pension, post-retirement and other post-employment benefit obligations 35 35
Other liabilities ..................................................... 5 --
------ --------
Total liabilities .................................................. 2,399 1,598
------ --------
Commitments and contingencies (Note 15)
Owner interest ........................................................ 655 --
Accumulated deficit ................................................... (28) --
Owner deficit ......................................................... -- (1,250)
Accumulated other comprehensive loss .................................. (4) --
-------- --------
Total Owner Equity (Deficit) ......................................... 623 (1,250)
------- --------
Total Liabilities and Owner Equity ................................... $3,022 $ 348
======= ========
See accompanying notes to consolidated financial statements.
F-4
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND THE YEARS ENDED DECEMBER 31, 2001 AND 2000
COMPANY PREDECESSOR
--------------- ---------------------------------------
PERIOD FROM PERIOD FROM
NOVEMBER 9 TO JANUARY 1 TO YEARS ENDED DECEMBER 31,
DECEMBER 31, NOVEMBER 8, ------------------------
(DOLLARS IN MILLIONS) 2002 2002 2001 2000
- ---------------------------------------------- --------------- ------------- ---------- ----------
Revenue ...................................... $ 58 $590 $666 $638
Operating Expenses:
Cost of revenue ............................. 20 178 209 238
General and administrative .................. 19 34 32 35
Bad debt expense ............................ 2 15 16 14
Depreciation and amortization ............... 33 9 12 15
Merger-related expenses ..................... -- -- 4 6
Impairment charges .......................... -- -- 7 --
----- ---- ---- -----
Total operating expenses .................. 74 236 280 308
----- ---- ---- -----
Operating (loss) income ................... (16) 354 386 330
Other expense (income):
Interest income ............................. -- (1) (4) (1)
Interest expense ............................ 28 11 -- --
Interest expense, affiliate ................. -- 76 114 124
Other expense (income) - net ................ 3 4 7 (14)
----- ----- ----- ------
(Loss) income before income taxes ......... (47) 264 269 221
Income tax (benefit) provision ............... (19) 107 108 91
----- ----- ----- ------
Net (loss) income ......................... $ (28) $157 $161 $130
===== ===== ===== ======
See accompanying notes to consolidated financial statements.
F-5
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND THE YEARS ENDED DECEMBER 31, 2001 AND 2000
COMPANY PREDECESSOR
--------------- -------------------------------------
PERIOD FROM PERIOD FROM
NOVEMBER 9 TO JANUARY 1 TO YEARS ENDED DECEMBER 31,
DECEMBER 31, NOVEMBER 8, ------------------------
(DOLLARS IN MILLIONS) 2002 2002 2001 2000
- -------------------------------------------------------------- --------------- ------------- ------------ ----------
Operating activities:
Net (loss) income ........................................... $ (28) $ 157 $ 161 $ 130
Adjustments to net (loss) income:
Depreciation and amortization ............................. 33 9 12 15
Employee benefit credit ................................... -- -- (9) (9)
Write down of investments ................................. -- -- 7 --
Asset impairment charges .................................. -- -- 7 --
Loss on disposal of assets ................................ -- 4 -- --
Other post-retirement benefit curtailment gain ............ -- -- -- (6)
Deferred tax (benefit) provision .......................... (19) (26) 8 (1)
Bad debt expense .......................................... 2 15 16 14
Gain on sale of investments ............................... -- -- -- (16)
Loss on foreign currency translation ...................... 2 -- -- --
Amortization of deferred financing costs .................. 2 2 -- --
Changes in operating assets and liabilities:
Accounts receivable ....................................... (6) (2) (15) (32)
Deferred directory costs .................................. (30) 20 3 --
Other current assets ...................................... 5 (6) (3) 2
Deferred revenue and customer deposits .................... 61 (21) 2 10
Accounts payable and other liabilities .................... 52 (3) 13 13
Employee benefit plan obligations and other, net .......... 1 (12) (10) 1
--------- ------- ------- -------
Cash provided by operating activities .................... 75 137 192 121
--------- ------- ------- -------
Investing activities:
Acquisition of Dex East ..................................... (2,754) -- -- --
Payment of acquisition expenses ............................. (44)
Expenditures for property, plant and equipment .............. (1) (13) -- (6)
Capitalized software development costs ...................... (2) (1) (7) (9)
Proceeds from sale of investments ........................... -- -- -- 17
Purchase of investments ..................................... -- -- -- (7)
--------- ------- ------- --------
Cash used for investing activities ....................... (2,801) (14) (7) (5)
--------- ------- -------- --------
Financing activities:
Repayments of short-term borrowings from affiliates ......... -- (498) (212) (138)
Proceeds from issuance of long-term debt .................... 2,255 330 -- --
Repayments of long-term debt ................................ (50) -- -- --
Capital contributed by Owner ................................ 655 -- -- --
Payment of debt issuance costs .............................. (96) (24) -- --
Dividends paid to Qwest ..................................... -- -- -- (29)
Contributions from (distributions to) Qwest in lieu of
income taxes .............................................. -- 104 88 (44)
Contributions from (distributions to) Qwest ................. -- (6) 95
--------- ------- -------- -------
Cash provided by (used for) financing activities .......... 2,764 (88) (130) (116)
--------- ------- ------- -------
Cash and cash equivalents:
Increase (decrease) ......................................... 38 35 55 --
Beginning balance ........................................... -- 55 -- --
--------- ------- ------- -------
Ending balance .............................................. $ 38 $ 90 $ 55 $ --
========= ======= ======= =======
Non-cash investing activities:
Contribution of LCI and financing............................ -- 20 -- --
Contribution of software assets ............................. -- 3 -- --
Distribution of land & buildings ............................ -- (10) -- --
See accompanying notes to consolidated financial statements.
F-6
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN OWNER EQUITY
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND THE YEARS ENDED DECEMBER 31, 2001 AND 2000
OTHER TOTAL
OWNER COMPREHENSIVE OWNER COMPREHENSIVE
PREDECESSOR DEFICIT INCOME (LOSS) DEFICIT INCOME
- ------------------------------------------------- -------------- --------------- -------------- --------------
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)
Capital contribution 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)
Net income ..................................... 157 157 $ 157
Other comprehensive income ..................... -- -- --
-----
Comprehensive income ........................... $ 157
=====
Contribution from Qwest in lieu of
taxes ........................................ 104 -- 104
Net non-cash capital contributions from Qwest 13 -- 13
--------- ---------
Balance, November 8, 2002 ....................... $ (976) $ -- $ (976)
========= ===== =========
- --------------------------------------------------------------------------------
ACCUMULATED
OTHER TOTAL
OWNER ACCUMULATED COMPREHENSIVE OWNER COMPREHENSIVE
COMPANY INTEREST DEFICIT LOSS EQUITY LOSS
- ------------------------------------ ---------- ------------- --------------- ---------- --------------
Balance, November 9, 2002 .......... $ -- $ -- $-- $ --
Capital contribution from
Owner ........................... 655 655
Net loss .......................... (28) (28) $(28)
Other comprehensive loss .......... (4) (4) (4)
-------
Comprehensive loss ................ $(32)
======
Balance, December 31, 2002 ......... $655 $ (28) $(4) $623
==== ===== ===== ======
See accompanying notes to consolidated financial statements.
F-7
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED )
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
1. DESCRIPTION OF BUSINESS
(A) ACQUISITION
On August 19, 2002, Qwest Communications International Inc. ("Qwest")
entered into concurrent purchase agreements (the "Dex East Purchase Agreement"
and the "Dex West Purchase Agreement") to sell the business of Qwest Dex
Holdings, Inc. and its wholly-owned subsidiary Qwest Dex, Inc. (collectively
"Qwest Dex") to Dex Holdings LLC (the "Dex Buyer"), the parent of Dex Media,
Inc. ("Dex Media"), new entities formed by the private equity firms of The
Carlyle Group and Welsh, Carson, Anderson and Stowe (together, the "Sponsors"),
in two separate phases. The Dex Buyer assigned its right to purchase the print
and internet directory businesses in the Dex East States (defined below) to Dex
Media East LLC ("Dex Media East" or the "Company"), a subsidiary of Dex Media
East, Inc. The Company operates the print and internet directory businesses
acquired in Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and
South Dakota, which we refer to as the Dex East States. In the second phase, a
separate indirect subsidiary of Dex Media will operate the print and internet
directory businesses that the Dex Buyer will acquire in Arizona, Idaho,
Montana, Oregon, Utah, Washington and Wyoming, or the Dex West States.
The acquisition is to 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 the Dex East States 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. The total amount of consideration paid for Qwest Dex's print and internet
directory businesses in the Dex East States was $2.754 billion (excluding fees
and expenses). For Federal income tax purposes, the acquisition was treated as
an asset purchase and, immediately after the consummation of the acquisition,
Dex Media East, Inc., the parent of Dex Media East, 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, Dex Media East, Inc. should
generally be able to depreciate or amortize the acquired assets, primarily
intangibles, based on a higher tax basis. As more fully described in Note 13,
as a single-member LLC of Dex Media East, Inc., the Company has reflected the
tax attributes it ascribes to its parent in the accompanying consolidated
financial statements.
In the second phase, 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, the Dex Buyer will purchase all of the interests in Dex West for
$4.3 billion (excluding fees and expenses and subject to adjustments relating
to working capital levels). Dex Media West will operate the acquired print and
internet directory businesses in the remaining seven states of Arizona, Idaho,
Montana, Oregon, Utah, Washington and Wyoming. The Dex West acquisition is
expected to close in the second half of 2003.
(B) PREDECESSOR BUSINESS
The combined financial statements of the acquired business in the Dex East
States prior to the November 8, 2002 acquisition date, referred to as "Dex
East" or the "Predecessor," represent a component of Qwest Dex and include the
assets, obligations and operating activities of Qwest Dex for the states of
Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota.
