10-K 1 dexo2012123110-k.htm DECEMBER 31, 2012 FORM 10-K DEXO 2012.12.31 10-K

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended December 31, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from__________to_________
Commission file number 001-07155
DEX ONE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
13-2740040
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1001 Winstead Drive, Cary, N.C.
 
27513
(Address of principal executive offices)
 
(Zip Code)
 
 
 
Registrant’s telephone number, including area code (919) 297-1600
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of class
 
Name of exchange on which registered
Common Stock, par value $.001 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.
Yes ¨ No þ
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.
 
Large accelerated filer o 
Accelerated filer o
Non-accelerated filer þ
Smaller reporting company o
 
 
 
   (Do not check if a smaller reporting company)
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes ¨ No þ
On June 29, 2012, the last day of the most recently completed second quarter, the aggregate market value of Dex One Corporation’s common stock (based upon the closing price per share of $0.93 of such stock traded on The New York Stock Exchange on such date) held by non-affiliates of the Registrant was approximately $46,034,327. At June 29, 2012, there were 50,809,175 outstanding shares of the Registrant’s common stock. On March 1, 2013, there were 50,895,166 outstanding shares of the Registrant's common stock.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes þ No ¨

 




TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EX-21.1
 
EX-23.1
 
EX-31.1
 
EX-31.2
 
EX-32.1
 
EX-101.INS - XBRL INSTANCE DOCUMENT
 
EX-101.SCH - XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
 
EX-101.CAL - XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
 
EX-101.DEF - XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
 
EX-101.LAB - XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
 
EX-101.PRE - XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT
 
       

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PART I

ITEM 1.
BUSINESS.

General
Except where otherwise indicated or as the context may otherwise indicate, the terms “Dex One,” “Successor Company,” “Company,” “Parent Company,” “we,” “us” and “our” refer to Dex One Corporation and its direct and indirect wholly-owned subsidiaries subsequent to the Effective Date, which is defined below. As of December 31, 2012, R.H. Donnelley Corporation, R.H. Donnelley Inc. (“RHDI” or “RHD Inc.”), Dex Media, Inc., Dex One Digital, Inc. ("Dex One Digital"), formerly known as Business.com, Inc. (“Business.com”), Dex One Service, Inc. (“Dex One Service”) and Newdex, Inc. ("Newdex") were our only direct wholly-owned subsidiaries. The financial information set forth in this Annual Report, unless otherwise indicated or as the context may otherwise indicate, reflects the consolidated results of operations and financial position of Dex One as of and for the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010. Our executive offices are located at 1001 Winstead Drive, Cary, North Carolina 27513 and our telephone number is (919) 297-1600. Our corporate Internet website address is www.DexOne.com. For more information on the products and services that Dex One offers, please visit our website at www.DexKnows.com®. We make available free of charge on our website our annual, quarterly and current reports, including amendments to such reports, as soon as practicable after we electronically file such material with, or furnish such material to, the United States Securities and Exchange Commission (“SEC”). These reports may be obtained at the SEC's public reference room at 100 F Street, N.E. Washington, DC 20549. Our filings can also be obtained from the SEC website at www.sec.gov. However, the information found on our website and the SEC website is not part of this Annual Report.

Dex One Corporation became the successor registrant to R.H. Donnelley Corporation upon emergence from Chapter 11 proceedings under Title 11 of the United States Code (“Chapter 11” or the "Bankruptcy Code") on January 29, 2010 (the “Effective Date”) and pursuant to Rule 12g-3 under the Securities Exchange Act of 1934. See our Annual Report on Form 10-K for the year ended December 31, 2010 for detailed information on matters associated with the Chapter 11 proceedings. Except where otherwise indicated or as the context may otherwise indicate, the terms “Predecessor Company,” “RHD,” “we,” “us” and “our” refer to R.H. Donnelley Corporation and its direct and indirect wholly-owned subsidiaries prior to the Effective Date. The financial information set forth in this Annual Report, unless otherwise indicated or as the context may otherwise indicate, reflects the consolidated results of operations and financial position of RHD as of and for the one month ended January 31, 2010.

On the Effective Date and in connection with our emergence from Chapter 11, RHD was renamed Dex One Corporation. The Company was formed on February 6, 1973 as a Delaware corporation. In November 1996, the Company, then known as The Dun & Bradstreet Corporation, separated through a spin-off into three separate public companies: The Dun and Bradstreet Corporation, ACNielsen Corporation, and Cognizant Corporation. In June 1998, The Dun & Bradstreet Corporation separated through a spin-off into two separate public companies: R.H. Donnelley Corporation (formerly The Dun & Bradstreet Corporation) and a new company that changed its name to The Dun & Bradstreet Corporation.

Corporate Overview
We are a marketing solutions company that helps local businesses and consumers connect. We operate in an attractive industry serving the significant market need to help local businesses be found and chosen by consumers. Our marketing consultants provide valuable service and advice to local businesses to help them thrive in an increasingly complex and fragmented marketing landscape. We offer businesses a broad portfolio of marketing solutions, from traditional print yellow pages to digital services that leverage consumers' increasing utilization of local, social and mobile tools. We also provide consumers with relevant and trusted information to satisfy their local shopping needs when and how they want. Our approach is highly differentiated from our competitors.
To transform Dex One and capitalize on market opportunities, we are focused on three critical factors:
1)
PEOPLE - Recruit, train and equip marketing consultants to enhance our access to and influence with local businesses.
2)
PARTNERSHIPS - Expand our digital offerings by establishing relationships with leading digital companies.
3)
PACKAGING - Simplify the buying and selling process by utilizing flexible bundles to implement high impact marketing campaigns that generate a high volume of quality leads for customers and offer guaranteed results.


3


Agreement and Plan of Merger

On August 20, 2012, Dex One entered into an Agreement and Plan of Merger (the “Merger Agreement”) with SuperMedia Inc. ("SuperMedia"), Newdex, and Spruce Acquisition Sub, Inc., a direct wholly owned subsidiary of Newdex (“Merger Sub”) (collectively, the "Merger Entities"), providing for the business combination of Dex One and SuperMedia. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, (i) Dex One will merge with and into Newdex, with Newdex as the surviving entity (the “Dex Merger”) and (ii) immediately following consummation of the Dex Merger, Merger Sub will merge with and into SuperMedia, with SuperMedia as the surviving entity and becoming a direct wholly owned subsidiary of Newdex (the “SuperMedia Merger” and together with the Dex Merger, the “Mergers”). As a result of the Mergers, Newdex, as successor to Dex One, will be renamed Dex Media, Inc. (“Dex Media”) and become a newly listed company.

On December 5, 2012, the Merger Entities entered into an Amended and Restated Agreement and Plan of Merger (the “Amended and Restated Merger Agreement”), which upholds the basic economic terms and strategic merits of the Mergers included in the original Merger Agreement, and, among other things, (i) extends the date on which a party may unilaterally terminate the Amended and Restated Merger Agreement from December 31, 2012 to June 30, 2013, (ii) reduces the number of directors of Dex Media after the effectiveness of the Mergers from eleven to ten, and (iii) provides that if either Dex One or SuperMedia is unable to obtain the requisite consents to the Mergers from its stockholders and to the contemplated amendments to its respective financing agreements from its senior secured lenders, the Mergers may be effected through voluntary pre-packaged plans under Chapter 11 of the Bankruptcy Code. Because we were unable to obtain the requisite consents to the contemplated amendments to our financing agreements from our senior secured lenders to effectuate the Mergers, the Company voluntarily filed for a pre-packaged bankruptcy under Chapter 11 on March 18, 2013. See "Filing of Voluntary Petitions in Chapter 11" below.
The purpose of this proposed transaction is to increase market share and improve our competitive position while benefiting from improved operating scale, significant service and cost synergies and enhanced cash flow, preserving access to tax attributes to offset future taxable income, and to better position the combined entity to retire debt with amended and extended credit facilities. Completion of the Mergers is subject to certain conditions stated in the Amended and Restated Merger Agreement.

See Item 8, "Financial Statements and Supplementary Data" - Note 1, "Business and Basis of Presentation - Agreement and Plan of Merger" for summarized information on the Amended and Restated Merger Agreement. In addition, please refer to the Amended and Restated Merger Agreement filed with a Current Report on Form 8-K with the SEC on December 6, 2012 for detailed information on the terms and conditions of the Amended and Restated Merger Agreement.

Filing of Voluntary Petitions in Chapter 11
On March 18, 2013 (the "Petition Date"), Dex One and certain of its subsidiaries (collectively, the “Debtors”) filed voluntary petitions in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) seeking Chapter 11 relief under the provisions of the Bankruptcy Code. The Chapter 11 cases are being jointly administered under the caption In re Dex One Corporation, et al. (the “Chapter 11 Cases”). The Debtors will continue to operate their businesses and manage their properties as debtors in possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. In connection with the Chapter 11 Cases, the Company has made information available on its website, www.DexOne.com, including its proposed plan of reorganization and disclosure statement describing the terms of the plan of reorganization and other information concerning the Company.

