| R H DONNELLEY CORP ITEM 1A RISK FACTORS Forward-Looking Information Certain statements contained in this Annual Report on Form 10-K regarding Donnelley’s future operating results, performance, business plans or prospects and any other statements not constituting historical fact are “forward-looking statements” subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995 |
| Where possible, words such as “believe,” “expect,” “anticipate,” “should,” “will,” “would,” “planned,” “estimates,” “potential,” “goal,” “outlook,” “may,” “predicts,” “could,” or the negative of those words and other comparable expressions, are used to identify such forward-looking statements |
| Actual events or results may differ materially |
| In evaluating those statements, you should specifically consider various factors, including the risks and uncertainties discussed below |
| Those factors may cause our actual results to differ materially from any of RHD’s forward-looking statements |
| All forward-looking statements attributable to us or a person on our behalf are expressly qualified in their entirety by this cautionary statement |
| All forward-looking statements reflect only our current beliefs and assumptions with respect to our future results, business plans, and prospects, and are based solely on information currently available to us |
| Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance |
| These forward-looking statements are made as of the date of this annual report and, except as required under the federal securities laws and the rules and regulations of the SEC, we assume no obligation to update or revise them or to provide reasons why actual results may differ |
| Risks, uncertainties and contingencies include: 1) Our ability to meet substantial debt service obligations We have a substantial amount of debt and significant debt service obligations due in large part to the financings related to the Dex Media Merger, AT&T Directory Acquisition and the SPA Acquisition |
| As of December 31, 2005, we had total outstanding debt of dlra3cmam078dtta8 million and had dlra170 million available under the revolving portion of our Senior Secured Credit Facility (as amended to date, the “Credit Facility”) |
| On January 31, 2006, subsequent to the Dex Media Merger, we had total outstanding debt of dlra10cmam889dtta1 million, including fair value adjustments required by purchase accounting, and had dlra175 million and dlra186dtta9 million available under the revolving portions of our Credit Facility and the Dex Media credit facilities, respectively |
| As a result of our significant amount of debt and debt service obligations, we face increased risks regarding, among other things, the following: • our ability to obtain additional financing in excess of the borrowing capacity under our dlra175 million revolving Credit Facility and dlra186dtta9 million under the revolving portion of Dex Media’s credit facilities on satisfactory terms to fund working capital requirements, capital expenditures, acquisitions, investments, debt service requirements and other general corporate requirements is limited; • we are more vulnerable to general economic downturns, competition and industry conditions, which could place us at a competitive disadvantage compared to our competitors that may be less leveraged; • we face increased exposure to rising interest rates as a portion of our debt (including debt assumed in the Dex Media Merger) is at variable interest rates; • we have reduced availability of cash flow to fund working capital requirements, capital expenditures, acquisitions or other strategic initiatives, investments and other general corporate requirements because a substantial portion of our cash flow will be needed to service our debt obligations; • we have limited flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; 16 _________________________________________________________________ [56]Table of Contents • the agreements governing our debt substantially limit our ability to access the cash flow and value of our subsidiaries and, therefore, to make payments on our notes and the notes of our subsidiaries; • our ability to borrow additional funds or refinance existing indebtedness may be limited; and • there could be a material adverse effect on our business and financial condition if we were unable to service our debt or obtain additional financing, as needed |
| Our ability to pay principal and interest on our debt obligations will depend upon our future operating performance and our ability to refinance debt |
| If we are unable to service our debt and fund our business, we may be forced to reduce or delay capital expenditures, defer or refuse to pursue certain strategic initiatives, seek additional debt financing or equity capital, restructure or refinance our debt or sell assets |
| We may not be able to obtain additional financing, refinance existing debt or sell assets on satisfactory terms or at all |
| Furthermore, the debt under our Credit Facility and the Dex Media credit facilities, bear interest at variable rates |
| If these rates were to increase significantly, our ability to borrow additional funds may be reduced and the risks related to our substantial debt would intensify |
| 2) Restrictive covenants under our debt agreements The indentures governing our and Dex Media’s notes and the agreements governing our Credit Facility and Dex Media’s credit facilities, include a number of significant restrictive covenants |