Dex East is not a separate legal entity but represents the business of Qwest
Dex in or attributable to the applicable states.
F-8
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED )
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(C) OPERATIONS
The Company is the largest telephone directory publisher of white and
yellow pages directories to businesses and residents in its region. Virtually
all of the Company's revenue is derived from the sale of advertising in its
various directories. The Company distributes its published directories to
residents and businesses in the local service area through a third-party
vendor. On June 12, 1998, Qwest completed its acquisition (the "Merger") of U S
WEST, Inc. ("U S WEST"). U S 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.
2. BASIS OF PRESENTATION
(A) THE COMPANY
The accompanying consolidated balance sheet as of December 31, 2002, and
the consolidated statements of operations, cash flows and owner equity for the
period from November 9, 2002 to December 31, 2002 reflect the consolidated
financial position, results of operations and cash flows of the Company from
the date of acquisition and include all material adjustments required under
purchase accounting. Dex East is considered the Predecessor to the Company. As
such, the historical financial statements of Dex East are included in the
accompanying consolidated financial statements, including the combined balance
sheet as of December 31, 2001 and the combined statements of operations, cash
flows and owner equity for the period from January 1, 2002 to November 8, 2002,
and for the years ended December 31, 2001 and 2000 (collectively the
"Predecessor combined financial statements"). The Predecessor combined
financial statements have not been adjusted to give effect to the acquisition.
As such, the consolidated financial statements of the Company after the
acquisition are not comparable to the Predecessor combined financial statements
prior to the acquisition.
(B) THE PREDECESSOR
The accompanying combined financial statements of the Predecessor include
the assets, obligations and activities of Qwest Dex for business conducted in
the Dex East States. To prepare these financial statements, management of Qwest
Dex either specifically identified, assigned or apportioned all assets,
liabilities, revenue and expenses of Qwest 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 Qwest
Dex as well as Qwest and its other affiliates, the assets, liabilities, revenue
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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Dex Media East and its two wholly-owned subsidiaries, Dex Media East Finance
Co. and Dex Media International Inc. All intercompany balances and transactions
have been eliminated in the consolidation.
(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 consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
F-9
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED )
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(C) REVENUE RECOGNITION
The sale of advertising in telephone directories published by the Company
is the primary source of revenue. The Company recognizes revenue 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, Qwest Dex recognized revenue and expense related to
published directories using the deferral and amortization method, under which
revenue and expense 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, Qwest Dex changed to the point of publication method of accounting, under
which Qwest Dex recognized revenue and expenses at the time the directory was
published.
On March 8, 2002, Qwest received a request from the Denver regional office
of the Securities and Exchange Commission ("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 Qwest Dex are cooperating fully with the SEC
investigation.
In August 2002, Qwest Dex reassessed the point of publication method of
accounting and concluded, based on that reassessment and its current practices,
that the point of publication method of accounting was not appropriate under
its circumstances.
The accompanying consolidated financial statements reflect revenue and
expense related to published directories under the deferral and amortization
method of accounting for all periods presented. The Company publishes white and
yellow pages with 12 month lives, while its Predecessor published white and
yellow pages directories, with lives varying from 11 to 13 months, as follows:
NUMBER OF DIRECTORIES PUBLISHED BY
LIFE OF DIRECTORY
----------------------------------
11 MONTHS 12 MONTHS 13 MONTHS
----------- ----------- ----------
COMPANY
November 9 to December 31, 2002 .. -- 20 --
PREDECESSOR
January 1 to November 8, 2002 .... -- 130 --
Year ended December 31, 2001 ..... 3 129 18
Year ended December 31, 2000 ..... 1 151 --
The Company enters into nonmonetary transactions where the Company's
advertising is promoted by the customer during the same period that the Company
carries the customer's advertisement and accounts for these transactions in
accordance with Emerging Issues Task Force ("EITF") Issue No. 99-17,
"Accounting for Advertising Barter Transactions." Revenue recognized for
advertising exchanged in barter transactions was less than $1 million in each
of the periods from November 9 to December 31, 2002 and from January 1 to
November 8, 2002. In each of the years ended December 31, 2001 and 2000, $2
million of such revenue was recognized. Equally offsetting amounts were
recognized in cost of revenue.
(D) COST OF REVENUE
Direct costs related to the sale, production and distribution 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.
F-10
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED )
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(E) DEFERRED REVENUE
Deferred revenue represents amounts billed and advance payments received
from customers that have not yet been recognized as revenue.
(F) DEFERRED DIRECTORY COSTS
Deferred directory costs relate to the production of directories. These
costs are amortized ratably to cost of revenue 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 $2 million, $5 million, $8 million and $16 million in the period
from November 9 to December 31, 2002, the period from January 1 to November 8,
2002, and the years ended December 31, 2001 and 2000, respectively, are
primarily included in general and administrative expense in the consolidated
statements of operations.
(H) CASH AND CASH EQUIVALENTS
The Company considers cash on hand, deposits in banks and investments
purchased with original maturities of three months or less to be cash and cash
equivalents. In the Predecessor periods, Dex East considered all obligations to
affiliates not settled on a quarterly basis to be financing activities for
purposes of the statement of cash flows.
(I) ACCOUNTS RECEIVABLE
The Company 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 the Company for common
customers within the local service area. QC purchases these accounts receivable
from the Company on a full recourse basis, and as such, the Company continues
to include its portion of the QC-billed receivables and any related reserves in
its consolidated balance sheets.
The Company reports its accounts receivable at the outstanding principal
net of the allowance for doubtful accounts. The allowance for doubtful accounts
for trade receivables includes all amounts past due more than 75 days as
determined by the contractual term of each sale. Receivables are charged
against the allowance for doubtful accounts when deemed uncollectible by
collection managers and any recoveries of previous charges are recorded as a
reduction of bad debt expense.
For accounts receivable purchased by QC, management uses a rolling
12-month average of write-offs compared to the prior 12 months of billings to
estimate the necessary allowance for doubtful accounts. When a receivable is
deemed to be uncollectible, the Company reduces its receivable against the
allowance for doubtful accounts. Any recoveries of amounts previously charged
against the allowance for doubtful accounts are recorded as a reduction of bad
debt expense.
The Company charges a percentage finance charge on certain past due trade
receivables. For local accounts receivables, the Company does not recognize
finance charges until the cash is collected from the customer. For national
accounts receivable, the Company recognizes finance charges when billed. At
December 31, 2002, $1 million of accounts receivable past due 90 days or more
were accruing finance charges.
F-11
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED )
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
The following table presents a breakdown of accounts receivable balances
as of December 31 (in millions):
COMPANY PREDECESSOR
--------- ------------
2002 2001
--------- ------------
Trade accounts receivable ..................... $72 $54
Accounts receivable purchased by QC ........... 3 24
Amounts due from related parties .............. -- 6
Less: allowance for doubtful accounts ......... (8) (8)
------ ------
Accounts receivable, net ...................... $67 $76
===== =====
(J) 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 is
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).
(K) 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 $10 million and $24 million at December 31, 2002 and 2001,
respectively, are included in property, plant and equipment. Amortization of
capitalized computer software costs totaled $1 million, $3 million, $3 million
and $2 million for the period from November 9 to December 31, 2002, the period
from January 1 to November 8, 2002, and the years ended December 31, 2001 and
2000, respectively. During December 2001, $7 million of capitalized computer
software costs were written off because of the abandonment of a sales
automation project and the implementation of various system enhancements. See
Note 17 for an additional discussion of the asset impairment.
(L) DEFERRED FINANCING COSTS
Costs incurred in connection with the financing activities related to the
acquisition are deferred and amortized using the effective interest method over
the terms of the related debt agreements ranging from six to ten years.
Amortization of these costs is charged to interest expense in the accompanying
consolidated statement of operations. Total costs deferred in the accompanying
consolidated balance sheet at December 31, 2002 was $94 million. There were no
deferred costs in the combined balance sheet of the Predecessor at December 31,
2001.
(M) IDENTIFIABLE INTANGIBLES AND 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.
F-12
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED )
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(N) GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess purchase price paid by the Company over the
fair value of the tangible and identifiable intangible assets and liabilities
acquired from Qwest Dex on November 8, 2002, the date of the acquisition. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
Goodwill and Other Intangible Assets, goodwill and indefinite-lived intangibles
balances are not being amortized, but instead will be tested for impairment at
least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142
also requires that intangible assets with estimated useful lives be amortized
over their respective estimated useful lives to their residual values, and
reviewed for impairment in accordance with SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets".
Intangible assets acquired include trademarks, customer relationships,
non-compete/publishing agreements and an advertising agreement. The acquired
Dex trademark is a perpetual asset and not subject to amortization. Annual
amortization for customer relationships is calculated using a declining method
in relation to the estimated retention periods of the acquired customers. Other
intangible assets are amortized on a straight-line basis over the estimated
lives of the assets ranging from five to forty years.
The Company evaluates the carrying value of goodwill and identified
intangibles not subject to amortization each fiscal year. As part of the
evaluation, the Company compares the carrying value of each intangible asset
with its fair value to determine whether there has been any impairment. The
Company assesses the ongoing recoverability of its intangible assets subject to
amortization by determining whether the intangible balance can be recovered
over the remaining amortization period through projected undiscounted future
cash flows. If projected future cash flows indicate that the unamortized
intangible asset balances will not be recovered, an adjustment is made to
reduce the net intangible asset to an amount consistent with projected future
cash flows discounted at the Company's incremental borrowing rate. Cash flow
projections, although subject to a degree of uncertainty, are based on trends
of historical performance and management's estimate of future performance,
giving consideration to existing and anticipated competitive and economic
conditions. As of December 31, 2002, the Company does not believe any
impairment of goodwill or other identified intangible assets has occurred.