The filing of the Chapter 11 Cases triggered an event of default that rendered the remaining financial obligations under the Company's $300.0 million Initial Aggregate Principal Amount of 12%/14% Senior Subordinated Notes due 2017 (“Dex One Senior Subordinated Notes”) and senior secured credit facilities automatically and immediately due and payable. The Debtors believe that any efforts to enforce the financial obligations under the Dex One Senior Subordinated Notes and senior secured credit facilities are stayed as a result of the filing of the Chapter 11 Cases in the Bankruptcy Court.

We anticipate confirmation of our plan of reorganization by the Bankruptcy Court, emergence from the Chapter 11 proceedings and consummation of the Mergers to occur in the first half of 2013, although there can be no assurance that these objectives will occur within the expected timeframe or at all.


4


Segment Reporting
For the periods covered by this annual report, management reviews and analyzes its business of providing marketing solutions as one operating segment.

Financial and Other Business Information
See Item 8, “Financial Statements and Supplementary Data” for financial information, including revenues and earnings from operations, for our operating segment.

Business Overview

Our business model of helping local businesses and consumers connect is fulfilled by providing proprietary and affiliate provided marketing solutions that combine multiple media platforms. Our marketing solutions drive large volumes of consumer leads to our customers and assist our customers with managing their messaging to those consumers. The local search industry is complex, dynamic and increasingly fragmented. Today, consumers have many ways to search for and connect with local businesses, including search engines, Internet yellow pages, social networks, mobile applications, industry-specific Internet sites, city sites, daily deal sites, and map sites along with more traditional media such as yellow pages, newspapers, direct mail and other sources. This rapid expansion of the local search industry has created new marketing opportunities, but many proprietors do not have the time, expertise, or resources to understand how to most effectively manage their advertising across this vast array of options. We believe our marketing solutions are well suited to help simplify and optimize this process for local businesses. Our marketing consultants offer personalized marketing consulting services and exposure across leading media platforms used by consumers searching for local businesses. These platforms include online and mobile local search solutions, major search engines, and print directories.

Our ability to effectively compete in our industry is supported by a number of additional advantages:

Domain expertise in the realm of local businesses;
An extensive database of local business information within our markets and the ability to collect and continuously update its content;
Direct and long-standing relationships with many local businesses maintained by our marketing consultants; and
A broad, multi-platform product portfolio, expanding base of digital capabilities and partnership network.

Our marketing solutions help consumers find our customers over 900 million times each year. Unlike other forms of advertising, where the message is inserted into some other form of content, consumers are specifically seeking our customers' advertising message. These references often occur deep in the consumer buying cycle, when consumers are ready to buy. This helps generate returns on investment for our customers that tend to be higher than those for other forms of local media, such as magazines, newspapers, radio and television.

Partnerships

The Company is transitioning to a compete-and-collaborate business model, as we anticipate that partner provided solutions will grow at a faster rate than our proprietary solutions and will allow our customers to enter the digital market much faster than we could provide without our partners. This compete-and-collaborate business model requires us to collaborate with certain of our competitors as well as other partners. These partnerships also enable us to seek out best-of-breed marketing solutions, allowing more customizable solutions for the variety of business customers we serve. They also help provide consumers with a more well-rounded information source to help simplify the purchase process and make smarter decisions. Through these partnerships, we are able to offer high quality, established, value-added products and services without the risks, capital investment, and ongoing maintenance associated with in-house development. Partnering also helps us to be more flexible to adapt to changes in customer needs, consumer preference, and emerging technology.

One such partnership we have is with Google, whereby Dex One has the distinction of being a Google AdWords Premier SMB Partner. This is Google's highest level of partnership offered only to a select group, which provides us with distinct market advantages. As a Google AdWords Premier SMB Partner, we can offer our customers Google AdWords in a robust form, co-branded with Google, as part of our network of DexNet sites. The partnership requires Dex One to meet Google's most stringent level of qualification for partnership, and in turn, provides Dex One with a full range of Google technology, support, and training, an expanded product set, financial incentives, and direct collaboration with Google search engine marketing experts on current and forthcoming products and processes.


5


We have expanded the breadth of our partner provided solutions to areas such as web and mobile site creation, web hosting, search engine optimization, network display ads, custom video and reputation management. We have alliances and partnerships for consumer content on our Internet yellow pages site, DexKnows.com, and elsewhere providing business listings, business reviews and other consumer-oriented information to enhance the user experience with our services.

We intend to continue to partner with other companies in the local search space for the benefit of sharing costs, generating incremental revenue and generating efficiencies and economies of scale, as we increase the number of ways we can connect local businesses and consumers with each other.

Marketing Solutions

We offer the following marketing solutions, which are complemented by our partnerships with some of the best known search engine companies, to promote businesses on the Internet via our proprietary search engine marketing product, DexNet:

Assessment of marketing programs and advertisements;
Message and image creation;
Recommendations for advertising placement;
Industry-specific research and information;
Market-specific research and information;
In-depth understanding of how consumers search for businesses and what influences them to buy from one business versus another;
Mobile and online website development;
Online reputation management;
Online video development and promotion;
Dex published yellow pages and white pages, which we co-brand with CenturyLink Inc. (“CenturyLink”) and YP, formerly AT&T Inc. ("YP" or "AT&T");
DexKnows.com, our Internet yellow pages site;
Dex Mobile, our mobile application, CitySearch, our iPad application and m.dexknows.com, our mobile browser;
Search engine marketing;
Search engine optimization;
Keyword implementation;
Social media marketing; and
Tracking and reporting.

While the number of our revenue streams is expanding and diversifying, we currently generate revenue primarily from two sources; print products and services and digital products and services, which includes DexKnows.com and DexNet. These product lines are increasingly sold as part of integrated marketing solutions packages, as well as on a standalone basis.

Multi-Platform Bundles

Our marketing solutions fulfill local business needs by providing targeted solution bundles that combine print and digital media platforms to drive large volumes of leads to our customers. We position our marketing solution bundles as easy-to-buy and easy-to-sell, which provides our customers flexibility and simplicity in making advertising decisions. This concept has begun to show positive trends with respect to customer spending habits and is improving customer retention. We also provide high levels of support and service through our marketing consultants who strive to understand customers' businesses and then present customized solutions from our leading offerings to create high impact, multi-platform marketing campaigns.

Our Dex Guaranteed Actions ("DGA") program guarantees customers a specified number of consumer actions, such as profile or website visits, emails, and/or telephone calls, based on a multi-platform package of advertising products designed for their specific type of business. The DGA program deepens our partnership with our customers in providing a simple and effective multi-platform campaign while ensuring advertising investments meet or exceed anticipated results. This program creates a foundation for our future, as we are able to add traffic partners, including leaders in key verticals, and simplify the marketing process for small and medium sized businesses.


6


Proprietary Print Products and Services

As reported by Burke Research ("Burke"), an independent, third-party firm commissioned by the Local Search Association, more than 60% of U.S. adults reference print yellow pages each year. According to Burke, Dex One print directories have generated over 900 million consumer references during 2012, generating large volumes of leads for our customers, and comprising a large portion of the value offered in our multi-platform bundles, including DGA packages.

We offer three primary types of printed yellow pages directories: core directories, community directories and Plus companion directories. Core directories generally cover large population or regional areas, whereas community directories typically focus on a sub-section of the areas addressed by corresponding core directories. The Plus companion directory is a small format directory used in addition to the core and community directories. It is complementary to the core directory with replicated advertising from the core directory. Our print directory advertising products can be broken down into three basic categories: yellow pages, white pages and specialty/awareness products.

Our directories are designed to meet the advertising needs of local and national businesses and the informational needs of local consumers. The diversity of advertising options available enables us to create customized marketing programs that are tailored to specific customer needs and budgets. The yellow pages and white pages print directories are also efficient sources of information for consumers, featuring a comprehensive list of businesses in the local market that are conveniently organized under thousands of directory headings.

Whenever practicable, we combine the white pages section and the yellow pages section of our print directory products into a single directory. In large markets where it is impractical to combine the two sections into one volume, separate stand-alone white and yellow pages print directories are normally published at about the same time. Dex One partners with cities and municipalities to meet our shared goals about the way yellow pages are distributed.

Our print directories are created using environmentally responsible practices and are fully recyclable. As part of our continuous environmental commitment, Dex One proactively communicates the ability for consumers to reduce the number of directories they receive or opt out completely. In every market we serve, consumers have the ability to choose which print directories they wish to receive or may elect to receive none at all through our directory customization program at www.dexknows.com/green or our partnership with the industry's consumer choice program accessed via the website www.yellowpagesoptout.com.

The growth of the Internet has caused print advertising sales to steadily decline over the past few years. However, our print products continue to provide value to many consumers based on the Burke research noted above. We continue to monetize this value and maximize the cash flow generated from our print products and services through evolution of our print directories, which includes tailoring their distribution to match consumer needs and providing their content on our digital platforms such as DexKnows.com. We also publish our print directories in a digital format at www.DexPages.comTM. This site provides those who prefer the traditional layout of print yellow pages a way to access any of our directories from the convenience of their computer or mobile phone, with the added benefit of keyword search, and live Internet links to business profiles and websites.