| These covenants could adversely affect RHD by limiting our ability to obtain funds from its subsidiaries, to plan for or react to market conditions or to otherwise meet its capital needs |
| These covenants, among other things, restrict our ability and the ability of our subsidiaries to: • incur additional debt; • pay dividends on RH Donnelley Inc |
| ”) equity interests, repurchase RHD Inc |
| ’s equity interests or make other payments to RHD, which could adversely affect the ability of RHD to satisfy its obligations under the notes; • make certain investments; • enter into certain types of transactions with affiliates; • expand into unrelated businesses; • use assets as security in other transactions; and • sell certain assets or merge with or into other companies |
| In addition, the Credit Facility includes other restrictive covenants and prohibits us from prepaying our and Dex Media’s notes while borrowings under the Credit Facility are outstanding |
| The Credit Facility also requires us to maintain certain financial ratios and meet other financial tests |
| The Dex Media credit facilities also include other and more restrictive covenants to maintain certain financial ratios and meet other financial tests |
| Our failure to comply with these covenants could result in an event of default, which, if not cured or waived, could require us to repay these borrowings before their scheduled due date |
| 3) Competition The US directory advertising industry is highly competitive |
| Approximately 80prca of total US directory advertising sales are attributable to Regional Bell Operating Company (“RBOCs”) and other incumbent directory publishers, collectively referred to as the incumbent publishers, that typically publish directories where they (or their licensors or affiliates) offer local phone service |
| In addition, more than 240 independent yellow pages directory publishers operating in the United States compete with those incumbent publishers and represent the remaining market share |
| 17 _________________________________________________________________ [57]Table of Contents In nearly all markets, we compete with one or more yellow pages directory publishers, which are predominantly independent publishers, such as the US business of Yell Group Ltd, Trans Western Publishing Company LLC (acquired by Yell Group Ltd |
| ), and White Directory Publishing Inc |
| In some markets, we also compete with other incumbent publishers in overlapping and adjacent markets |
| Some of these independent publishers and other incumbent publishers with which we compete are larger than we are and have greater financial resources than we have |
| We may not be able to compete effectively with these other publishers for advertising sales or these companies or others (including private equity firms) for acquisitions in the future |
| We also compete for advertising sales with other traditional media, including newspapers, magazines, radio, direct mail, telemarketing, billboards and television |
| Many of these other traditional media competitors are larger than we are and have greater financial resources than we have |
| We may not be able to compete effectively with these companies for advertising sales or acquisitions in the future |
| The Internet has emerged as an attractive medium for advertisers |
| Advances in technology have brought and likely will continue to bring new participants, new products and new channels to the industry, including increasing use of electronic delivery of traditional directory information and electronic search engines/services |
| The yellow pages directory advertising business is subject to changes arising from developments in technology, including information distribution methods and users’ preferences |
| The use of the Internet and wireless devices by consumers as a means to transact commerce may result in new technologies being developed and services being provided that could compete with our traditional products and services |
| National search companies such as Google^® and Yahoo! |
| ^® are focusing and placing large priorities on local commercial search initiatives |
| Our growth and future financial performance may depend on our ability to develop and market new products and services and create new distribution channels, while enhancing existing products, services and distribution channels, to incorporate the latest technological advances and accommodate changing user preferences, including the use of the Internet and wireless devices |
| We may not be able to respond successfully to any such developments |
| Directory publishers have increasingly bundled online advertising with their traditional print offerings in order to enhance total usage and advertiser value |
| We compete through our Internet sites, DexOnline |
| com, bestredyp |
| com and a small suite of additional sites serving various local markets in Illinois |
| Through our online city guides, ”look and feel” electronic directories and search websites, we also compete with the Internet yellow pages directories of independent and other incumbent directory publishers, and with other Internet sites, including those available through wireless applications, that provide classified directory information, such as Switchboard |
| com, and with search engines and portals, such as Yahoo! |
| ^®, Google^®, MSN^® and others, some of which have entered into affiliate agreements with other major directory publishers |