(O) STOCK OPTIONS
COMPANY. At December 31, 2002, certain employees of the Company
participated in one stock option plan which is described more fully in Note 12.
The Company accounts for this plan under the recognition and measurement
principles of Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations. No stock-based
employee compensation cost is reflected in net income, as all options granted
under the plan had an exercise price equal to the market value of the
underlying common stock on the measurement date of grant. For the period from
November 9 to December 31, 2002, if the Company had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation using a straight-line method
of attributing compensation expense, the effect on net income would have been
less than $1 million.
F-13
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED )
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
PREDECESSOR. Employees of the Predecessor participated in the Qwest
employee stock incentive plans. The Qwest stock incentive plans are accounted
for under the recognition and measurement principles of APB Opinion No. 25. No
compensation expense is reflected in net income, as all options granted by the
Predecessor had an exercise price that is at least equal to the market value of
the underlying security on the measurement date. Had the Predecessor applied
the fair value recognition provisions of SFAS No. 123 to stock-based
compensation, the pro forma net income of Dex East would have been as follows
(in millions):
YEARS ENDED
PERIOD FROM DECEMBER 31,
JANUARY 1 TO ----------------
NOVEMBER 8, 2002 2001 2000
----------------- ------ -------
Net Income:
As reported ......... $157 $161 $130
Pro forma ........... 157 160 129
(P) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company follows the provisions of SFAS No. 133, Accounting for
Derivative Instruments and Certain Hedging Activities and SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities,
an Amendment of SFAS No. 133. SFAS Nos. 133 and 138 require that all derivative
instruments be recorded on the balance sheet at their respective fair values.
On the date a derivative contract is executed, the Company designates the
derivative as a hedge of the variability of cash flows to be received or paid
related to a recognized asset or liability or forecasted transaction (cash-flow
hedge). For all hedging relationships, the Company formally documents the
hedging relationship and its risk-management objective and strategy for
undertaking the hedge, the hedging instrument, the item, the nature of the risk
being hedged, how the hedging instrument's effectiveness in offsetting the
hedged risk will be assessed, and a description of the method of measuring
ineffectiveness. The Company also formally assesses, both at the hedge's
inception and on an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in cash flows
of hedged items. When it is determined that a derivative is not highly
effective as a hedge or that is has ceased to be a highly effective hedge, the
Company discontinues hedge accounting prospectively.
Changes in the fair value of a derivative that is highly effective and
that is designated and qualifies as a cash-flow hedge are recorded in
accumulated other comprehensive income to the extent that the derivative is
effective as a hedge, until earnings are affected by the variability in cash
flows of the designated hedged item. The ineffective portion of the change in
fair value of a derivative instrument that qualifies as a cash-flow hedge is
reported in earnings.
The Company discontinues hedge accounting prospectively when it is
determined that the derivative is no longer effective in offsetting changes in
the cash flows of the hedged item, the derivative is expired or is sold,
terminated or exercised, or management determines that designation of the
derivative as a hedging instrument is no longer appropriate. In situations in
which hedge accounting is discontinued, the Company continues to carry the
derivative at its fair value on the balance sheet and recognizes any subsequent
changes in its fair value in earnings.
(Q) COMPREHENSIVE INCOME (LOSS)
The Company 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.
F-14
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED )
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(R) INCOME TAX PROVISION
The Company will be included in the consolidated Federal income tax return
and combined state income tax returns for Dex Media Inc., the Company's
ultimate parent. The Company is a single member limited liability company and
is disregarded as a separate taxable entity from its parent for income tax
purposes. The Company calculates and records income taxes as if it filed a
separate corporate income tax return.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recorded to reflect the future tax
consequences of temporary differences between the financial reporting bases of
assets and liabilities and their tax bases at each year end. Deferred tax
assets and liabilities are measured using the enacted income tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled. Deferred tax assets and liabilities are adjusted for
future income tax rate changes in the year the changes are enacted. Deferred
tax assets are recognized for operating loss and tax credit carryforwards if
management believes, based upon existing evidence, that it is more likely than
not that the carryforwards will be utilized. All deferred tax assets are
reviewed for realizability and valuation allowances are recorded if it is more
likely than not that the deferred tax assets will not be realized.
(S) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include cash and cash equivalents, accounts
receivable, accounts payable, short-term and long-term borrowings. The carrying
values of cash and cash equivalents, accounts receivable, accounts payable and
short-term borrowings approximate their fair values because of their short-term
nature. The carrying value of the Company's variable-rate long-term debt
approximates fair value because the related interest rates reset to current
market rates on a short-term basis. The fair value of the Company's fixed-rate
long-term debt is based on quoted market prices or is estimated by discounting
the future cash flows of each instrument at rates currently offered to the
Company for similar debt instruments of comparable maturities.
(T) SEGMENT INFORMATION
The Predecessor previously reported two operating segments: Directory
Publishing and Internet Yellow Pages. The chief operating decision maker of the
Company does not regularly review the operating results of any separate
components of the Company.
(U) RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the 2002
presentation.
(V) PREDECESSOR FINANCIAL STATEMENTS
In order to divide the Qwest Dex consolidated financial statements between
Dex East and Dex West, it was necessary for Qwest Dex 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 revenue and/or 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 Qwest Dex accounts between Dex East and Dex West.
F-15
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED )
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
BALANCE SHEETS:
Cash and cash equivalents--as there was no cash and cash equivalents
balance as of January 1, 2000 in the Qwest Dex consolidated financial
statements, a zero balance was assigned to both Dex East and Dex West at that
date. Changes in cash and cash equivalents during the period from January 1 to
November 8, 2002, and the years ended December 31, 2001 and 2000 and the
resulting ending balances as of November 8, 2002, and December 31, 2001 and
2000 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 revenue 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 Qwest Dex current assets
excluding other current assets.
Property, plant and equipment, net--the majority of 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 revenue 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.
Short-term borrowings --as discussed in Note 8, Qwest Dex had outstanding
debt due to Qwest Capital Funding ("QCF"), an affiliate of Qwest, that was
ascribed to Qwest Dex in 1999. As the initial amount of this debt was
determined based on the fair value of the Qwest Dex business derived using an
EBITDA multiple at that time, Qwest 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 and associated debt issuance
costs incurred by Qwest 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 revenue 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 revenue and general and administrative expenses for
the years presented.
Employee compensation--apportioned based upon relative employee-related
expense amounts recorded in cost of revenue and general and administrative
expenses for the years presented.
F-16
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED )
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Deferred revenue and customer deposits--specifically identified by state
and by directory.
Other accrued liabilities--apportioned based upon relative expense amounts
recorded in cost of revenue 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 revenue and general and administrative expenses for
the years presented.
STATEMENTS OF OPERATIONS:
Revenue--(i) specifically identified by state and by directory and (ii)
for other revenue that was not state-specific, amounts were apportioned based
upon the relative percentage of Qwest Dex's directory services revenue for the
respective years presented.
Cost of revenue--specifically identified by state and by directory.
General and administrative--apportioned primarily based on relative cost
of revenues.
Bad debt expense--specifically identified based on customer specific
information and association with a specific state or directory.
Depreciation and amortization expense--computed using historical
depreciation rates applied to property, plant and equipment balances.
Merger-related expenses--apportioned based upon relative employee-related
expense amounts recorded in cost of revenue 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 revenue.
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.
(W) NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement
concerns 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
F-17
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED )
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
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. The Company does not believe the adoption
of this pronouncement will have a material effect on the Company's financial
statements.
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 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. The Company does not believe the adoption of this pronouncement will
have a material effect on the Company's financial statements.
Financial Accounting Standards Board Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued in November 2002. The
interpretation provides guidance on the guarantor's accounting and disclosure
requirements for guarantees, including indirect guarantees of indebtedness of
others. The Company has adopted the disclosure requirements of the
interpretation as of December 31, 2002. The accounting guidelines are applicable
to guarantees issued after December 31, 2002 and require that the Company record
a liability for the fair value of such guarantees in the balance sheet.
F-18
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND THE YEARS ENDED DECEMBER 31, 2001 AND 2000
4. ACQUISITION OF DEX EAST
The acquisition of Dex East (as more fully described in Note 1) was
accounted for as a purchase in accordance with SFAS No. 141, "Business
Combinations." The operations of Dex East have been included in the
accompanying consolidated financial statements from the acquisition date. The
purchase price was allocated first to tangible and identifiable intangible
assets acquired and liabilities assumed based upon estimates of their fair
values, with the remainder allocated to goodwill as follows (in millions):
Fair value of the assets acquired and liabilities assumed:
Dex purchase price .............................. $ 2,754
Working capital contribution .................... 16
Fees and expenses ............................... 140
-------
Total purchase price ................................. 2,910
Estimated fair values
Assets acquired:
Tangible 287
Other identifiable intangible assets ......... 1,791
Liabilities assumed ............................ (71)
-------
Goodwill ............................................. $ 903
=======
The purchase price was allocated as follows:
Current assets .................................. $ 171
Property and equipment .......................... 20
Intangible assets ............................... 1,791
Goodwill ........................................ 903
Other assets .................................... 96
-------
Total assets ......................................... 2,981
Current liabilities ............................. 36
Other liabilities ............................... 35
-------
Total liabilities .................................... 71
-------
Total purchase price ................................. $ 2,910
=======
F-19
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND THE YEARS ENDED DECEMBER 31, 2001 AND 2000
The sources of funds for the purchase price are as follows:
Revolving Credit Facility ............... $ 50
Tranche A Term Loan Facility ............ 530
Tranche B Term Loan Facility ............ 700
Senior notes ............................ 450
Senior subordinated notes ............... 525
Capital contribution from Owner ......... 655
-------
Total source of funds .......................... $ 2,910
=======
5. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following unaudited proforma financial information summarizes the
results of operations of the Company as if the acquisition of Dex East (Note 1)
had occurred on January 1st for each of the years presented. The proforma
financial information does not necessarily reflect the results of operations
that would have occurred had the acquisition occurred on January 1, 2001, and
does not purport to represent what the Company's results of operations might be
for any future period.