Proprietary Digital Products and Services

We have the following three core products and services that provide us significant advantages and differentiation in the market beyond our digital partnerships: 

DexKnows.com

Our owned and operated online website, DexKnows.com, and mobile application, Dex Mobile, help us to reduce our average cost per lead while increasing the quality of the traffic we deliver to our customers. Customer content is placed on our DexKnows.com platform through digital business listings, DexKnows Enhanced Packs, DexKnows Starter Packs, searchable business profiles and through Internet products including DexNet and Prime Display. We also leverage our customers' print content by porting it to our proprietary digital platforms. DexKnows.com products are often offered as part of multi-platform bundles or in DGA packages, which allows customers an easy way to advertise in a variety of different media, while aligning available advertising budgets to required leads.

We purchase information from other national databases to enhance in-region listings and supply out-of-region listings, although these out-of-region business profiles are not as comprehensive as our in-region information. DexKnows.com includes approximately 13.2 million business listings and more than 200 million residential listings from across the United States.


7


Consumers can access information on DexKnows.com from their computer, tablet or mobile phone. As a dedicated local search platform, DexKnows.com provides a more targeted and efficient tool for finding relevant local business information than many other online search properties. DexKnows.com offers many consumer-friendly features that provide users with the ability to refine their searches using a navigable, flexible digital category structure that includes such things as specific product and brand names, business name, hours of operation, payment options, locations, and very precise geographic targeting down to a neighborhood level. Extensive user reviews from Dex One consumers and partnered sites are available to help consumers evaluate potential product and service providers. Digital coupons, restaurant menus and expanded profile information are also available for a significant number of relevant businesses, along with a growing number of online videos and business images, which help to provide a more personalized view of local businesses and their offerings.

We have content agreements and distribution agreements with various search engines, portals and local community destination websites. These agreements provide us with access to important channels to enhance our distribution network on behalf of our customers. This enhanced distribution typically leads to increased usage among consumers and greater value and return on investment for our customers, which has also led to increasing customer retention rates on DexKnows.com. One such distribution agreement is with Yahoo!. In the Qwest region (now owned and operated by CenturyLink), customers benefit from inclusion within the following Yahoo! Local and Yahoo! Yellow Pages advertising products:
Yahoo! Local Featured Listings—sponsored listings with guaranteed placement on the first or second results pages for broader exposure in a specific geography or category.
Yahoo! Local Enhanced Listings—sponsored listings that offer the ability to add a detailed description of their business, photos, a tagline and coupons to create greater online visibility for businesses and enhance their appearance within organic results.

We have a YP.com (“YPC”) Reseller Agreement with YP, which allows us to be the exclusive provider of YPC Internet yellow pages advertising in our Illinois and Northwest Indiana markets:  
Basic Listings (Bronze and Silver) – We have the rights to distribute an unlimited number of customers to the YPC Internet yellow pages website.
Premium Listings – We have the rights to sell enhanced YPC advertising products, for example, guaranteed placement and/or inclusion on the YP.com Internet yellow pages website, to our Illinois and Northwest Indiana customers.

DexNet

Our digital affiliate marketing solutions are powered by our search engine marketing product, DexNet, which is an efficient, scalable platform that allows us to utilize advanced algorithms to help us manage our customers' digital marketing campaigns.  DexNet improves our ability to deliver the right number of leads to each customer cost effectively and on a real time basis. The ability to make the appropriate digital marketing campaign decisions based on leads versus clicks requires significant experience and expertise on an individualized market basis.  Therefore, DexNet provides an advantage relative to many competitors.

DexNet drives consumer leads to our customers through placement of their business listings in prime locations on DexKnows.com and other major search engines. DexNet provides a comprehensive search engine marketing approach to serving the Internet marketing needs of local businesses through five major product and service elements:

Customer Profile - constructs a simple but content rich presence on the web for the customer and is designed to maximize the opportunity to appear on major search engines.
Distribution - provides the customer's information and business information to multiple local search platforms including YP.com, Google Maps, CitySearch.com, SuperPages.com and Local.com.
Paid Search - develops, deploys and manages effective search marketing campaigns across major search platforms, such as Google, Bing and Yahoo!, on behalf of the customer.
Monitoring and Optimization - continuously monitors and optimizes campaigns to adjust spend and distribution to get the most calls per click using the DexNet learning engine.
Reporting - provides transparent, real-time results, such as phone calls, e-mails, listing views, website visits, driving directions, and the total number of times the profile is sent to mobile. Reporting is accessible 24 hours a day, 7 days a week and combines results received from DexKnows.com and leading local search sites.


8


The DexNet system not only manages the distribution of customer content across the network of DexNet sites, it is also a learning engine. The system analyzes existing DexNet campaigns to determine which sites and keywords perform the best for different categories and geographies and applies that learning to optimize performance for existing and future campaigns.

Account Management System

Dex One's Account Management System ("AMS") is a single integrated portal for customers. The easy to navigate system, together with powerful reporting and tracking capabilities, provides significant benefits to our customers.  AMS provides the ability for customers to log in and make real-time changes to their online marketing as well as view real-time performance data. Customers can update their DexKnows.com business profile, online videos and coupon offers and get detailed lead information, including tracking profile views, calls, website clicks and emails for the most recent 12 months. They can also track their online reputation, monitor ratings and reviews and social mentions across a variety of prominent Internet sites and social networks. Additionally, AMS enables our marketing consultants to construct proposals on their mobile devices wherever they may be, using drill down menus to guide content collection efforts during their discussions with local businesses.

Business Cycle Overview
Our sales, marketing, operations and production teams work together to foster the efficiency and effectiveness of our end-to-end process from advertising purchase to product distribution or service fulfillment and billing. We work with vendor partners to print and distribute our proprietary print and digital products, including DexKnows.com and Dex published yellow pages print directories, while facilitating the fulfillment of DexNet purchases on the sites of our online distribution partners.

Our print directories usually have a 12-month directory cycle period. A publication process generally takes 15 to 20 months from the beginning of the sales cycle to the end of a directory’s life and the sales stage closes approximately 70 days prior to publication. Consistent with our print directories, our digital products and services historically have a 12-month billing cycle. DexKnows.com and DexNet products can be purchased at any time of the year, whether the print directory for a given area is in campaign or not, which allows customers to receive consumer leads right away. Our marketing consultants work directly with customers to align print and digital product cycles where it makes sense to simplify the process of contract signature and renewal. Traditional DexKnows.com and DexNet products are typically live online within 24 hours of contract finalization. Some digital products, particularly those that flow through a partner and require additional content collection and/or development take longer. Other products and services such as reputation management are typically available in 72 hours, online video (including production) usually takes 17-20 days, and websites typically take 30-45 days to go live. Most online advertising can be updated at any time through our customer portal, AMS, allowing seasonal or other promotions and content to be regularly refreshed.

We now offer customers the ability to purchase digital products and services for time frames shorter than our standard one year contract. These variable term contracts give Dex One the ability to offer our digital products and services on digital terms, allowing customers to trial products with less risk, and helping to accommodate seasonal businesses who only want to advertise during certain times of the year. Variable term contracts have helped to attract new customers to try our digital offerings.

Sales

Marketing Consultants - Recruiting, Training and Tools

Our marketing consultant team is comprised of approximately 1,400 employees. Management believes that our marketing consultants facilitate the establishment of personal, long-term relationships with local print and digital customers that are necessary to maintain a higher rate of customer renewal. We look continuously for digitally savvy, consultative, and solution-oriented individuals who have a proven ability to convert new customers. We are building a higher degree of digital and technical aptitude to better support our customers in understanding the new marketing opportunities available to them across all local search platforms. We assign our customers among marketing consultants based on a careful assessment of a customer's expected advertising expenditures, overall growth potential and by location. This practice allows us to deploy our marketing consultants in an effective manner.

9


We believe that formal training is important to maintaining a highly productive sales force. Our marketing consultants are formally trained on relationship selling skills. This process is a highly customer-centric consultative selling model that emphasizes diagnosis of customer needs before developing customized solutions. We believe this process increases the effectiveness for retaining and growing existing customers along with the ability to acquire new customers and successfully sell multiple products. New marketing consultants receive extensive initial training including relationship selling skills, product portfolio, customer care and administration, standards and ethics. All sales managers have been trained on new active management processes to provide daily management and coaching to the local marketing consultants. Our sales process, combined with the daily management activities, provides customers a level of high-quality service centered on their individual needs.

Our Dex One Sales Academy (the "Academy") provides initial training, ongoing knowledge and skills enhancement, and additional support to marketing consultants throughout the business.  The Academy has changed the way training is taught by delivering training through instructor led facilitation as well as online e-learning. The curriculum and on-going progress of our marketing consultants is managed within the Learning Connection, our in-house learning management system. Transcripts and progress of each sales employee is tracked within the system to ensure understanding of the material. The e-learning modules support product, systems and skill-based training needs and is available through desktop and mobile devices. In 2012, virtual classroom training was introduced to extend the reach of training in a cost effective manner. Also in 2012, our Digital Mastery Training Program was introduced, which focuses on advanced product knowledge and selling strategies and provides additional development for our marketing consultants.

The Academy also develops curriculum to support new sales roles and new programs.  The Digital Media Learning Program includes Google sales certification for each marketing consultant in conjunction with our Google AdWords Premier SMB Partnership. All of our marketing consultants and managers are “Google Certified.”  Since the launch of this program, we have experienced improvement in our overall digital sales growth. 