| We may not be able to compete effectively with these other companies, some of which may have greater resources than we do for advertising sales or acquisitions in the future |
| In addition, the market position of telephone utilities, including those with which we have relationships, may be adversely impacted by the Telecommunications Act of 1996, referred to as the Telecommunications Act, which effectively opened local telephone markets to increased competition |
| In addition, Federal Communication Commission rules regarding local number portability, advances in communications technology (such as wireless devices and voice over Internet protocol) and demographic factors (such as potential shifts in younger generations away from wire line telephone communications towards wireless or other communications technologies) may further erode the market position of telephone utilities, including Sprint, AT&T and Qwest |
| As a result, it is possible that Sprint, AT&T and/or Qwest will not remain the primary local telephone service provider in their local service areas |
| If Sprint, AT&T or Qwest were no longer the primary local telephone service provider in any particular local service area, our license to be the exclusive publisher in that market and to use the ILEC brand name on our directories in that market may not be as valuable as we presently anticipate, and we may not realize some of the existing benefits under our commercial arrangements with Sprint, AT&T or Qwest |
| Following the completion of the merger of Sprint and Nextel Communications, it was announced that the combined company intends to spin-off its local telephone operations under the name Embarq^tm |
| While our contractual arrangements with Sprint provide that any successor to the local telephone business must enter into 18 _________________________________________________________________ [58]Table of Contents substantially similar arrangements with us for the remaining term of our agreement with Sprint, it is possible that the spin-off could have a material adverse effect on our results of operations or financial condition for a variety of reasons, including if the spun-off business does not perform as well as it would have had it remained part of a larger company |
| We will also be required to transition to new branding of the separated local telephone businesses, which could have a material adverse effect on our business, results of operations or financial condition |
| While SBC’s acquisition of AT&T has not yet raised any issues regarding the value of our contractual relationship with AT&T, we cannot assure you that the form of or ramifications from that transaction will not have some material adverse effect on our financial condition or results of operations |
| Likewise, we have transitioned to the AT&T brand, which could have a material adverse effect on our business, results of operations or financial condition |
| 4) Usage of printed yellow pages directories and changes in technology |
| From 1997 to 2000, overall references to print yellow pages directories in the United States declined; however, overall references to print yellow pages directories have remained relatively stable from 2000 through 2005 |
| We believe the past decline was primarily a result of demographic shifts among consumers, particularly the increase of households in which English was not the primary language spoken |
| We also believe that the past decline was attributable to increased usage of Internet-based directory products, particularly in business-to-business and retail categories, as well as the proliferation of very large retail stores for which consumers and businesses may not reference the yellow pages |
| We believe that over the next several years, references to print yellow pages directories may gradually decline as users may increasingly turn to digital and interactive media delivery devices for local commercial search information |
| Any decline in usage could: • impair our ability to maintain or increase our advertising prices; • cause businesses that purchase advertising in our yellow pages directories to reduce or discontinue those purchases; and • discourage businesses that do not purchase advertising in our yellow pages directories from doing so |
| Although we believe that the decline in the usage of our printed directories will be offset in part by an increase in usage of our Internet-based directories, we cannot assure you that such increase in usage will result in additional revenue |
| Any of the factors that may contribute to a decline in usage of our print directories, or a combination of them, could impair our revenues and have a material adverse effect on our business |
| The directory advertising industry is subject to changes arising from developments in technology, including information distribution methods and users’ technological preferences |
| The use of the Internet and wireless devices by consumers as a means to transact commerce may result in new technologies being developed and services being provided that could compete with our products and services |
| As a result of these factors, our growth and future financial performance may depend on our ability to develop and market new products and services and create new distribution channels, while enhancing existing products, services and distribution channels, to incorporate the latest technological advances and accommodate changing user preferences, including the use of the Internet |