YEARS ENDED DECEMBER
31,
--------------------
(IN MILLIONS) 2002 2001
- ---------------------------------------- -------- ---------
Revenue ................................ $ 689 $ 666
Operating expense:
Cost of revenue ....................... 209 209
General and administrative ............ 72 50
Depreciation and amortization ......... 229 231
Merger-related expenses ............... -- 4
Impairment charges .................... -- 7
----- -----
Total operating expense ............. 510 501
----- -----
Operating income .................... 179 165
Other expense:
Interest expense ...................... 194 211
Other expense ......................... 7 7
----- -----
Income before income taxes .......... (22) (53)
Provision for income taxes ............. (8) (21)
----- -----
Net income .......................... $ (14) $ (32)
===== =====
Revenue and expense for the twelve months following the consummation of
the acquisition of Dex East will be approximately $83 million and $22 million
lower, respectively, than they would have been had the transactions not
occurred because the acquisition was accounted for under the purchase method of
accounting, under which deferred revenue and deferred directory costs were fair
valued. Had these purchase accounting adjustments not been made, approximately
$83 million of deferred revenue would have been recorded as revenue and $22
million of deferred directory costs would have been recorded as expense over
the twelve months following the consummation of the acquisition. The purchase
method of accounting will not affect the Company's 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, and is
therefore not included in the pro forma information above.
The nature of the adjustments applied in preparing the unaudited pro forma
financial information is as follows:
F-20
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(A) MANAGEMENT FEES
Additional general and administrative expense has been included to reflect
a $2 million annual fee to be paid to the Sponsors under a management
agreement.
(B) AMORTIZATION OF INTANGIBLE ASSETS
Additional annual amortization of identifiable intangible assets acquired
is included in depreciation and amortization. See Note 7 for the Company's
determination of identifiable intangible assets acquired, underlying useful
lives and related amortization periods.
(C) INTEREST EXPENSE
Additional interest expense is included to reflect total interest expense
as if the Dex East acquisition had occurred and related debt had been obtained
at January 1, 2001. The pro forma adjustment to interest expense reflects an
interest rate of 9 7/8% for the Company's senior notes due 2009, an interest
rate of 12 1/8% for the Company's senior subordinated notes due 2012, an
estimated interest expense relating to the Company's new credit facilities
(including the commitment fees on the unused portions of the Company's 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 the Predecessor.
(D) INCOME TAXES
The estimated tax effect of the pro forma adjustments has been included at
the Company's estimated effective tax rates for the periods presented.
6. PROPERTY, PLANT AND EQUIPMENT
The following table presents the composition of property, plant and
equipment as of December 31.
COMPANY PREDECESSOR
--------- ------------
2002 2001
(IN MILLIONS) ESTIMATED LIVES --------- ------------
Computers and equipment ...................... 3-7 years $ 5 $ 76
Leasehold improvements ....................... 5 years 4 9
Capitalized software ......................... 18 months-5 years 10 24
Furniture and fixtures ....................... 7 years 1 7
Construction in progress ..................... N/A 3 --
--- -----
Gross property, plant and equipment .......... 23 116
Less: accumulated depreciation .............. (1) (85)
------ -----
Net property, plant and equipment ......... $22 $ 31
===== =====
Depreciation and amortization expense (excluding amortization of
intangibles) for the period from November 9 to December 31, 2002, the period
from January 1 to November 8, 2002 and the years ended December 31, 2001 and
2000 was $1 million, $9 million, $12 million and $15 million, respectively.
F-21
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND THE YEARS ENDED DECEMBER 31, 2001 AND 2000
7. GOODWILL AND INTANGIBLE ASSETS
The excess purchase price paid by the Company over its estimates of the
fair value of the tangible assets and liabilities of Dex East as of the date of
the acquisition was approximately $2.694 billion ($903 million of goodwill and
$1.791 billion of intangible assets). Intangible assets, net of amortization
totaled $1.759 billion at December 31, 2002. The gross carrying amount and
accumulated amortization of other intangible assets and their estimated useful
lives are as follows (Dollars in millions):
GROSS CARRYING ACCUMULATED NET BOOK
VALUE AMORTIZATION VALUE LIFE
INTANGIBLE ASSETS ---------------- -------------- --------- ------------
Customer relationships--local $ 897 $ (24) $ 873 20 years(1)
Customer relationships--national .......... 241 (5) 236 25 years(1)
Non-compete/publishing agreements ......... 251 (1) 250 40 years
Dex Trademark ............................. 311 -- 311 Indefinite
Qwest Dex Trademark agreement ............. 68 (2) 66 5 years
Advertising agreement ..................... 23 -- 23 15 years
------- ------- ------
Totals ................................. $ 1,791 $ (32) $1,759
======= ======= ======
(1) Amortization is calculated using a declining method in relation to
estimated retention lives of acquired customers.
Amortization expense for amortizing intangible assets for the period from
November 9 to December 31, 2002 was $32 million. Estimated amortization expense
for the next five years is (in millions):
2003 ...................... $214
2004 ...................... 181
2005 ...................... 154
2006 ...................... 131
2007 ...................... 110
Thereafter ................ 658
8. SHORT-TERM BORROWINGS (PREDECESSOR)
Qwest Dex had a line of credit borrowing arrangement with Qwest Capital
Funding, Inc. ("QCF") under which Qwest Dex could borrow up to approximately
$4.3 billion at an annual interest rate of 7.5%. Borrowings under this
arrangement were due on demand and the maturity date of this arrangement was
January 15, 2003, but expired on the date of acquisition, November 8, 2002. As
of November 8, 2002 (prior to acquisition) and December 31, 2001, amounts
outstanding under this line of credit, as apportioned to Dex East based upon
the methodologies discussed in Note 3(v), were $893 million and $1.391 billion,
respectively, including accrued interest of $3 million and $9 million,
respectively. Qwest Dex intended and Qwest expected that the outstanding
borrowings under this arrangement would be either repaid or renegotiated on an
annual basis.
In September 2002, Qwest Dex formalized the apportionment of outstanding
borrowings due to QCF between Dex East and Dex West, in accordance with the
methodology disclosed in Note 3(v).
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 (LIBOR) plus 11.50%. The loan is guaranteed by
Qwest Dex Holdings, Inc. and Qwest Services Corporation, and the obligations
are
F-22
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND THE YEARS ENDED DECEMBER 31, 2001 AND 2000
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. As of
November 8, 2002 (prior to acquisition) the amount outstanding under this
obligation, as apportioned to Dex East was $330 million. In conjunction with
the financing, Qwest Dex incurred $55 million in debt issuance costs of which
$24 million was apportioned to Dex East. Amortization of $2 million related to
these costs is included in interest expense for the period from Jaunary 1 to
November 8, 2002. Upon completion of the sale of Dex West, the entire
$750 million debt balance must be paid from the proceeds of the sale of Dex
West.
9. LONG-TERM DEBT
Long-term debt is comprised of the following (in millions, in descending
order of right of payment):
DECEMBER 31,
2002
-------------
Notes payable to banks, Tranche A Term Loan, bearing interest at adjusted
LIBOR plus 3% (4.56% at December 31, 2002), interest payable at various
intervals based on interest periods, and principal payable quarterly
beginning on September 30, 2003, maturing in November 2008. The notes
are secured by substantially all of the Company's assets. Due to the
repricing characteristics of the debt, the carrying amount of the debt
approximates fair value. .................................................. $530
Notes payable to banks, Tranche B Term Loan, bearing interest at adjusted
LIBOR plus 4% (5.56% at December 31, 2002), interest payable at various
intervals based on interest periods, and principal payable quarterly
beginning on September 30, 2003, maturing in May 2009. The notes are
secured by substantially all of the Company's assets. Due to the repricing
characteristics of the debt, the carrying amount of the debt approximates
fair value. ............................................................... 661
Notes payable to banks, Tranche B-Euros Term Loan (Euros portion),
bearing interest at 6.91%, interest payable at various intervals based on
interest periods, and principal payable quarterly beginning September 30,
2003, maturing in May 2009. The notes are secured by substantially all of
the Company's assets. Due to the repricing characteristics of the debt, the
carrying amount of the debt approximates fair value. ...................... 41
Unsecured senior notes payable, bearing interest at 9.875%, interest payable
semi-annually (May and November), principal due in November 2009. At
December 31, 2002, the fair value of the notes was approximately $484
million. .................................................................. 450
Unsecured senior subordinated notes payable, bearing interest at 12.125% ,
interest payable semi-annually (May and November), principal due in
November 2012. At December 31, 2002, the fair value of the notes was
approximately $581 million. ............................................... 525
----
F-23
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND THE YEARS ENDED DECEMBER 31, 2001 AND 2000
$2,207
Less: current portion of Long-term debt ......... (40)
---
$2,167
======
At December 31, 2002 the aggregate amounts of required principal payments
on long-term debt are as follows:
2003 ...................... $ 40
2004 ...................... 89
2005 ...................... 108
2006 ...................... 134
2007 ...................... 139
Thereafter ................ 1,697
------
$2,207
======
In connection with the acquisition, the Company entered into a syndicated
credit facility consisting of (i) a $100 million six year revolving credit
facility, (ii) a $530 million six year term loan (Tranche A), (iii) a $661
million six and a half year term loan (Tranche B), and (iv) a $39 million six
and a half year term loan payable in Euros (Tranche B-Euros). The entire
amounts for Tranche A, Tranche B, and Tranche B-Euros, along with $50 million
of the revolving credit facility were used to consummate the acquisition. The
$50 million of the revolving credit facility was repaid in December 2002.