Our marketing consultants have a variety of tools available to help them with their role.  For telephone-based representatives, WebEx has been introduced allowing our marketing consultants to conduct virtual sales calls with their customers by having the customer log into a WebEx meeting and simultaneously view the screens of our marketing consultants, making the entire sales process much more interactive and engaging.  Our premise marketing consultants use iPads, which provide a more appealing and flexible sales presentation, while also improving on their overall productivity.

Local Sales
Approximately 85% of our advertising revenue is derived from the sale of our marketing solutions to local businesses. Our local sales channel is divided into three sales sub-channels: premise sales, telephone sales and locally centralized sales.

Premise local marketing consultants - These marketing consultants conduct sales meetings face to face at customers' business locations and typically handle higher dollar and more complex accounts.
Telephone local marketing consultants - These marketing consultants handle lower dollar value accounts and conduct sales over the phone. We have recently made a strategic change to centralize the telephone marketing consultants from our local markets to three inside sales center locations in Overland Park, Kansas, Denver, Colorado and Omaha, Nebraska. This allows us to leverage scale of resources for greater efficiency and focus equally across the geography we serve as well as out of market opportunities. We are able to utilize state of the art telephone technology to increase reach, contact rates and efficiencies.
Locally centralized sales - This sales mechanism is used to contact non-advertisers or very low dollar value customers that in many cases have renewed their account for the same product for several years. It also includes multiple types of automated sales efforts at low cost, such as contacting low dollar value accounts through a letter renewal effort. 

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National Sales

In addition to our local sales marketing consultants, we utilize a separate sales channel to serve our national customers. In 2012, national customers accounted for about 15% of our revenue. National customers are typically national or large regional chains such as rental car companies, insurance companies and pizza businesses that purchase advertisements in many yellow pages directories in multiple geographic regions. In order to sell to national customers, we employ associates to manage our selling efforts. In addition, we contract with third party Certified Marketing Representatives (“CMR”) who design and create advertisements for national companies and place those advertisements in relevant yellow pages directories nationwide and in digital products and services. Some CMRs are departments of general advertising agencies, while others are specialized agencies that focus solely on directory advertising. The CMRs are responsible for billing the national customers for their advertising. We receive payment for the value of advertising placed in our directories, net of the CMR’s commission, directly from the CMR and at the time of publication. We accept orders from approximately 150 CMRs.

Printing and Distribution
Our directories are printed through our long-standing relationship with printing vendor R.R. Donnelley & Sons Company (“R.R. Donnelley”), as well as with Quad/Graphics, Inc. ("Quad/Graphics"). In general, R.R. Donnelley prints all YP and legacy CenturyLink directories and larger, higher-circulation CenturyLink directories in the Qwest region, whereas Quad/Graphics prints CenturyLink directories in the Qwest region that are smaller and have a more limited circulation. Our agreements with R.R. Donnelley and Quad/Graphics for the printing of all of our directories extend through 2014 and 2015, respectively.

The physical delivery of directories is facilitated through several outsourcing relationships.  Delivery methods utilized to distribute directories to consumers are selected based on factors such as cost, quality, geography and market need.  Primary delivery methods include U.S. Postal Service and hand delivery.  We have contracts with two companies for the distribution of our directories. These contracts are scheduled to expire at various times from May 2013 through May 2015. Occasionally, we use United Parcel Service or other types of expedited delivery methods.  Frequently, a combination of these methods is required to meet the needs of the marketplace.

Printing, paper and distribution costs represented approximately 12% of net revenue for the year ended December 31, 2012.

Credit, Collections and Bad Debt Expense
Since most of our products and services have 12-month cycles and most customers are billed over the course of that 12-month period, we extend credit to our customers in the form of a trade receivable. A majority of these customers are local businesses with default rates that usually exceed those of larger companies. Our policies toward the extension of credit and collection activities associated with trade receivables are designed to allow for a targeted level of sales growth while cost effectively managing the risks associated with customer delinquency and bad debt.

Local advertising customers spending above identified credit threshold levels or types of businesses historically indicating a higher delinquency risk may be subject to a credit review that includes evaluation of credit or payment history with us, third party credit scoring and credit checks with other vendors. Where appropriate, advance payments (in whole or in part) and/or personal guarantees from business owners may be required prior to the extension of credit to select advertisers.  In addition to efforts to assess credit risk prior to extending credit to customers, we employ well-developed collection strategies utilizing an integrated system of internal and automated means to engage customers concerning payment obligations. The Company may choose to renew contracts with customers who have accounts receivable balances with us in arrears if the customer agrees to pay sufficient funds to comply with credit policy standards or the customer may prepay in full for new advertising. The Company may also choose to renew contracts with select customers with known bad debt experience by obtaining a partial advance payment toward new advertising contracts or by completing a business credit review.

Fees for national customers are generally billed upon publication of each issue of the directory in which the advertising is placed by CMRs.  Because we do not usually enter into contracts with national customers directly, we are subject to the credit risk of CMRs on sales to those customers, to the extent we do not receive fees in advance. 


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Competition
The local search industry in which we operate is highly competitive and fragmented. We compete with other print and online yellow pages directory publishers, as well as other types of media including direct mail, search engines, local search sites, advertising networks, social networks, SEO providers and emerging technologies. Among our highest spending category of customers, we also compete with television, newspaper and radio, which tend to charge more for similar coverage. New content delivery technologies and consumer trends continue to evolve in the local advertising industry such as with social media, group buying sites, mobile applications, etc. This represents potential competition as well as opportunities for partnership and incremental sales. We regularly monitor developing trends and technologies to assess opportunities for enhancing our own capabilities through new product development, partnerships or acquisitions, and identify competitive threats where a specific response may be warranted. In addition, we continue to transition to a compete-and-collaborate model in which we are both partners and competitors with the same firm in different aspects of operations. Dex One's people, partnerships and advancements in our marketing solutions well position us, relative to our competitors, to simplify the process of creating, placing and optimizing the local advertising investments of our customers.

We also compete with one or more traditional print yellow pages directory publishers, including independent publishers such as Yellowbook and LocalEdge Media. In some markets, we compete with other incumbent publishers such as SuperMedia and YPC. We compete with these publishers based on price, quality, features, usage leadership and distribution. Most of the major yellow pages directory publishers offer print and online directories as well as online search products. Virtually all independent publishers, including Yellowbook, a competitor in the majority of our markets, compete aggressively and use pricing and discounting as a primary competitive tool to try to increase their market share. Due to the recent economic environment and trends in our industry and an increase in competition and more fragmentation in the local business search space, we have experienced a significant decline in print advertising sales during 2012 and we currently expect this trend to continue in 2013. We believe these same trends are also impacting our competitors.

Digital competition has intensified as technologies (both online and wireless) have improved and broadband and smartphone penetration has increased, offering a diverse set of advertising alternatives for small businesses. We consider our primary digital competition to be the major search engines, such as Google, Yahoo!, Bing and others, in addition to the online directory properties of the largest yellow pages directory publishers, such as Superpages.com, provided by SuperMedia, and YPC. Additionally, we compete with a growing number of digital local shopping-related competitors including industry specific digital verticals, such as FindLaw.com and ServiceMagic.com, user-generated content sites such as Yelp and Kudzu, and search engine intermediaries such as ReachLocal and Yodle. We also compete with a number of well known digital map solutions such as MapQuest® and Google Maps. Most of these companies operate on a national scale, competing for consumer and business users across our entire region and actively soliciting customers in many of our markets. In some cases, we are not able to compete effectively with these digital competitors, many of which have greater resources than we do. Our digital strategy and our business will continue to be adversely affected as our competitors build local sales forces or otherwise continue to more effectively reach small local businesses for local commercial search services.

Our enhanced distribution arrangements involve, and will likely continue to involve, cooperating with other local media companies with whom we also compete, particularly with respect to online local search. As a result, particularly as usage continues to migrate from print to online, we bear some risk that such cooperation arrangements may presently, or come to constitute, a significant component of the aggregate distribution of the advertising message that we offer to certain of our customers. Some of these local media companies with whom we cooperate and compete have greater financial resources than we do. Should our relationships with such companies be discontinued for any reason, it may be detrimental to our customers and thereby may result in lower rates of renewal of our contractual relationships with our customers. Our reliance on these cooperation arrangements may also provide an unintended competitive advantage to some of our competitors by (a) promoting the products and services of those competitors and (b) establishing, building and reinforcing an indirect relationship between our customers and those competitors, which could facilitate those competitors entering into direct relationships with our customers without our involvement. Over the last few years, we have experienced a loss in our customer base due to competition and changes in advertiser preferences in the markets we serve. We believe that our transition to a compete-and-collaborate business model will allow us to aggregate more leads for our customers in our markets and potentially grow our customer base. If we are not able to execute on this business model, we could experience a continued loss of customers, which would have a material adverse effect on our business, financial condition and results of operations.


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Raw Materials
Our principal raw material is paper and we use recycled material.  It is one of our largest cost items, representing approximately 4% of net revenue for the year ended December 31, 2012.  Paper used is supplied by two paper companies, CellMark Paper, Inc. and Nippon Paper Industries USA, Co., Ltd., with whom we have three year agreements that commenced in January 2010. Paper used for the covers and tabs of our directories is supplied by Unisource Worldwide, Inc. Both agreements with Unisource Worldwide, Inc. expired on December 31, 2012. Beginning January 1, 2013, we have one year agreements to purchase paper from Resolute FP US Inc., Nippon Paper Industries USA, Co., Ltd. and Unisource Worldwide, Inc.