| We may not be able to provide services over the Internet successfully or compete successfully with other Internet-based directory services |
| In addition, if we fail to anticipate or respond adequately to changes in technology and user preferences or are unable to finance the capital expenditures necessary to respond to such changes, our results of operations or financial condition could be materially adversely affected |
| 5) Integration of the Dex Media business into our operations Combining the operations, technologies and personnel of Dex Media, coordinating and integrating its sales organizations and distribution channels, and implementing appropriate standards, internal controls, processes, procedures, policies and information systems will be time consuming and expensive |
| Disruption of, or loss of momentum in, the activities of one or more of our and Dex Media’s businesses or loss of key personnel caused by the integration process, diversion of management’s attention from our daily operations 19 _________________________________________________________________ [59]Table of Contents and any delays or difficulties encountered in connection with the integration of Dex Media could have an adverse effect on our business, results of operations or financial condition |
| In addition, during the integration process it is possible that some of our assets may be disposed of and a reduction in our workforce may occur, thereby resulting in restructuring charges that could adversely affect our financial results |
| Achieving the benefits we expect from the Dex Media Merger will depend in large part on successful integration of our operations with Dex Media’s operations |
| Failure to realize these benefits could have an adverse effect on our business, results of operations or financial condition |
| 6) Impact of bankruptcy proceedings against Qwest, Sprint or AT&T during the term of the respective commercial arrangements Qwest is currently highly leveraged and has a significant amount of debt service obligations over the near term and thereafter |
| In addition, Qwest has faced and may continue to face significant liquidity issues as well as issues relating to its compliance with certain covenants contained in the agreements governing its indebtedness |
| Based on Qwest’s public filings and announcements, Qwest has taken measures to improve its near-term liquidity and covenant compliance |
| However, Qwest still has a substantial amount of indebtedness outstanding and substantial debt service requirements |
| Consequently, it may be unable to meet its debt service obligations without obtaining additional financing or improving operating cash flow |
| Accordingly, we cannot assure you that Qwest will not ultimately seek protection under US bankruptcy laws |
| In any such proceeding, our agreements with Qwest, and Qwest’s ability to provide the services under those agreements, could be adversely impacted |
| For example: • Qwest, or a trustee acting on its behalf, could seek to reject our agreements with Qwest as “executory” contracts under US bankruptcy law, thus allowing Qwest to avoid its obligations under such contracts |
| Loss of substantial rights under these agreements could effectively require us to operate our business as an independent directory business, which could have a material adverse effect on us |
| • Qwest could seek to sell certain of its assets, including the assets relating to Qwest’s local telephone business, to third parties pursuant to the approval of the bankruptcy court |
| In such case, the purchaser of any such assets might be able to avoid, among other things, our publishing agreement and non-competition agreement with Qwest |
| • We may have difficulties obtaining the funds collected by Qwest on our behalf pursuant to the billing and collection service agreements at the time such proceeding is instituted, although pursuant to such agreements, Qwest prepares settlement statements ten times per month for each state in the Dex Media states summarizing the amounts due to Dex Media East and Dex Media West and purchases Dex Media East’s and Dex Media West’s accounts receivable billed by it within approximately nine business days following such settlement date |
| Further, if Qwest continued to bill our customers pursuant to the billing and collection services agreement following any such bankruptcy filing, customers of Qwest may be less likely to pay on time, or at all, bills received, including the amount owed to us |
| Contract rights under the directory services license agreement, trademark license agreement and non-competition agreement with Sprint and its affiliates and under the directory services license agreement and non-competition agreement with AT&T and its affiliates constitute a substantial portion of RHD’s commercial arrangements with Sprint and AT&T, as the case may be |
| Pursuant to these commercial arrangements, we are the exclusive directory publisher for Sprint in the markets where Sprint provided telephone service at the time of the relevant agreements and for AT&T in Illinois and Northwest Indiana |
| If a bankruptcy case were to be commenced by or against Sprint or AT&T or the relevant respective affiliates, as the case may be, it is possible that all or part of the applicable agreements could be considered an “executory” contract and could therefore be subject to rejection by Sprint or AT&T or the relevant respective affiliates, as the case may be, or by a trustee appointed in a bankruptcy case |