Interest rate periods under the bank facility can, at the option of the
Company, be for various maturities, ranging from overnight up to six months,
and are subject to interest rate options. The interest rate options allow the
Company to choose a LIBOR-based rate or an alternative base rate (ABR) which
shall be the higher of the prime rate or Federal Funds plus 50 basis points.
The applicable interest rate spreads added to LIBOR-based borrowings are 3% for
Tranche A borrowings and 4% for Tranche B borrowings. The spreads on ABR
borrowings are 2% for Tranche A and 3% for Tranche B. Borrowings under the
Tranche B-Euros bear interest with a base rate of Euro LIBOR with a spread of
4%. The Company is required to pay an annual unused facility fee of .5%,
payable quarterly, on the unused portion of the revolving credit facility. The
Company expects to use the revolving credit facility primarily to fund its
future working capital needs. As of December 31, 2002, there were no borrowings
under the revolving credit facility. The interest rates on Tranche A, Tranche B
and Tranche B-Euros, along with the annual unused facility fee related to the
revolving credit line may be reduced depending on certain Company financial
ratios. The Company paid interest and fees on the bank facility of $1 million
for the period from November 9 to December 31, 2002.
The Company entered into interest rate swaps, an interest rate cap and a
foreign currency hedging transaction to mitigate the interest rate and foreign
currency exchange rate risk related to the credit facilities mentioned above.
Refer to Note 10 for disclosure on these transactions.
The credit agreement related to the bank financing and the indenture
related to the Company's senior notes and senior subordinated notes contain
various provisions that limit additional borrowings, capital expenditures,
dividend payments and require the maintenance of certain financial covenants.
As of December 31, 2002, the Company was in compliance with these covenants.
F-24
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND THE YEARS ENDED DECEMBER 31, 2001 AND 2000
The obligations under the Company's revolving credit facility and term loan
facilities are guaranteed jointly and severally by Dex Media East, Inc., Dex
Media Finance Co. and Dex Media International, Inc. ("Credit Guarantors"). The
Company and these entities are all under the common control of Dex Media. The
Company may borrow up to $100 million, of which $99 million is available, under
the revolving credit facility. In addition, the Company may borrow up to $160
million, pursuant to the delayed draw portion of the Tranche A term loan
facility in connection with the acquisition of Dex West. The commitment under
the delayed draw portion of the Tranche A term loan facility terminates if the
Dex West acquisition is not consummated. The Credit Guarantors shall be
responsible for repaying these obligations in the event that the Company fails
to perform under these facilities.
The obligations under the Company's senior notes and senior subordinated
notes are guaranteed by Dex Media International, Inc. The Company has a
principal obligation of $975 million for these notes, for which Dex Media
International, Inc. shall be responsible for repaying in the event that the
Company and Dex Media East Finance Co., co-issuer of the senior notes and senior
subordinated notes, fail to perform under these notes. Separate financial
statements for Dex Media East Finance Co. and Dex Media International, Inc., the
only subsidiaries of the Company (the "Subsidiaries") are not provided because
the Subsidiaries have no independent assets or operations from the Company, Dex
Media East Finance Co. is a 100%-owned finance operating subsidiary of the
Company and Dex Media International, Inc. is a 100%-owned operating subsidiary
of the Company, the co-issuance of Dex Media East Finance Co. and the guarantee
by Dex Media International, Inc. create obligations that are full and
unconditional, and the co-issuance by Dex Media East Finance Co. and the
guarantee by Dex Media International, Inc. create obligations that are joint and
several.
The Company has entered into a registration rights agreement with the
initial purchasers. In that agreement, the Company agreed to use all
commercially reasonable efforts to file with the SEC and cause to become
effective a registration statement relating to an offer to exchange the senior
notes and the senior subordinated notes for an issue of SEC-registered notes
with terms identical to the senior notes and the senior subordinated notes. The
Company has fixed a preliminary registration statement on Form S-4 with the
SEC. If the exchange offer is not completed on or before the date that is 180
days after November 8, 2002, the annual interest rate borne by the senior notes
and the senior subordinated notes will be increased by 1.0% per annum until the
exchange offer is completed.
10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company utilizes variable-rate debt to finance a portion of its
operations. This debt exposes the Company to variability in interest payments
due to changes in interest rates. Management believes that it is prudent to
mitigate the interest rate risk on a portion of its variable rate borrowings.
To meet this objective, management entered into four interest rate swap
agreements and an interest rate cap agreement to manage fluctuations in cash
flows resulting from adverse changes in interest rates. The interest rate swaps
effectively change the variable-rate cash flow exposure on the debt obligations
to fixed cash flows. Under the terms of the interest rate swaps, the Company
receives fluctuating interest rate payments and makes fixed interest rate
payments, thereby creating the equivalent of fixed-rate interest payments. The
purpose of the interest rate cap agreement is to limit interest payments made
over the life of the notes to the extent of the notional amount of the cap
agreement.
The Company acquired forward starting interest-rate-related derivative
instruments to manage its exposure on its debt instruments. The Company does
not enter into derivative instruments for any purpose other than
cash-flow-hedging purposes. That is, the Company does not speculate using
derivative instruments.
By using derivative financial instruments to hedge exposures to changes in
interest rates, the Company exposes itself to credit risk and market risk.
Credit risk is the possible failure of the counterparty to perform under the
terms of the derivative contract. When the fair value of a derivative contract
is positive, the counterparty owes the Company, which creates credit risk for
the Company. When the fair value of a derivative contract is negative, the
Company owes the counterparty and, therefore, it does not possess credit risk.
The Company minimizes the credit risk in derivative instruments by entering
into transactions with high-quality counterparties.
F-25
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Market risk is the adverse effect on the value of a financial instrument
that results from a change in interest rates or currency exchange rates. The
market risk associated with interest-rate contracts is managed by establishing
and monitoring parameters that limit the types and degree of market risk that
may be undertaken.
The Company assesses interest rate cash flow risk by continually
identifying and monitoring changes in interest rate exposures that may
adversely impact expected future cash flows. The Company maintains risk
management control systems to monitor interest rate cash flow risk attributable
to both the Company's outstanding debt obligations as well as the Company's
offsetting hedge positions. The risk management control systems involve the use
of analytical techniques, including cash flow sensitivity analysis, to estimate
the expected impact of changes in interest rates on the Company's future cash
flows.
During November 2002, the Company entered into four interest rate swap
agreements to hedge against the effects of increases in the interest rates
associated with floating rate debt on its bank financing . The interest rate
swap agreements have an aggregate notional amount of $370 million, applicable
fixed rates ranging from 2.35% to 4.085% and expire in various terms ranging
from two to six years. In light of the current low interest rate environment,
all interest rate related derivative instruments have forward starting dates of
May 8, 2003.
Changes in the fair value of interest rate swaps designated as hedging
instruments that effectively offset the variability of cash flows associated
with variable-rate, term debt obligations are reported in accumulated other
comprehensive income, net of tax (AOCI). These amounts subsequently are
reclassified into interest expense as a yield adjustment of the hedged interest
payments in the same period in which the related interest payments affect
earnings. Due to the forward starting dates of the interest rate related
derivative instruments, the Company has not reclassified any amounts for the
period from November 9 to December 31, 2002, the period from January 1 to
November 8, 2002 and the years ended December 31, 2001 and 2000. At December
31, 2002, the Company had $4 million in unrealized losses, net of tax, all of
which is included in AOCI.
As of December 31, 2002, $2 million of deferred losses, net of tax, on
derivative instruments, are recorded in other comprehensive income. These
amounts are expected to be reclassified to earnings during the next 12 months.
Transactions and events are expected to occur over the next 12 months that will
necessitate reclassifying these derivative gains and losses to earnings.
During November 2002, the Company entered into a foreign currency swap
agreement to hedge against the effects of foreign currency fluctuations between
the US Dollar and the Euro on its Tranche B-Euros. The foreign currency swap
agreement does not qualify for hedge accounting treatment and, therefore, all
gains and losses resulting from the change in fair market value of the foreign
currency swap are reported directly in earnings. The foreign currency swap has
a notional amount of 39 million Euros, $41 million at December 31, 2002, and
expires in December 2005.
During November 2002, the Company entered into an interest rate cap
agreement. The Company has not designated the interest rate cap as a hedging
instrument and therefore reports all gains and losses resulting from the change
in fair market value of the interest rate cap directly in earnings. The amount
reported in earnings in the period from November 9 to December 31, 2002
amounted to less than $1 million. The interest rate cap has a notional amount
of $200 million and expires in May 2005.
F-26
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
11. COMPREHENSIVE INCOME (LOSS)
Components of comprehensive income (loss) are changes in equity other than
those resulting from investments by owners and distributions to owners. Net
income (loss) is the primary component of comprehensive income (loss). For the
Company, the components of comprehensive income (loss) other than net income
(loss) is the change in unrealized gain or loss on derivatives qualifying for
hedge accounting, net of tax, and a reclassification adjustment for unrealized
gains on marketable equity securities included in net income, net of tax. The
aggregate amounts of such changes to equity that have not yet been recognized
in net income are reported in the equity portion of the consolidated balance
sheets as accumulated other comprehensive income (loss).