Intellectual Property
We own and control confidential information as well as a number of trade secrets, trademarks, service marks, trade names, copyrights, patents and other intellectual property rights that, in the aggregate, are of material importance to our business. We believe that “Dex One®,” “Dex®,” “CenturyLink®,” ‘‘AT&T Real Yellow Pages,’’ “DexKnows.com®,” “DexKnows®,” “DexNet® and “DexDigital®” and related names, marks and logos are, in the aggregate, material to our business. We are licensed to use certain technology and other intellectual property rights owned and controlled by others, and, similarly, other companies are licensed to use certain technology and other intellectual property rights owned and controlled by us.

DexNet is our distribution platform that delivers the web to local businesses in a predictable and budgeted manner.  DexNet provides business owners with predictable customer lead volume and price transparency of the effective cost-per-lead and manages the consistent delivery of leads throughout the duration of an advertising campaign.

We are the exclusive official directory publisher of listings and classified advertisements for Qwest Communications International, Inc.  (“Qwest”) (and its successors), which is now owned and operated by CenturyLink, in the states Dex Media East, Inc. ("DME Inc.") and Dex Media West, Inc. ("DMW Inc.") operate our directory business and in which Qwest provided local telephone service as of November 8, 2002 (subject to limited extensions). We also have the exclusive right to use certain CenturyLink branding on directories in these markets. In addition, Qwest assigned and/or licensed to us certain intellectual property used in the Qwest directory business prior to November 8, 2002. These rights generally expire in 2052.

We have an exclusive license to produce, publish and distribute directories for CenturyLink (and its successors) in the markets where Sprint provided local telephone service as of September 21, 2002 (subject to limited extensions), as well as the exclusive license to use CenturyLink’s name and logo on directories in those markets. These rights generally expire in 2052.

We have an exclusive license to provide yellow pages directory services for YP (and its successors) and to produce, publish and distribute white pages directories on behalf of YP in Illinois and Northwest Indiana, as well as the exclusive right to use the YP and AT&T brand and logo on print directories in those markets. These rights generally expire in 2054.

Under license agreements for subscriber listings and directory delivery lists, each of CenturyLink (including Qwest) and AT&T have granted to us a non-exclusive, non-transferable restricted license of listing and delivery information for persons and businesses that order and/or receive local exchange telephone services in the relevant service areas at the prices set forth in the respective agreements. Generally, we may use the listing information solely for publishing directories (in any format) and the delivery information solely for delivering directories, although in the case of Qwest, we may also resell the information to third parties solely for direct marketing activities, database marketing, telemarketing, market analysis purposes and internal marketing purposes, and use it ourselves in direct marketing activities undertaken on behalf of third parties. The term of these license agreements is generally consistent with the term of the respective publishing agreements described above.

Although we do not consider any individual trademark or other intellectual property to be material to our operations, we believe that, taken as a whole, the licenses, marks and other intellectual property rights that we acquired in conjunction with prior acquisitions are material to our business. We consider our trademarks, service marks, databases, software and other intellectual property to be proprietary, and we rely on a combination of copyright, trademark, patent, trade secret, non-disclosure and contract safeguards for protection. We also benefit from the use of the phrase “yellow pages.” which we believe to be in the public domain in the United States.


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Employees
As of March 1, 2013, Dex One has approximately 2,300 employees of which approximately 700, or 30%, are represented by labor unions covered by two collective bargaining agreements. The unionized employees are represented by either the International Brotherhood of Electrical Workers of America (“IBEW”), which represents approximately 300, or 43%, of the unionized workforce, or the Communication Workers of America (“CWA”), which represents approximately 400, or 57%, of the unionized workforce. Our collective bargaining agreement with the IBEW expires in May 2015 and our collective bargaining agreement with the CWA expires in March 2016. Dex One considers our relationships with our employees and both unions to be in good standing.
Executive Officers of the Registrant
See "Item 10. Directors, Executive Officers and Corporate Governance" in Part III of this Annual Report on Form 10-K.

ITEM 1A.
RISK FACTORS

Forward-Looking Information
Certain statements contained in this Annual Report on Form 10-K regarding Dex One'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,” “estimated,” “potential,” “goal,” “outlook,” “may,” “predicts,” “could,” or the negative of those words and other comparable expressions, are used to identify such forward-looking statements. All forward-looking statements reflect only our current beliefs and assumptions with respect to our future results, business plans and prospects, based on information currently available to us and consequently are subject to significant risks and uncertainties. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance. In evaluating forward-looking statements included in this annual report, you should specifically consider various factors, including the risks and uncertainties discussed below. These factors may cause our actual results to differ materially from those expressed in, or implied by, our forward-looking statements. All forward-looking statements attributable to us or a person speaking on our behalf are expressly qualified in their entirety by these cautionary statements. 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, trends, uncertainties and contingencies that could negatively impact our future operating results, performance, business plans or prospects include:

Risks Related to Our Financial Condition and Capital Structure
1) Our substantial debt poses various risks
We have a substantial amount of debt and significant debt service obligations. As of December 31, 2012, we had total outstanding debt of $2.0 billion, all of which is classified as a current obligation on our consolidated balance sheet as discussed below. See Item 8, “Financial Statements and Supplementary Data” - Note 5, “Long-Term Debt” for detailed information on our outstanding debt.

As a result of our debt and debt service obligations, we face various risks regarding, among other things, the following:
we may not be able to obtain additional financing or refinance our existing indebtedness on satisfactory terms or at all;
our indebtedness limits our financial flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
rising interest rates could increase the costs of servicing our debt because a majority of our debt is at variable interest rates;
interest and principal payments on our indebtedness reduces the cash flow available to us to fund working capital requirements, capital expenditures, acquisitions or other strategic initiatives, investments and other general corporate requirements because a substantial portion of our cash flow is needed to service our debt obligations; and
speculation as to our financial condition and the effect of our debt level and debt service obligations could disrupt our relationships with customers, suppliers, employees, creditors and other third parties.


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As noted in Item 1, “Business” - “Agreement and Plan of Merger,” because the Company was unable to obtain the requisite consents to the contemplated amendments to our financing agreements from our senior secured lenders to effectuate the Mergers, the Company voluntarily filed a pre-packaged bankruptcy under Chapter 11. The filing of the Chapter 11 Cases triggered an event of default that rendered the remaining financial obligations under our Dex One Senior Subordinated Notes and senior secured credit facilities automatically and immediately due and payable. Certain senior secured lenders who are party to the Support and Limited Waiver Agreement (the “Support Agreement”), however, have agreed to a conditional waiver whereby they will not accelerate the financial obligations under our senior secured credit facilities upon the Company's Chapter 11 filing. The Support Agreement, including the conditional waiver noted above and the obligations of all parties to the Support Agreement, may terminate automatically upon the occurrence of certain circumstances or events if such circumstance or event has not been cured by the Company or waived unconditionally by the consenting lenders. Nonetheless, any efforts to enforce the acceleration provisions of our outstanding debt will be automatically stayed as a result of filing the Chapter 11 Cases in the Bankruptcy Court and during pendency of filing the Chapter 11 Cases unless the Bankruptcy Court approves a motion to enforce such provisions. We believe it is unlikely that the Bankruptcy Court would approve such a motion. However, there can be no assurance that this will not occur. In the event the Bankruptcy Court does permit modification of the stay and allows the acceleration of all of our outstanding debt, the Company would not have adequate cash on hand or other financial resources to satisfy all of its debt obligations.
Based on these circumstances, we have classified all of our outstanding debt as current obligations as of December 31, 2012.
2) We may be unable to continue as a going concern
The Company's consolidated financial statements and related notes have been prepared using accounting principles generally accepted in the United States applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, as noted in Item 8, "Financial Statements and Supplementary Data" - Note 1, "Business and Basis of Presentation - Going Concern,” certain events could impact our ability to continue as a going concern. The assessment of our ability to continue as a going concern was made by management considering, among other factors: (1) the Company's voluntary Chapter 11 bankruptcy filing on March 18, 2013 and the impact it has or could have on our outstanding debt, (2) the Company's highly leveraged capital structure and the current maturity date of our senior secured credit facilities of October 24, 2014, and (3) the significant negative impact on our operating results and cash flows associated with our print products primarily as a result of (i) customer attrition, (ii) declines in overall advertising spending by our customers, (iii) the significant impact of the weak local business conditions on consumer spending in our clients' markets, (iv) an increase in competition and more fragmentation in local business search and (v) the migration of customers to digital marketing solutions. These circumstances and events raise substantial doubt as to whether the Company will be able to continue as a going concern for a reasonable period of time.
The report of our independent registered public accounting firm on the consolidated financial statements of the Company as of and for the year ended December 31, 2012 includes an explanatory paragraph describing the existence of substantial doubt about the ability of our Company to continue as a going concern. The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or to the amounts and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern.
3) The restrictive covenants under our debt agreements limit our operational flexibility
The agreements governing our amended and restated credit facilities, including an indenture governing our Dex One Senior Subordinated Notes contain affirmative and negative covenants. These covenants could adversely affect us by, among other things, limiting our ability to obtain funds from our subsidiaries, or to otherwise meet our capital needs. These covenants generally limit or restrict our ability, and our subsidiaries ability, to:
incur additional indebtedness or liens;
make capital expenditures and investments (including acquisitions);
sell assets;
pay dividends or otherwise make distributions;
make payments of certain indebtedness;
engage in sale and leaseback transactions, swap transactions and transactions with affiliates; and
modify the Dex One Senior Subordinated Notes.