| If one or more of these agreements were rejected, the applicable agreement may not be specifically enforceable, in which case we would have only an unsecured claim for damages against Sprint or AT&T, as 20 _________________________________________________________________ [60]Table of Contents the case may be, for the breach of contract resulting from the rejection |
| If the applicable directory services license agreement were rejected, we would, among other things, no longer be entitled to be Sprint’s or AT&T’s, as the case may be, exclusive publisher of telephone directories in the affected markets |
| We could also lose our right to use Sprint’s and/or AT&T’s (or their respective successors) name and logo, as the case may be, and to enforce the provisions of the applicable agreements under which we have the right to license trademarks of successor local exchange carriers in the Sprint or AT&T markets, as the case may be |
| If the applicable non-competition agreement were rejected and specific enforcement were not available, Sprint or AT&T, as the case may be, would, among other things, no longer be precluded from publishing print telephone directories or selling certain advertising in the respective applicable restricted markets |
| The loss of any rights under any of these arrangements with Sprint and its affiliates or AT&T and its affiliates may have a material adverse effect on our financial condition or results of operations |
| 7) The inability to enforce any of our key agreements with Sprint, AT&T or Qwest In connection with our acquisitions, we entered into commercial arrangements with each of Sprint and AT&T, including non-competition agreements, and in connection with the Dex Media Merger, we assumed several agreements with Qwest, including a publishing agreement, a noncompetition agreement, billing and collection services agreements and a hosting agreement |
| The Sprint non-competition agreement prohibits Sprint in the markets where Sprint provided local telephone service at the time of the transaction from selling local directory advertising or producing, publishing and distributing print directories, with certain limited exceptions |
| The AT&T non-competition agreement prohibits AT&T from producing, publishing and distributing print directories in Illinois and Northwest Indiana, from selling local or national directory advertising in such directories and from selling local Internet yellow pages advertising for certain Internet yellow pages directories (or from licensing certain AT&T marks to a third party for that purpose), subject to limited exceptions |
| The Qwest noncompetition agreement prohibits Qwest from selling directory products consisting principally of listings and classified advertisements for subscribers in the geographic areas in the Dex Media states in which Qwest provides local telephone service that are directed primarily at customers in those geographic areas |
| However, under state and federal law, a covenant not to compete is only enforceable: • to the extent it is necessary to protect a legitimate business interest of the party seeking enforcement; • if it does not unreasonably restrain the party against whom enforcement is sought; and • if it is not contrary to the public interest |
| Enforceability of a non-competition covenant is determined by a court based on all of the facts and circumstances of the specific case at the time enforcement is sought |
| For this reason, it is not possible for us to predict whether, or to what extent, a court would enforce either Sprint, AT&T or Qwest’s covenants not to compete against us during the term of the non-competition agreement |
| If a court were to determine that the non-competition agreement is unenforceable, Sprint, AT&T or Qwest, as the case may be, could compete directly against us in the previously restricted markets |
| Our inability to enforce the non-competition agreement with Sprint, AT&T or Qwest could have a material adverse effect on our financial condition or results of operations |
| Our commercial arrangements with each of Sprint and AT&T have an initial term of 50 years, subject to specified automatic renewal and early termination provisions |
| These commercial arrangements with Sprint and AT&T may be terminated by them prior to their stated term under certain specified circumstances, some of which at times may be beyond our reasonable control and/or which may require extraordinary efforts or the incurrence of material excess costs on our part in order to avoid breach of the applicable agreement |
| It is possible that these arrangements will not remain in place for their full stated term or that we may be unable to avoid all potential breaches of or defaults under these commercial arrangements |
| Further, any remedy exercised by Sprint or AT&T, as the case may be, under any of these arrangements with Sprint or AT&T could have a material adverse effect on our financial condition or results of operations |
| Under the Qwest publishing agreement, we are the exclusive official publisher of directories for Qwest in the Dex Media states until November 7, 2052 |
| Under the billing and collection services agreements, as 21 _________________________________________________________________ [61]Table of Contents amended, Qwest has agreed until December 31, 2008 to continue to bill and collect, on behalf of Dex Media East and Dex Media West, amounts owed by Dex Media’s accounts, which are also Qwest local telephone customers, for our directory services |