For the period from November 9 to December 31, 2002, the period from
January 1 to November 8, 2002 and the years ended December 31, 2001 and 2000,
comprehensive income (loss) included the following components (in millions):
COMPANY PREDECESSOR
--------------- ----------------------------------
PERIOD FROM PERIOD FROM YEARS ENDED
NOVEMBER 9 TO JANUARY 1 TO DECEMBER 31,
DECEMBER 31, NOVEMBER 8, -----------------
2002 2002 2001 2000
--------------- -------------- ------ --------
Changes in fair value of derivatives, net of tax ..... $ (4) $-- $-- $ --
Reclassification adjustment for unrealized gains
on marketable equity securities included in net
income, net of tax .................................. -- -- -- (10)
---- --- --- -----
Other comprehensive loss ............................. $ (4) $-- $-- $ (10)
==== === === =====
12. OWNER EQUITY
(A) OWNER CONTRIBUTION
As more fully described in Note 4, the Company's parent, Dex Media East
Inc., contributed $655 million to member equity in connection with the
acquisition.
(B) STOCK OPTIONS
COMPANY. On November 8, 2002, Dex Media adopted a Stock Option Plan (the
"Plan") that permits the grant of nonqualified and incentive stock options to
its employees, consultants and independent directors or those of its wholly
owned subsidiaries. As of December 31, 2002, the maximum number of shares of
common stock available for grant was 234,591. The Compensation Committee of Dex
Media determines the exercise price for each option; however, all outstanding
stock options have an exercise price that is equal to the fair market value of
the common stock on the date the stock option was granted. Outstanding options
have a term of ten years. Outstanding options vest in two segments. Twenty-five
percent of the awards granted vest in equal installments at December 31 of
2003-2007. Seventy-five percent of the awards granted vest in equal installments
at December 31 of 2003-2007 if certain EBITDA targets are met. Any unvested
awards after this period will vest in full one day before the tenth anniversary
of the grant date.
F-27
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Summarized below is information regarding the Plan at December 31, 2002,
as it relates to the employees of the Company.
Options outstanding ......................................... 156,887
Options exercisable ......................................... --
Weighted average exercise price ............................. $ 100
Weighted average remaining contractual life (years) ......... 9.86
Had the Company accounted for employee stock options grants under the fair
value method prescribed by SFAS No. 123, the pro forma results of the Company
for the period from November 9 to December 31, 2002 would have been a loss of
$28 million, which is the same amount as reported under APB No. 25.
Following are the weighted average assumptions used to estimate the fair
value of options granted to Company employees during 2002.
Risk-free interest rate ........................ 2.78%
Expected dividend yield ........................ 0%
Expected option life (years) ................... 5.0
Expected stock price volatility ................ 0%
Weighted average grant date fair value ......... $ 12.96
Options granted ................................ 156,887
PREDECESSOR. Employees of the Predecessor participated in the Qwest
employee stock incentive plans. The Qwest stock incentive plans were 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. Generally, options under the Qwest stock incentive plans held
by current Dex Media East employees expired 90 days after the acquisition of Dex
East by the Company.
Had the Predecessor accounted for Qwest employee stock option grants under
the fair value method prescribed by SFAS No. 123, the pro forma results of Dex
East would have been as follows (in millions):
PERIOD FROM YEARS ENDED
JANUARY 1 TO DECEMBER 31,
NOVEMBER 8, --------------
2002 2001 2000
-------------- ------ -------
Net income:
As reported ......... $157 $161 $130
Pro forma ........... 157 160 129
F-28
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Following are the weighted average assumptions used to estimate the fair
value of options granted to employees of the Predecessor during the period from
January 1 to November 8, 2002 and the years ended December 31, 2001 and 2000.
PERIOD FROM YEARS ENDED
JANUARY 1 TO DECEMBER 31,
NOVEMBER 8, -------------------------
2002 2001 2000
------------- ----------- -----------
Risk-free interest rate ........................ 4.2% 4.2% 6.0%
Expected divident yield ........................ 0.0% 0.1% 1.0%
Expected option life (years) ................... 5.0 5.5 4.7
Expected stock price volatility ................ 49.3% 64.0% 52.6%
Weighted average grant date fair value ......... $ 2.72 $ 15.58 $ 23.03
Options granted ................................ 137,686 369,940 761,317
(C) CAPITALIZATION (PREDECESSOR)
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 were no authorized, issued or outstanding shares of stock of
Dex East.
13. INCOME TAXES
The composition of the income tax (benefit) provision follows (in
millions):
COMPANY PREDECESSOR
--------------- -------------------------------
PERIOD FROM PERIOD FROM YEARS ENDED
NOVEMBER 9 TO JANUARY 1 TO DECEMBER 31,
DECEMBER 31, NOVEMBER 8, --------------
2002 2002 2001 2000
--------------- -------------- ------ -----
Federal:
Current ......................................... $ -- $104 $ 79 $69
Deferred ........................................ (15) (19) 7 2
---- ---- ---- ---
Total Federal ................................ (15) 85 86 71
---- ---- ---- ---
State and Local:
Current ......................................... -- 28 21 17
Deferred ........................................ (4) (6) 1 3
---- ---- ---- ---
Total State and Local ........................ (4) 22 22 20
---- ---- ---- ---
Total income tax (benefit) provision ......... $(19) $107 $108 $91
==== ==== ==== ===
F-29
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
The effective tax rate differs from the statutory tax rate as follows:
COMPANY PREDECESSOR
--------------- ----------------------------------------
PERIOD FROM PERIOD FROM YEARS ENDED
NOVEMBER 9 TO JANUARY 1 TO DECEMBER 31,
DECEMBER 31, NOVEMBER 8, -----------------------
2002 2002 2001 2000
--------------- -------------- ---------- ----------
Federal statutory rate .......... 35.0% 35.0% 35.0% 35.0%
State income taxes, net ......... 5.2 5.2 5.2 5.2
Other ........................... 0.2 0.2 -- 1.0
---- ---- ---- ----
Effective tax rate .............. 40.4% 40.4% 40.2% 41.2%
==== ==== ==== ====
COMPANY. The acquisition of Dex East (as more fully described in Note 1)
was considered to be a taxable asset acquisition for income tax purposes. As a
result, the Company recorded all acquired assets at their fair market value at
the date of sale. In addition, the Company acquired several intangible assets
that will be amortized for tax purposes on a straight-line basis over a 15-year
period beginning with the date of acquisition.
Dex Media East will be included in the consolidated federal income tax
return and combined state income tax returns for Dex Media, the Company's
ultimate parent. Dex Media East is a single member limited liability company
and is disregarded as a separate taxable entity from its parent for income tax
purposes. The Company calculates and records income taxes as if it filed a
separate corporate income tax return on an individual basis. For the period
November 9 to December 31, 2002, the Company generated a loss for tax purposes
of approximately $41 million. Because this period is considered to be a
short-period for income tax purposes, certain items included in the computation
of the tax loss were adjusted to reflect limitations imposed by existing tax
law associated with short-period income tax returns. The net operating loss for
the year will expire in the year 2023. No valuation allowance has been provided
for the net operating loss as it is more likely than not that the loss
carryover will be utilized before the end of the expiration period. This
presumption is based upon the taxable income expected to be generated by the
Company over the next several years.
No payments for income taxes were made for the tax period from November 9
to December 31, 2002, due to the net operating loss.
PREDECESSOR. Qwest Dex was included in the Qwest consolidated Federal
income tax return group and combined state income tax returns. Qwest Dex and
Dex East provided income taxes as if they were separate taxpayers. Neither
Qwest Dex nor Dex East had a formal tax-sharing arrangement with Qwest.
Consequently, for financial reporting purposes, Dex East has reflected in its
combined statements of changes in owner deficit, contributions and
distributions in lieu of recording receivables and payables for income taxes.
Qwest Dex made net payments of income taxes to third parties and QSC of
which $28 million, $29 million and $129 million for the period from January 1
to November 8, 2002, and for the years ended December 31, 2001 and 2000,
respectively, were apportioned to Dex East.
F-30
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
The components of the net deferred tax assets and liabilities were as
follows (in millions):
COMPANY PREDECESSOR
--------- ------------
YEAR ENDED
DECEMBER 31,
----------------------
2002 2001
--------- ------------
Current:
Revenue currently taxable, not yet recognizable ............. $ -- $ 29
Expenses not currently deductible ........................... 1 (2)
---- -------
Net current deferred tax assets .......................... $ 1 $ 27
---- ------
Noncurrent:
Post-employment benefits, including pension ................. $ -- $ 7
Amortization of goodwill and other intangibles .............. 1 --
Net operating loss carryforward ............................. 17 --
Depreciation ................................................ -- (6)
Other ....................................................... 2 (11)
---- ------
Net noncurrent deferred tax assets (liabilities) ......... $ 20 $(10)
==== ======
Included in the 2002 deferred tax asset relating to other is $2 million in
deferred tax assets associated with mark-to-market adjustment for the Company's
derivative financial instruments, which has been included in accumulated other
comprehensive loss on the consolidated balance sheet. These deferred taxes are
recorded in other comprehensive income (as more fully described in Note 11) and
do not impact the Company's statement of operations. Qwest Dex, Dex East and Dex
Media East believe that it is more likely than not that all net deferred tax
assets will be realized. Therefore, valuation allowances have not been provided.
14. EMPLOYEE BENEFIT PLANS
(A) PENSION, POST-RETIREMENT AND OTHER POST-EMPLOYMENT BENEFITS
COMPANY. Effective November 9, 2002, the Company created pension and
post-retirement benefit plans with features similar to the Qwest plans
described below and all employees who previously participated in the Qwest
plans were transferred to the Dex Media East plans. The Company is still in the
process of finalizing plan documents and will file for a determination letter
with the IRS once documents are complete. The actuarially determined liability
of the Qwest plans attributable to Dex Media East employees as of the date of
acquisition of the Company will become the beginning accrued liability for the
Dex Media East Plans. Within 270 days of the date of acquisition, Qwest will
transfer the actuarially determined pension trust assets relating to Dex Media
East to the Dex Media East pension trust.