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The affirmative covenants require, among other things, that we meet various financial covenants, including leverage ratios and interest coverage ratios. Our ability to comply with these covenants depends on various factors, certain of which are outside of our control. Such factors include our ability to generate sufficient revenues and cash flows from operations, our ability to reduce over time our outstanding indebtedness, and changes in interest rates. Our failure to comply with those covenants could result in our triggering a default under our credit agreements which could have an adverse effect on our business, financial condition and results of operations.

4) Our variable rate indebtedness subjects us to interest rate risk
At December 31, 2012, $1.8 billion, or approximately 89%, of our outstanding indebtedness bore interest at variable rates. An increase in interest rates could cause our debt service obligations to increase significantly. The Company has entered into fixed interest rate swap agreements and interest rate cap agreements to manage fluctuations in cash flows resulting from changes in interest rates on variable rate debt. However, we cannot provide assurances that such agreements will be effective in managing our exposure to rising interest rates. See Item 8, “Financial Statements and Supplementary Data” - Note 5, “Long-Term Debt” for a detailed discussion of the interest rates applicable to borrowings under our amended and restated credit facilities and Item 8, “Financial Statements and Supplementary Data” - Note 6, “Derivative Financial Instruments” for information on our interest rate swap agreements and interest rate cap agreements.

Risks Related to Our Business
1) The ongoing weak economic conditions continue to adversely affect our business
As a result of the ongoing weak economic conditions, we have continued to experience lower advertising sales during 2012 primarily as a result of declines in new and recurring business, including both renewal and incremental sales to existing customers, mainly driven by (1) customer attrition, (2) declines in overall advertising spending by our customers, (3) the significant impact of the weak local business conditions on consumer spending in our customers’ markets and (4) an increase in competition and more fragmentation in local business search. We currently expect these weak economic conditions to continue throughout 2013. Consequently, prolonged weak economic conditions will continue to have an adverse effect on our business, financial condition and results of operations.

2) The continuing decline in the use of print yellow pages continues to adversely affect our business
Over the past several years, overall references to print yellow pages directories in the United States have continued to decline while the usage of online and wireless local search products and services has increased rapidly. We believe this decline has been influenced by increasing consumer usage of a variety of digital information services, including search engines, online directories, social networks, industry-specific websites, and mobile applications. We believe that over the next several years, references to print yellow pages directories will continue to decline as users increasingly turn to digital and other interactive media delivery devices for local commercial search information. These trends have, in part, resulted in print advertising sales declining in 2012, and we expect these trends to continue in 2013.

Continuing declines in usage of our print products could:
impair our ability to maintain or increase our advertising prices;
cause businesses that purchase advertising in our print yellow pages directories to reduce or
discontinue those purchases; and
discourage businesses that do not presently purchase advertising in our yellow pages directories from doing so in the future.

Although the decline in the usage of our printed directories has been partially offset by an increase in usage of our digital products and services, we cannot provide any assurances that such usage will result in additional revenue or profits. Any of the factors that may contribute to a decline in usage of our print directories, or a combination of them, could adversely affect our business, financial condition and results of operations.


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3) Some of our competitors are larger than we are and have greater financial and other resources
The local search industry in which we operate is highly competitive and fragmented. We compete with other print and online yellow pages directory publishers, as well as other types of media including direct mail, search engines, local search sites, advertising networks, social networks, SEO providers and emerging technologies. We also compete with one or more traditional print yellow pages directory publishers, including independent publishers such as Yellowbook and LocalEdge Media, and in some markets, we compete with other incumbent publishers such as SuperMedia and YPC. Most major yellow pages directory publishers offer print and online directories as well as online search products. We compete with these publishers based on price, discounting, quality, features, usage leadership and distribution. Our competitors’ approaches to pricing and discounting may affect our pricing strategies and our future revenues. Among our highest spending category of customers, we also compete with television, newspaper and radio, which tend to charge more for similar coverage. Some of our competitors are larger than we are and have greater financial and technological resources than we have and may be able to commit more resources or otherwise devote more capital to their business, thus limiting our ability to compete effectively with these entities.

4) Increased competition from digital technologies continues to adversely affect our business

We also face increased competition from digital technologies (both online and wireless) as such technologies have improved, offering a diverse set of advertising alternatives for small businesses. We consider our primary digital competition to be the major search engines, such as Google, Yahoo!, Bing and others. Additionally, we compete with a growing number of digital local shopping-related competitors including industry specific digital verticals, such as FindLaw.com and ServiceMagic.com, user-generated content sites such as Yelp and Kudzu, and search engine intermediaries such as ReachLocal and Yodle. We also compete with a number of well known digital map solutions such as MapQuest and Google Maps. Most of these companies operate on a national scale, competing for consumer and business users across our entire region and actively solicit clients in many of our markets. In some cases we are not able to compete effectively with these digital competitors, many of which have greater resources than we do. Our digital strategy and our business will continue to be adversely affected as our competitors build local sales forces and otherwise continue to more effectively reach small local businesses for local commercial search services.

Our enhanced distribution arrangements involve, and will likely continue to involve, cooperating with other local media companies with whom we also compete, particularly with respect to online local search. Our reliance on these cooperation arrangements may also provide an unintended competitive advantage to some of our competitors by (a) promoting the products and services of those competitors and (b) establishing, building and reinforcing an indirect relationship between our customers and those competitors, which could facilitate those competitors entering into direct relationships with our customers without our involvement. Material loss of customers would have a material adverse effect on our business, financial condition and results of operations.

5) The changing market position of telephone utilities could adversely affect our business
The market position of telephone utilities, including CenturyLink and YP may erode over time. As a result, it is possible that CenturyLink and YP, or their successors, may not remain the primary local telephone service provider in their local service areas. If CenturyLink or YP, or their successors, 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 may decline in value and adversely affect our business, financial condition and results of operations.

6) The termination or modification of one or more of our solution partner agreements, including Internet search engine, local search or portal agreements, could adversely affect our business
Our ability to provide a full set of marketing solutions to our customers relies on relationships with various solution partners, including major Internet search companies and local media companies. If we are unable to maintain these relationships, renew material portal agreements or if the level of service provided by our partners changes, our business could be adversely affected.


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7) Directory distribution and other governmental regulation could adversely affect our business
In addition, new laws and regulations (including, for example, limiting distribution of print directories), new interpretations of existing laws and regulations, increased governmental enforcement or other developments could require us to make additional unforeseen expenditures or could lead to us suffering declines in revenues. For example, “opt out” and “opt in” legislation has been proposed in certain states where we operate that would either (i) allow consumers to opt out of the delivery of print yellow pages or (ii) prevent us from delivery until consumers who preferred delivery of print yellow pages affirmatively elected to receive the print directory. If such legislation were to become effective, it could have a material adverse effect on the use of our products and, ultimately, our revenues. If different forms of this type of legislation are adopted in multiple jurisdictions, it could also materially increase our operating costs in order to comply. We are adopting voluntary measures to permit consumers to share with us their preferences with respect to the delivery of our various print and digital products. If a large number of consumers advise us that they do not desire delivery of our products, the usage of our products and, ultimately our revenues, could materially decline, which may have an adverse effect on our business, financial condition and results of operations.

8) New technologies could adversely affect our business
The directory advertising industry is subject to changes arising from developments in technology, including information distribution methods and users’ technological preferences. The use of the Internet and wireless devices by consumers as a means to transact commerce may result in new technologies being developed and services being provided that could compete with our products and services. National search companies such as Google and Yahoo! are focusing and placing a high priority on local commercial search initiatives. As a result of these factors, our growth and future financial performance may depend on our ability to develop and market new products and services, to negotiate satisfactory strategic arrangements with national search companies and utilize new distribution channels, while enhancing existing products, services and distribution channels, to incorporate the latest technological advances and accommodate changing user preferences, including the use of the Internet and wireless devices. We may not be able to develop and market new products. 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, it could adversely affect our business, financial condition and results of operations.

9) We could recognize impairment charges or be required to accelerate amortization expense by shortening the estimated remaining useful lives of our definite-lived intangible assets or other long-lived assets
At December 31, 2012, the net carrying value of our intangible assets totaled $1,832.7 million and we have no recorded goodwill at any of our reporting units. In the recent past, we have recognized significant goodwill and non-goodwill intangible asset impairment charges. We recognized a goodwill impairment charge of $801.1 million during the year ended December 31, 2011 and goodwill and non-goodwill intangible asset impairment charges totaling $1,159.3 million during the eleven months ended December 31, 2010. These impairment charges had no impact on current or future operating cash flow, compliance with debt covenants or tax attributes.