| In 2005, Qwest billed approximately 28prca of Dex Media’s local revenue on Dex Media’s behalf as part of Qwest’s telephone bill and held these collections in joint accounts with Qwest’s own collections |
| Under the hosting agreement, Qwest has agreed until October 1, 2009 to provide dedicated hosting services, including backup and recovery of data hosted on our servers in Qwest’s data centers |
| The termination of any of these agreements or the failure by Qwest to satisfy its obligations under any of these agreements could have a material adverse effect on our business |
| 8) Future changes in directory publishing obligations in AT&T and Qwest markets Pursuant to the directory services license agreement with AT&T, we are required to discharge AT&T’s regulatory obligation to publish white pages directories covering each service territory in the Illinois and Indiana markets for which we acquired the AT&T Directory Business |
| If the staff of a state public utility commission in Illinois or Indiana were to impose additional or change legal requirements in any of these service territories with respect to this obligation, we would be obligated to comply with these requirements on behalf of AT&T, even if such compliance were to increase our publishing costs |
| Pursuant to the directory services agreement, AT&T will generally not be obligated to reimburse us for any increase in our costs of publishing directories that satisfy AT&T’s publishing obligations |
| Our results of operations relative to competing directory publishers could be adversely affected if we are not able to increase our revenues to cover any such unreimbursed compliance costs |
| Pursuant to our publishing agreement with Qwest, we are required to discharge Qwest’s regulatory obligation to publish white pages directories covering each service territory in the Dex states where it provides local telephone service as the incumbent service provider |
| If the staff of a state public utility commission in a Dex state were to impose additional or changed legal requirements in any of Qwest’s service territories with respect to this obligation, we would be obligated to comply with these requirements on behalf of Qwest, even if such compliance were to increase our publishing costs |
| Pursuant to the publishing agreement, Qwest will only be obligated to reimburse us for one half of any material net increase in our costs of publishing directories that satisfy Qwest’s publishing obligations (less the amount of any previous reimbursements) resulting from new governmental legal requirements, and this obligation will expire on November 7, 2009 |
| Our competitive position relative to competing directory publishers could be adversely affected if we are not able to recover from Qwest that portion of our increased costs that Qwest has agreed to reimburse and, moreover, we cannot assure you that we would be able to increase our revenue to cover any unreimbursed compliance costs |
| Our directory services license agreement with Sprint generally provides that Sprint will reimburse us for material increases in our costs relating to our complying with Sprint’s directory publishing obligations in our Sprint markets |
| 9) Reliance on, and extension of credit to, small and medium-sized businesses Approximately 85prca of our directory advertising revenue is derived from selling advertising to small and medium-sized enterprises (“SMEs”) |
| In the ordinary course of our yellow pages publishing business, we extend credit to these advertisers for advertising purchases |
| SMEs, however, tend to have fewer financial resources and higher failure rates than large businesses |
| The proliferation of very large retail stores may continue to harm small- and medium-sized businesses |
| We believe these limitations are significant contributing factors to having advertisers in any given year not renew their advertising in the following year |
| In addition, full or partial collection of delinquent accounts can take an extended period of time |
| Consequently, we could be adversely affected by our dependence on and our extension of credit to small- and medium-sized businesses |
| 10) Dependence on third-party providers of printing, distribution and delivery services We depend on third parties for the printing and distribution of our respective directories |
| We have a printing contract with RR Donnelley, which expires on December 31, 2012 |
| As a result of the Dex Media Merger, we assumed printing contracts with RR Donnelley and Quebecor, which expire in December 2011 and December 2014, respectively |
| Because of the large print volume and specialized binding of directories, 22 _________________________________________________________________ [62]Table of Contents only a limited number of companies are capable of servicing our printing needs |
| Accordingly, the inability or unwillingness of RR Donnelley or Quebecor, as the case may be, to provide printing services on acceptable terms or at all could have a material adverse effect on our business |
| No common ownership or other business affiliation exists between RR Donnelley and us |
| We have contracts with three companies for the distribution of our directories |
| Although these contracts are scheduled to expire in February 2007, any of these vendors may terminate its contract with us upon 120 days’ written notice |
| As a result of the Dex Media Merger, we assumed a contract with Product Development Corporation, or PDC, for the distribution of our directories |