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. The Company'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 Dex
Media in the period from November 9 to December 31, 2002 and Dex Media did not
make any contributions to the post-employment benefit plan in the period from
November 9 to December 31, 2002.
Pension and post-retirement benefit cost attributable to Dex Media East
employees were less than $1 million for the period from November 9 to December
31, 2002.
F-31
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
To compute its expected return on pension plan assets, the Company applies
its expected rate of return to the market-related value of the pension plan
assets. The market-related asset value is a computed value that recognizes
changes in fair value of plan assets over a period of time, not to exceed five
years. In accordance with SFAS No. 87, "Employers' Accounting for Pensions,"
the Company elected to recognize actual returns on its plan assets ratably over
a five year period when computing its market-related value of plan assets. This
method has the effect of smoothing market volatility that may be experienced
from year to year. As a result, the Company's expected return is not
significantly impacted by the actual return on plan assets experienced in the
current year.
Following is a reconciliation of the benefit obligation for the pension
and post-retirement plans (in millions):
PERIOD FROM NOVEMBER 9
TO
DECEMBER 31, 2002
-----------------------
POST-
PENSION RETIREMENT
--------- -----------
Benefit obligation accrued at November 9, 2002 $87 $28
Service cost ............................................ 1 --
Interest cost ........................................... 1 --
Actuarial loss .......................................... -- 4
--- ---
Benefit obligation accrued at December 31, 2002 ......... $89 $32
=== ===
Following is a reconciliation of the change in the fair value of plan
assets for the pension and post-retirement plans (in millions):
PERIOD FROM NOVEMBER 9
TO
DECEMBER 31, 2002
-----------------------
POST-
PENSION RETIREMENT
--------- -----------
Fair value of the plan assets at November 9, 2002 ......... $80 $--
Actual loss on plan assets ................................ -- --
--- ---
Fair value of plan assets at December 31, 2002 ............ $80 $--
=== ===
F-32
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
The following table represents the funded status of the pension and
post-retirement plans (in millions):
PERIOD FROM NOVEMBER 9
TO DECEMBER 31, 2002
------------------------------
PENSION POST-RETIREMENT
----------- ----------------
Unfunded status ......................... $ (9) $ (32)
Unrecognized net actuarial loss ......... 1 4
------ ------
Accrued benefit liability ............... $ (8) $ (28)
====== ======
The actuarial assumptions used to compute the pension credit and
post-retirement benefit cost are based upon information available as of January
1, 2002 and are as follows:
PERIOD FROM NOVEMBER 9 TO
DECEMBER 31, 2002
--------------------------------
PENSION POST-RETIREMENT
------------- ----------------
Weighted average discount rate ........................... 6.75% 6.75%
Weighted average rate of compensation increase ........... 4.65% 4.65%
Expected long-term rate of return on plan assets ......... 9.40% 9.40%
Initial healthcare cost trend rate ....................... N/A 10.00%
Ultimate healthcare cost trend rate ...................... N/A 5.00%
Year ultimate trend rate is reached ...................... N/A 2013
The actuarial assumptions used to compute the unfunded status for the
plans are based upon information available as of December 31, 2002 and are as
follows:
PERIOD FROM NOVEMBER 9 TO
DECEMBER 31, 2002
--------------------------------
PENSION POST-RETIREMENT
------------- ----------------
Weighted average discount rate ......................... 6.75% 6.75%
Weighted average rate of compensation increase ......... 4.65% 4.65%
Initial healthcare cost trend rate ..................... N/A 10.00%
Ultimate healthcare cost trend rate .................... N/A 5.00%
Year ultimate trend rate is reached .................... N/A 2013
A one-percent change in the assumed healthcare cost trend rate would have
had the following effects for the period from November 9 to December 31, 2002
(in millions):
ONE PERCENT CHANGE
------------------------
INCREASE DECREASE
---------- -----------
Effect on the aggregate of the service and interest cost
components of net periodic post-retirement benefit cost
(statement of operations) ............................. $ -- $ --
Effect on accumulated post-retirement benefit obligation
(balance sheet) ....................................... $ 2 $ (1)
PREDECESSOR. Qwest Dex employees participated in the Qwest pension,
post-retirement and other post-employment benefit plans. The amounts
contributed by Qwest Dex were not segregated or restricted to pay amounts due
to Qwest Dex employees and could be used to provide benefits to
F-33
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
other employees of Qwest or its affiliates. The cost of pension and
post-retirement health care and life insurance benefits and required
contributions were apportioned to Dex East based upon demographic information
provided by the plan administrator.
The noncontributory defined benefit pension plan included substantially
all management and occupational (union) employees. Post-retirement healthcare
and life insurance plans provided medical, dental, vision and life insurance
benefits for certain retirees. Qwest also provided postemployment benefits to
certain former employees.
Effective January 1, 2001, Qwest modified the pension plan benefits for
all former U S 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
Qwest Dex in the period from January 1 to November 8, 2002, and the year ended
December 31, 2001 and neither Qwest nor Qwest Dex made any contributions to the
post-retirement benefit plan in the period from January 1 to November 8, 2002,
and the year ended December 31, 2001. Qwest made contributions of $16 million
to the post-retirement benefit plan in the year ended December 31, 2000.
Dex East was apportioned pension credits for the period from January 1 to
November 8, 2002, and the years ended December 31, 2001 and 2000 of $6 million,
$10 million and $10 million respectively. Dex East's apportioned
post-retirement benefit costs (excluding the curtailment gain of $6 million in
2000) for the period from January 1 to November 8, 2002, and the years ended
F-34
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
December 31, 2001 and 2000 were $3 million, $1 million and $1 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 3(v).
(B) 401(K) PLAN
COMPANY. Dex Media sponsors one defined contribution benefit plan covering
substantially all management and occupational employees of the Company. Under
this plan, employees may contribute a percentage of their annual compensation
to the plan up to a maximum percentage identified in the plan. The annual
dollar contribution of the employees is limited to a maximum amount determined
by the Internal Revenue Service. Employees who previously participated in the
Qwest Savings & Investment Plan described below were given the option of
leaving their balance in that plan, moving their balance to the Dex Media plan,
or moving their balance to another qualified plan. Those employees who chose to
participate in the Dex Media East plan were credited for eligibility, vesting
and all other purposes in the new plan. The Company matched 100% of employee
contributions up to 3% of base compensation, and those matching contributions
to the plan were less than $1 million for the period from November 9 to
December 31, 2002.
PREDECESSOR. Qwest sponsors two defined contribution benefit plans
covering substantially all management and occupational employees, including
employees of Qwest Dex. Both plans were established prior to the Merger; one by
pre-Merger Qwest (the Qwest Plan) and one by U S WEST (the U S 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. Qwest Dex matched a percentage of
employee contributions, and those matching contributions were invested in Qwest
common stock. Dex East was apportioned its share of matching contributions to
the plans amounting to less than $1 million, $2 million and $3 million for the
period from January 1 to November 8, 2002, and the years ended December 31,
2001 and 2000, respectively. Effective January 1, 2002, Qwest merged the Qwest
Plan into the U S WEST Plan which was renamed the Qwest Savings & Investment
Plan ("QSIP"). As a result of Qwest's failure to file its June 30 and September
30, 2002 quarterly reports on Form 10-Q, Qwest suspended the investment of
employee contributions in its common stock.
(C) EMPLOYEE STOCK PURCHASE PLAN
COMPANY. As of December 31, 2002, the Company does not sponsor an employee
stock purchase plan.
PREDECESSOR. Qwest has an Employee Stock Purchase Plan ("ESPP") in which
Qwest Dex employees were 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. As a result of Qwest's failure to file its June 30 and
September 30, 2002 quarterly reports on Form 10-Q, Qwest suspended purchases
and sales under its ESPP.
F-35
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
15. COMMITMENTS AND CONTINGENCIES
(A) LEASE COMMITMENTS
The Company has entered into operating leases for office facilities and
equipment with terms ranging up to 15 years. Minimum future lease payments for
the operating leases associated with the properties used by the Company as of
December 31, 2002, are as follows (in millions):
2003 .................... $ 8
2004 .................... 7
2005 .................... 7
2006 .................... 6
2007 .................... 5
Thereafter .............. 4
---
$37
===
The Company recorded rent expense under operating leases of $1 million for
the period from November 9 to December 31, 2002. The Predecessor recorded rent
expense under operating leases of $5 million, $11 million and $9 million for
the period from January 1 to November 8, 2002 and the years ended December 31,
2001 and 2000, respectively. For the periods prior to November 8, 2002, rent
expense was specifically identified to Dex East based upon the actual rent on
properties Qwest Dex leased in the states included within the Predecessor's
combined financial statements.
During 1999, Qwest 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. The Synthetic Lease facility
had certain financial covenants, including a debt-to-EBITDA ratio of 3.50-to-1.
In March 2002, Qwest Dex paid the full amount necessary to acquire its
corporate headquarters, which was subject to the 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 Qwest Dex was no longer liable for its residual
value guarantees that were applicable if Qwest Dex did not renew the lease or
purchase the building at the end of its lease term. The purchase price
apportioned to Dex East was $10 million, and was apportioned based upon
relative employee-related expense amounts recorded in cost of revenue and
general and administrative expenses for the year ended December 31, 2001. In
September 2002, Qwest Dex transferred its corporate headquarters building to
Qwest in accordance with the Dex East purchase agreement.
As part of the Dex East Purchase Agreement, the Company is 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 Company. The aggregate lease commitments disclosed above
include an estimate of the amounts associated with this provision of the
agreement.
(B) LITIGATION
COMPANY. The Company is involved, from time to time, in litigation arising
in the normal course of business. The outcome of this litigation is not
expected to have a material adverse impact on the Company.