During the first quarter of 2012, the Company performed an evaluation of the estimated remaining useful lives of its definite-lived intangible assets and other long-lived assets. Based on our evaluation, the Company determined that the estimated useful lives of our directory services agreements, local and national customer relationships and tradenames and trademarks no longer reflected the period they were expected to contribute to future cash flows. Therefore, the Company reduced the estimated remaining useful lives of these intangible assets. As a result of reducing the estimated remaining useful lives of these intangible assets, the Company experienced an increase in amortization expense of $161.6 million during 2012.
See Item 8, “Financial Statements and Supplementary Data” - Note 2, “Summary of Significant Accounting Policies – Identifiable Intangible Assets and Goodwill” for additional information on the impairment charges and changes to the estimated remaining useful lives of our definite-lived intangible assets.

If industry and local business conditions in our markets deteriorate in excess of current estimates, potentially resulting in further declines in advertising sales and operating results, and / or if the trading value of our debt and equity securities continue to decline significantly, we will be required to assess once again the recoverability and useful lives of our intangible assets and other long-lived assets. These factors, including changes to assumptions used in our impairment analysis as a result of these factors, could result in future impairment charges, a reduction of remaining useful lives associated with our intangible assets and other long-lived assets and acceleration of amortization expense.


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10) Our business could be adversely affected by interruptions to our computer and IT systems
Most of our business activities rely to a significant degree on the efficient and uninterrupted operation of our computer and information technology ("IT") systems and those of third parties with which we have contracted. Our computer and IT systems are vulnerable to damage or interruption from a variety of sources, as well as potential cybersecurity incidents, and our disaster recovery systems may be deemed ineffective. Any failure of these systems or cybersecurity incidents could have a material adverse effect on our business, financial condition and results of operations.

11) The bankruptcy of any of our telecommunication partners could adversely affect us
In the event that any of our telecommunications partners sought protection under U.S. bankruptcy laws, our agreements with such partners, including our rights to provide search services under those agreements, could be materially adversely impacted. In addition, our telecommunication partners may be unable in such circumstance to provide services to us under our contracts with them. Consequently, the bankruptcy of any of our telecommunication partners could have an adverse effect on our business, financial condition and results of operations.

12) Early termination of our contracts with our telecommunication partners could have an adverse effect on our business
Our commercial arrangements with CenturyLink (including Qwest) and AT&T have an initial term of 50 years, subject to specified automatic renewal and early termination provisions. These commercial arrangements may be terminated by our counterparty prior to their stated term under certain specified circumstances, some of which at times may be beyond our reasonable control and/or which may require extraordinary efforts or the incurrence of material excess costs on our part in order to avoid breach of the applicable agreement. It is possible that these arrangements will not remain in place for their full stated term or that we may be unable to avoid all potential breaches of or defaults under these commercial arrangements. Further, any remedy exercised by CenturyLink or AT&T, as the case may be, under any of these arrangements could have a material adverse effect on our financial condition or results of operations. At this time, we are not aware of any information or circumstances that might give rise to a termination right by CenturyLink and AT&T.

13) Future regulatory changes in directory publishing obligations in the CenturyLink (formerly Qwest) and YP (formerly AT&T) markets could have an adverse effect on our business
Pursuant to our agreements with Qwest and AT&T, we are required to discharge Qwest’s and AT&T's regulatory obligations to publish white pages directories in various territories. If the staff of a state public utility commission were to impose additional or changed legal requirements in any of the service territories with respect to these obligations, we would be obligated to comply with these requirements on behalf of Qwest or AT&T, even if such compliance were to increase our publishing costs. Pursuant to our publishing agreements with Qwest and AT&T, Qwest and AT&T are not obligated to reimburse us for all of our increased costs of publishing directories that satisfy Qwest’s or AT&T’s publishing obligations resulting from new governmental legal requirements. Consequently, our costs could increase which could have an adverse effect on our business, financial condition and results of operations.

14) Continuing digital-related regulation may adversely affect our business

As the local search industry continues to evolve, specific laws relating to the provision of digital products and services and the use of digital and digital-related applications may become relevant. Regulation of the digital and digital-related products and services is itself still developing both formally by, for instance, statutory regulation, and also less formally by, for instance, industry self regulation. If our regulatory environment becomes more restrictive, including by increased digital regulation, it could adversely affect our business, financial condition and results of operations.

15) Environmental regulations could adversely affect our business
Our operations, as well as the properties owned and leased for our business, are subject to stringent laws and regulations relating to environmental protection. The failure to comply with applicable environmental laws, regulations or permit requirements, or the imposition of liability related to waste disposal or other matters arising under these laws, could result in civil or criminal fines, penalties or enforcement actions, third-party claims for property damage and personal injury or requirements to clean up property or other remedial actions. Some of these laws provide for “strict liability,” which can render a party liable for environmental or natural resource damage without regard to negligence or fault on the part of the party.

Many of these laws and regulations are becoming increasingly stringent, and the cost of compliance with these requirements can be expected to increase over time. To the extent that the costs associated with meeting any of these requirements are substantial and not adequately provided for, there could be a material adverse effect on our business, financial condition and results of operations.

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16) Our reliance on, and extension of credit to, local businesses could adversely affect our business
Approximately 85% of our advertising revenues are derived from the sale of our marketing solutions to local businesses. In the ordinary course of our business, we extend credit to these customers in the form of a trade receivable for advertising purchases. Local businesses, however, tend to have fewer financial resources and higher failure rates than large businesses, especially during a downturn in the general economy. The proliferation of very large retail stores may continue to adversely affect local businesses. We believe these limitations are significant contributing factors to having customers in any given year not renew their advertising in the following year. If customers fail to pay within specified credit terms, we may cancel their advertising in future directories, which could further impact our ability to collect past due amounts as well as adversely impact our advertising sales and revenue trends. 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 local businesses in the form of trade receivables.

17) Our dependence on third-party providers of printing, distribution, delivery and IT services could adversely affect our business, financial condition or results of operations
We depend on third parties for the printing and distribution of our respective directories. We also rely on the services of an IT outsource service provider for IT development and support services related to our directory publishing business. We must rely on the systems of our third-party service providers, their ability to perform key operations on our behalf in a timely manner and in accordance with agreed levels of service and their ability to attract and retain sufficient qualified personnel to perform our work. A failure in the systems of one of our third-party service providers or their inability to perform in accordance with the terms of our contracts or to retain sufficient qualified personnel, could have a material adverse effect on our business, results of operations and financial condition. Because of the large print volume and specialized binding of directories, only a limited number of companies are capable of servicing our printing needs. Accordingly, the inability or unwillingness of our third party service providers, as the case may be, to provide printing services on acceptable terms or at all or any deterioration in our relationships with them could have a material adverse effect on our business.

The physical delivery of directories is facilitated through several outsourcing relationships.  Delivery methods utilized to distribute directories to consumers are selected based on factors such as cost, quality, geography and market need.  Primary delivery methods include U.S. Postal Service and hand delivery. We have contracts with two companies for the distribution of our directories. Although these contracts are scheduled to expire at various times from May 2013 through May 2015, any of these vendors may terminate its contract with us upon 120 days’ written notice. Only a limited number of companies are capable of servicing our delivery needs. Accordingly, the inability or unwillingness of our current vendors to provide delivery services on acceptable terms, or at all, could have a material adverse effect on our business.

We also outsource a significant portion of our IT needs to a single outsource service provider. If we were to lose the services of the IT outsource service provider, we would be required either to hire sufficient staff to perform these IT development and support services in-house or to find an alternative service provider. In the event we were required to perform any of the services that we currently outsource, it is possible that we would not be able to perform them on a cost-effective basis. There are a limited number of alternative third-party service providers, if any.

18) The sale of advertising to national accounts is coordinated by third parties that we do not control, the performance and financial stability of which could adversely affect our business
Approximately 15% of our revenue is derived from the sale of advertising to national or large regional companies, such as rental car companies, automobile repair shops and pizza delivery businesses, that purchase advertising in several of our directories. Substantially all of the revenue derived from national accounts is serviced through CMRs from which we accept orders. CMRs are independent third parties that act as agents for national companies and design their advertisements, arrange for the placement of those advertisements in directories and provide billing services. As a result, our relationship with these national customers depends significantly on the performance and financial stability of these third party CMRs that we do not control.


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Although we believe that our respective relationships with these CMRs have been mutually beneficial, if some or all of the CMRs with which we have established relationships were unable or unwilling to do business with us on acceptable terms or at all, such inability or unwillingness could have a material adverse effect on our business. In addition, any decline in the performance of CMRs with which we do business could harm our ability to generate revenue from our national accounts and could materially adversely affect our business. We also act as a CMR directly placing certain national advertising in competition with these CMRs. It is possible that our status as a competitor of CMRs could adversely impact our relationships with CMRs or expose us to possible legal claims from CMRs. In light of the overall downturn in the economy, we may be adversely impacted by credit risk with CMRs from which we accept orders and credit risk that CMR’s face with their customers. We cannot assure you that this credit risk will not have a significant impact on our financial condition or results of operations in the future.