| Although this contract expires on May 31, 2009, PDC may terminate the contract with us upon 120 days written notice |
| Accordingly, the inability or unwillingness of our current vendors to provide delivery services on acceptable terms or at all could have a material adverse effect on our business |
| 11) Fluctuations in the price and availability of paper Our principal raw material is paper |
| Prior to the Dex Media Merger, we purchased paper from three vendors under agreements that expire on December 31, 2006 |
| Pursuant to the contract under which we obtained the great majority of our paper, the price of the paper was set at inception and increases at various dates during the term of the agreement |
| Should the market price of the paper drop below the set prices under that contract, both parties are obligated to negotiate in good faith a lower paper price |
| Following the Dex Media Merger, all of the paper that the acquired directories currently use is supplied by two companies: Nippon Paper Industries USA, Co, Ltd |
| (formerly Daishowa America Co, Ltd |
| ), which we refer to as Nippon, and Catalyst Paper Corporation (formerly Norske Skog Canada (USA), Inc |
| Pursuant to our agreements with Nippon and Catalyst, they are obligated to provide up to 60prca and 40prca of our annual paper requirements, 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 |
| The contract with Nippon expires on December 31, 2009 and the contract with Catalyst expires on December 31, 2008 |
| Furthermore, we purchase paper used for the covers of our directories from Spruce Falls, Inc, which we refer to as Spruce Falls |
| Pursuant to an agreement between Spruce Falls and us, Spruce Falls is obligated to provide 100prca of our annual cover stock paper requirements |
| Prices under this agreement are negotiated each year |
| If, in a particular year, the parties are unable to agree on repricing, either party may terminate this agreement |
| This agreement expires on December 31, 2006 |
| Changes in the supply of, or demand for, paper could affect market prices or delivery times |
| Paper is one of our largest cost items, accounting for approximately 5prca to 7prca of our total operating and general and administrative expenses during the year ended December 31, 2005 |
| 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, results of operations or financial condition |
| 12) The sale of advertising to national accounts is coordinated by third parties that we do not control Approximately 15prca of our revenue is currently derived from the sale of advertising to national or large regional companies, such as rental car companies, automobile repair shops and pizza delivery businesses, that purchase advertising in several of our directories |
| Substantially all of the revenue derived from national accounts is serviced through Certified Marketing Representatives, which we refer to as CMRs, with whom we contract |
| CMRs are independent third parties that act as agents for national companies and design their advertisements, arrange for the placement of those advertisements in directories and provide billing services |
| As a result, our relationship with these national advertisers depend significantly on the performance of these third party CMRs that we do not control |
| Although we believe that our respective relationships with these CMRs have been mutually beneficial, if some or all of the CMRs with whom we have established relationships were unable or unwilling to do business with us on acceptable terms or at all, such inability or unwillingness could materially adversely affect our business |
| In addition, any decline in the performance of the CMRs with whom we contract could harm our ability to generate revenue from our national accounts and could materially 23 _________________________________________________________________ [63]Table of Contents adversely affect our business |
| During 2003, we began acting as a CMR directly placing certain national advertising |
| It is possible that such a development could adversely impact our relationships with CMRs or expose us to possible legal claims from CMRs |
| 13) General economic factors Our business results could be adversely affected by a prolonged national or regional economic recession |
| We derive substantially all of our net revenue from the sale of advertising in directories |
| Typically, our advertising revenues, as well as those of yellow pages publishers in general, do not fluctuate widely with economic cycles |
| In addition, any residual economic effects of, and uncertainties regarding the following, could adversely affect our business: • the general possibility, express threat or future occurrence of terrorist or other related disruptive events; or • the United States’ continuing or expanded involvement in war especially with respect to the major markets in which we operate that depend heavily upon travel, tourism or the military |
| 14) Work stoppages among our sales force Following the Dex Media Merger, approximately 1cmam600 of our Dex Media employees are represented by labor unions covered by two collective bargaining agreements |
| Dex Media’s collective bargaining agreement with the IBEW, which covers approximately 500 of Dex Media’s unionized workforce, expires in May 2006, and Dex Media’s collective bargaining agreement with the CWA, which covers approximately 1cmam100 of Dex Media’s unionized workforce, expires in October 2006 |