F-36
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
PREDECESSOR. Qwest is involved in various legal matters that are more fully
disclosed in its recent publicly available filings. If Qwest or any of its
subsidiaries suffers a judgment in excess of $100 million, or if Qwest Dex
suffers a judgment in excess of $50 million (in excess of available insurance),
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 Qwest
Dex assets and stock.
(C) COLLECTIVE BARGAINING AGREEMENT
Forty-eight percent of the Company's employees are members of the
Communication Workers of America. The collective bargaining agreement covering
their employment is scheduled to expire in October 2003. In January 2003, the
Company extended its collective bargaining agreement with the International
Brotherhood of Electrical Workers until May 5, 2006.
(D) DEX WEST ACQUISITION
In the event that the Dex West acquisition is consummated, the Company will
incur additional loans in a total principal amount of up to $160 million under
the Tranche A term loan facility subject to certain conditions, the proceeds of
which are to be distributed to the Owner to fund a portion of the Dex West
acquistiion. If the acquisition of Dex West is not consummated, the Company will
be obligated to pay up to $24 million in fees to various financial institutions
that have made financing commitments relating to the acquisition of Dex West. As
of December 31, 2002 the Company has accrued $6 million of the Dex West
commitment fees as an obligation in its consolidated balance sheet.
Under the terms of the Dex East Purchase Agreement, the Company will be
obligated to pay certain separation costs in the event that the acquisition of
Dex West is not consummated. The obligation is limited to $40 million to which
approximately $2 million paid by the Company upon the closing of the acquisition
of Dex East has been credited. The remaining obligation, if any, will be paid
during the next year.
16. TRANSACTIONS WITH QWEST AND ITS AFFILIATES
(A) SHARED SERVICES
Qwest and its affiliates provide services to the Company and its
Predecessor 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. Prior to the November 8, 2002 acquisition, services provided by
Qwest and its affiliates are considered affiliate transactions for the
Predecessor, and services provided after November 8, 2002 are considered shared
services with a third party. Pursuant to the Dex East Purchase Agreement, Qwest
will continue to provide these services to the Company for a period of up to 18
months after the completion of the sale. These services include:
Billing and Collection--As discussed in Note 3(i) above, the Company has a
billing and collection agreement with QC under which revenue and related
receivables are billed and collected by QC on behalf of the Company 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 the
Company 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--Information technology services are provided to
the Company by Qwest for software development and other related projects, which
are billed to the Company, based upon prevailing third party market prices,
determined on a service-by-service basis.
F-37
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
General and Administrative--QSC provides legal, financial management and
certain human resources services to the Company. These services are billed to
the Company using FDC.
Telephony and Data Services--Telephony and data services are provided to
the Company by QC, primarily at tariffed or negotiated contract rates, based
upon a master services agreement.
Customer Lists--Pursuant to a listing services agreement between the
Company and QC, the Company acquires a listing of all business and residential
customers annually from QC. The amount charged to the Company is consistent
with the prevailing third party market prices charged by QC to nonaffiliated
purchasers of these same customer lists.
Other--The Company also purchases various products and services from
certain other Qwest affiliates at prevailing third party market prices or FDC.
Included in statements of operations are the following shared services (in
millions):
COMPANY PREDECESSOR
--------------- --------------------------
YEARS ENDED
PERIOD FROM PERIOD FROM DECEMBER 31,
NOVEMBER 9 TO JANUARY 1 TO ------------
DECEMBER 31, NOVEMBER 8,
2002 2002 2001 2000
--------------- ------------- ------ -----
Cost of revenue ............................. $2 $ 4 $11 $20
General and administrative expenses ......... 2 32 28 33
-- --- --- ---
Total ...................................... $4 $36 $39 $53
== === === ===
(B) SERVICES PROVIDED TO QWEST AND ITS AFFILIATES
Rates charged for advertising services provided by the Company and the
Predecessor to Qwest and its affiliates are determined based upon prevailing
third party market prices. Included in Predecessor's revenue is $6 million for
the period January 1 to November 8, 2002 and $6 million and $5 million for the
years ended December 31, 2001 and 2000, respectively.
As part of the Dex East Purchase Agreement, Qwest has agreed to purchase
from the Company, under a take-or-pay arrangement, $20 million annually in
advertising services from the Company over a 15-year period beginning with the
date of sale. For the period from November 9 through December 31, 2002, Qwest
purchased $2 million in advertising services under this arrangement. If the Dex
West acquisition is consummated, the amount that Qwest purchases from the
Company under the advertising agreement may be reduced based on the relative
size of the Company to Dex Media West or reduced in any other manner that Qwest
chooses in apportioning its advertising purchases among the Company and Dex
Media West. Therefore, if the Dex West acquisition is consummated, Qwest may
purchase more advertising from Dex Media West than the Company or may not
purchase any advertising from the Company at all.
(C) DUE FROM (TO) QWEST AND ITS AFFILIATES
Amounts due from (to) Qwest and its affiliates in the accompanying
consolidated financial statements include the following (in millions):
COMPANY PREDECESSOR
--------- ------------
DECEMBER 31,
------------------------
2002 2001
--------- ------------
Accounts receivable purchased by QC ............... $ 3 $ 24
Amounts due from Qwest and its affiliates ......... 3 6
Amounts due to Qwest and its affiliates ........... (24) (26)
Short-term borrowings from QCF .................... -- (1,391)
F-38
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
17. MERGER-RELATED EXPENSES AND IMPAIRMENT CHARGES
(A) MERGER-RELATED EXPENSES (PREDECESSOR)
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 Qwest Dex, principally
the involuntary separation of 359 employees. Qwest and Qwest 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 (in millions):
PERIOD FROM
JANUARY 1 TO
NOVEMBER 8, YEARS ENDED
2002 DECEMBER 31,
------------- --------------
2001 2000
------ -----
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, Qwest 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-employment benefit plan curtailment gain. As
discussed in Note 14(a), the gain resulted from the post-Merger termination of
retiree medical benefits for all former U S 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 (in millions):
JANUARY 1, DECEMBER
2000 2000 2000 31, 2000
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
=====
F-39
DEX MEDIA EAST LLC
AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF DEX MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIODS FROM NOVEMBER 9 TO DECEMBER 31, 2002, JANUARY 1 TO NOVEMBER 8,
2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
JANUARY 1, DECEMBER
2001 2001 2001 31, 2001
BALANCE PROVISION UTILIZATION BALANCE
----------- ----------- ------------- ----------
Contractual settlements ......................... $-- $ 1 $ 1 $--
Severance and employee-related expenses ......... 2 2 4 --
Rebranding ...................................... -- 1 1 --
--- --- --- ---
Total ........................................... $ 2 $ 4 $ 6 $--
=== === === ===
(B) IMPAIRMENT CHARGES
In December 2001, Qwest 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 related
to Dex East of $7 million were written off in December 2001. The abandoned
projects included a sales automation project as well as various system
enhancements.
18. RELATED PARTY TRANSACTIONS
In connection with the acquisition of Dex East, the Company entered into a
management consulting agreement with each of the Sponsors. Each agreement
allows the Company access to the Sponsor's 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 East of $15 million. In
addition, each of the Sponsors will receive an annual advisory fee of $1million
for advisory, consulting and other services. Such annual payment shall continue
until such time as the agreement is terminated. Pursuant to this management
consulting agreement, the Company paid $30 million in aggregate one-time fees
on November 8, 2002.
19. SUBSEQUENT EVENT
During February 2003, the Company entered into a five year agreement with
AMDOCS for the complete modernization of the Company's core production platform.
Welsh, Carson, Anderson and Stowe, one of the Sponsors, is a shareholder of
AMDOCS. This project will result in a comprehensive, integrated production
system, from order entry through the production and distribution of Qwest Dex
directories. The Company expects to incur approximately $48 million in charges
related to the agreement with AMDOCS over the next five years.
F-40
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 LLP.
23.3 Consent of KPMG LLP.
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.
II-4
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 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 March 20, 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
- -------------------------------- ------------------------------------------------------ ---------------
/s/ George Burnett Chief Executive Officer, President and Director March 20, 2003
- ------------------------- (principal executive officer)
George Burnett
/s/ Robert Neumeister, Jr. Chief Financial Officer and Executive Vice President March 20, 2003
- ------------------------- (principal financial and accounting officer)
Robert Neumeister, Jr
* Co-Chairman of the Board March 20, 2003
- -------------------------
James A. Attwood, Jr.
* Co-Chairman of the Board March 20, 2003
- -------------------------
Anthony J. de Nicola
* Director March 20, 2003
- -------------------------
John Almeida, Jr.
* Director March 20, 2003
- -------------------------
William Kennard
* Director March 20, 2003
- -------------------------
Bruce Rosenblum
* Director March 20, 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 March 20, 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
- -------------------------------- ------------------------------------------------------ ---------------
/s/ George Burnett Chief Executive Officer, President and Director March 20, 2003
- ------------------------- (principal executive officer)
George Burnett
/s/ Robert Neumeister, Jr. Chief Financial Officer and Executive Vice President March 20, 2003
- ------------------------- (principal financial and accounting officer)
Robert Neumeister, Jr.
* Co-Chairman of the Board March 20, 2003
- -------------------------
James A. Attwood, Jr.
* Co-Chairman of the Board March 20, 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 March 20, 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
- -------------------------------- ------------------------------------------------------ ---------------
/s/ George Burnett Chief Executive Officer, President and Director March 20, 2003
- ------------------------- (principal executive officer)
George Burnett
/s/ Robert Neumeister, Jr. Chief Financial Officer and Executive Vice President March 20, 2003
- ------------------------- (principal financial and accounting officer)
Robert Neumeister, Jr.
* Co-Chairman of the Board March 20, 2003
- -------------------------
James A. Attwood, Jr.
* Co-Chairman of the Board March 20, 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.
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.
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------
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 LLP.
23.3 Consent of KPMG LLP.
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.