| If our unionized workers were to engage in a strike, work stoppage or other slowdown in the future, our business could experience a significant disruption of operations and an increase in operating costs, which could have a material adverse effect on our business |
| We cannot assure you that the collective bargaining agreements with IBEW and CWA will be renewed on satisfactory terms or at all and upon expiration of such agreements we cannot assure you that a strike or other work stoppage may not ensue |
| In addition, if a greater percentage of our work force becomes unionized, the business and financial results of our business could be materially adversely affected |
| 15) Turnover among our sales force or key management The success of our business is dependent on the leadership of its key personnel |
| The loss of a significant number of experienced sales representatives and sales managers could adversely affect our Company’s results of operations, financial condition and liquidity, as well as its ability to service our debt |
| Our success also depends on our ability to identify, hire, train and retain qualified sales personnel in each of the regions in which we operate |
| We currently expend significant resources and management time in identifying and training their sales representatives and sales managers |
| Our ability to attract and retain qualified sales personnel will depend, however, on numerous factors, including factors outside our control, such as conditions in the local employment markets in which we operate |
| Furthermore, our success depends on the continued services of key personnel, including our experienced senior management team as well as our regional sales management personnel |
| If we fail to retain the necessary key personnel of RHD, our results of operations, financial conditions and liquidity, as well as our ability to service our debt, including payment on the notes could be adversely affected |
| Following the Dex Media Merger, a number of the officers of Dex Media have left the company or notified us of their intention to leave |
| Further loss of key personnel could result from the integration process associated with the Dex Media Merger |
| Although we believe that we can replace key employees within a reasonable time, the loss of key personnel could have a material adverse effect on our business |
| 24 _________________________________________________________________ [64]Table of Contents 16) The loss of important intellectual property rights Some trademarks such as the “Sprint,” “AT&T” and “Donnelley” brand names and as a result of the Dex Media Merger, trademarks such as “Dex,” “DexOnline |
| com” and “Dex Knows” and other intellectual property rights are important to our business |
| We rely upon a combination of copyright and trademark laws as well as contractual arrangements, including licensing agreements, particularly with respect to Sprint, AT&T and Qwest markets, to establish and protect our intellectual property rights |
| We are required from time to time to bring lawsuits against third parties to protect our intellectual property rights |
| Similarly, from time to time, we are party to proceedings whereby third parties challenge our rights |
| We cannot be sure that any lawsuits or other actions brought by us will be successful or that we will not be found to infringe the intellectual property rights of third parties |
| Although we are not aware of any material infringements of any trademark rights that are significant to our business, any lawsuits, regardless of their outcome, could result in substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition or results of operations |
| In addition, we only have rights to use the Sprint, AT&T and Qwest name and logos in certain markets |
| Furthermore, in connection with the anticipated spin-off by Sprint of its local telephone operations, we will be required to transition to new branding of the separated local telephone businesses, which will use the name Embarq TM The loss of important intellectual property rights such as trademarks could have a material adverse effect upon our business, financial condition and results of operations and the business |
| (17) Information technology modernization effort We are in the process of upgrading and modernizing our legacy Amdocs process management infrastructure to Amdocs’ iGen platform, an integrated, Web-based, fully scalable set of business applications |
| While we expect this modernization effort to permit us to advance our digital local commercial search and integrated media strategy by more effectively and efficiently capturing and organizing our local market content, the modernization effort is complicated and is expected to be fully implemented for Sprint and AT&T during 2007 |
| At this stage, it is also unclear what impact (if any) the integration of the Dex Media business may have on our existing information technology modernization effort |
| During the modernization effort we may experience a disruption to our business |
| We cannot assure you that any disruption caused by the modernization effort will not materially adversely affect our business |
| In addition, we expect to incur capital expenditures in connection with this modernization effort, which are relatively higher than our historical levels of capital expenditures, and which represent funds that would otherwise have been available to repay debt or for other strategic or general corporate purposes |