19) Work stoppages or increased unionization among our work force could adversely affect our business, financial condition or results of operations
Approximately 700 of our employees are represented by labor unions covered by two collective bargaining agreements. In addition, some of our key suppliers’ employees are represented by unions. The unionized employees are represented by either the IBEW, which represents approximately 300 of the unionized workforce, or the CWA, which represents approximately 400 of the unionized workforce. Our collective bargaining agreement with the IBEW expires in May 2015 and our collective bargaining agreement with the CWA expires in March 2016. If our unionized workers, or those of our key suppliers, were to engage in a strike, work stoppage or other slowdown in the future, our business could experience a significant disruption of operations and an increase in operating costs, which could have a material adverse effect on our business.

20) Turnover among our sales force or key management could adversely affect our business
The success of our business is dependent on the leadership of our key personnel. The loss of a significant number of experienced key personnel could adversely affect our results of operations, financial condition and liquidity. Our success also depends on our ability to identify, hire, train and retain qualified sales personnel in each of the regions in which we operate. We currently expend significant resources and management time in identifying and training our local marketing consultants and sales managers. Our ability to attract and retain qualified sales personnel will depend, however, on numerous factors, including factors outside our control, such as conditions in the local employment markets in which we operate.

Furthermore, our success depends on the continued services of key personnel, including our experienced senior management team as well as our regional sales management personnel. If we fail to retain the necessary key personnel, our results of operations, financial conditions and liquidity, could be adversely affected.

21) Instability or under-performance of our search engine marketing platforms or the loss of important intellectual property rights could adversely affect our business, financial condition or results of operations
Our digital search engine marketing business relies on sophisticated and proprietary technology platforms to optimize our customers' spend across search engines and our other distribution partners. Issues with the stability or the performance of these platforms could materially affect our business.
Some trademarks and related names, marks and logos such as “Dex One®,” “Dex®,” ‘‘Qwest®,’’ “CenturyLink®,” ‘‘AT&T Real Yellow Pages,’’ “DexKnows.com®,” “DexKnows®,” “DexNet® and “DexDigital®” and other intellectual property rights are important to our business. We rely upon a combination of patent, copyright and trademark laws as well as contractual arrangements, including licensing agreements, particularly with respect to CenturyLink and YP markets, to establish and protect our intellectual property rights. We are required from time to time to bring lawsuits against third parties to protect our intellectual property rights. Similarly, from time to time, we are party to proceedings whereby third parties challenge our rights. We cannot be sure that any lawsuits or other actions brought by us will be successful or that we will not be found to infringe the intellectual property rights of third parties. As the Internet grows, it may prove more onerous to protect our trademarks and domain names, including DexKnows.com, from domain name infringement or to prevent others from using Internet domain names that associate their business with ours. Although we are not aware of any material infringements of any trademark rights that are significant to our business, any lawsuits, regardless of their outcome, could result in substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition and results of operations. Furthermore, the loss of important intellectual property rights could have a material adverse effect upon our business, financial condition and results of operations.


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22) Legal proceedings could adversely affect our business, financial condition or results of operation
From time to time, we are parties to civil litigation including regulatory and other proceedings with governmental authorities and administrative agencies. Adverse outcomes in lawsuits or investigations could result in significant monetary damages or injunctive relief that could adversely affect our operating results or financial condition as well as our ability to conduct our businesses as they are presently being conducted.

23) Fluctuations in the price and availability of paper could adversely affect our business, financial condition or results of operation
Our principal raw material is paper and we use recycled material.  It is one of our largest cost items, representing approximately 4% of net revenue for the year ended December 31, 2012. We cannot assure you that we will be able to renegotiate our paper contracts in the future or renegotiate without an increase to the fixed pricing currently agreed upon in the contracts. Changes in the supply of, or demand for, paper could affect market prices or delivery times. We do not engage in hedging activities to limit our exposure to increases in paper prices. In the future, the price of paper may fluctuate significantly due to changes in supply and demand. We cannot assure you that we will have access to paper in the necessary amounts or at reasonable prices or that any increases in paper costs would not have a material adverse effect on our business, results of operations and financial condition especially in light of our projected continuing decline in advertising sales.

Risks Related to the Proposed Merger with SuperMedia

1) The exchange ratios are fixed and will not be adjusted in the event of any change in either Dex One’s or SuperMedia’s stock price

Upon the closing of the proposed merger with SuperMedia (the "Transaction"), each share of Dex One common stock will be converted into 0.2 shares of Dex Media common stock and each share of SuperMedia common stock will be converted into the right to receive 0.4386 shares of Dex Media common stock. These exchange ratios will not be adjusted for changes in the market price of either Dex One or SuperMedia common stock between the signing of the Merger Agreement and the completion of the Transaction. Changes in the prices of Dex One common stock and SuperMedia common stock will affect the value of the Dex Media common stock that Dex One stockholders and SuperMedia stockholders will receive in the Transaction.

2) Dex One stockholders cannot be sure of the market value of the shares of Dex Media common stock to be issued upon completion of the Transaction

Dex One stockholders will each receive a fixed number of shares of Dex Media common stock in the Transaction. The market value of Dex One common stock at the time of the completion of the Transaction may vary significantly from the price on the date the Merger Agreement was executed, the date of filing of this Annual Report on Form 10-K, the date on which Dex One stockholders vote on the Transaction or the date on which the Dex One prepackaged bankruptcy plans become effective. Because the exchange ratio will not be adjusted to reflect any changes in the market price of Dex One common stock, the market value of the Dex Media common stock issued in the Transaction and the Dex One common stock surrendered in the Transaction may be higher or lower than the value of these shares on earlier dates. 100% of the Transaction consideration to be received by Dex One stockholders will be Dex Media common stock.

Changes in the market prices of Dex One common stock and SuperMedia common stock may result from a variety of factors that are beyond the control of Dex One or SuperMedia, including changes in their businesses, operations and prospects, regulatory considerations, governmental actions and legal proceedings and developments. Market assessments of the benefits of the Transaction, the likelihood that the Transaction will be completed and general and industry-specific market and economic conditions may also have an effect on the market price of Dex One common stock and SuperMedia common stock. Changes in market prices of SuperMedia common stock and Dex One common stock may also be caused by fluctuations and developments affecting domestic and global securities markets. Neither Dex One nor SuperMedia is permitted to terminate the Merger Agreement solely because of changes in the market price of either party’s respective common stock.

In addition, the Transaction may not be completed until a significant period of time has passed after the voting deadline to approve the Transaction with respect to other closing conditions in the Merger Agreement or the prepackaged bankruptcy plans. As a result, the market values of Dex One common stock or SuperMedia common stock may vary significantly from the date of the voting deadline to the date of the completion of the Transaction. You are urged to obtain up-to-date prices for Dex One common stock and SuperMedia common stock. There can be no assurance that the Transaction will be completed, that there will not be a delay in the completion of the Transaction or that all or any of the anticipated benefits of the Transactions will be obtained.


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3) Failure to successfully combine the businesses of Dex One and SuperMedia or failure to do so in the expected time frame may adversely affect Dex Media’s future results

The success of the Transaction will depend, in part, on Dex Media’s ability to realize the anticipated benefits from combining the businesses of Dex One and SuperMedia. To realize these anticipated benefits, the businesses of Dex One and SuperMedia must be successfully combined. Historically, Dex One and SuperMedia have been independent companies, and they will continue to be operated as such until the completion of the Transaction. The management of Dex Media may face significant challenges in consolidating the functions of SuperMedia and Dex One, integrating the technologies, organizations, procedures, policies and operations of the two companies, as well as addressing the different business cultures at the two companies and retaining key personnel. If Dex One and SuperMedia do not successfully integrate their business operations, the anticipated
benefits of the Transaction may not be realized fully or at all or may take longer to realize than expected. The integration may also be complex and time consuming and require substantial resources and effort. The integration process and other disruptions resulting from the Transaction may also disrupt each company’s ongoing businesses and/or adversely affect our relationships with employees, regulators and others with whom we have business or other dealings. There can be no assurance that Dex Media will be able to accomplish this integration process smoothly or successfully. In addition, the integration of certain operations following the Transaction will require the dedication of significant management resources, which will compete for management’s attention with its efforts to manage the day-to-day business of Dex Media. Even if Dex One and SuperMedia are
able to integrate their business operations successfully, there can be no assurance that this integration will result in the realization of the full benefits of synergies, cost savings, growth and operational efficiencies that may be possible from this integration, or that these benefits will be achieved within a reasonable period of time. Any inability to realize the full extent of, or any of, the anticipated cost savings and financial benefits of the Transaction, as well as any delays encountered in the integration process, could have an adverse effect on the business and results of operations of Dex Media, which may affect the market price of Dex Media common stock.

4) Dex One and SuperMedia will be subject to business uncertainties and contractual restrictions while the Transaction is pending

Uncertainty about the effect of the Transaction on employees and customers may have an adverse effect on Dex One or SuperMedia and consequently on Dex Media. These uncertainties may impair Dex One’s or SuperMedia’s ability to retain and motivate key personnel and could cause customers and others that deal with Dex One or SuperMedia to defer entering into contracts with Dex One or SuperMedia or making other decisions concerning Dex One or SuperMedia or seek to change existing business relationships with Dex One or SuperMedia. Certain of Dex One’s or SuperMedia’s commercial contracts contain change of control restrictions that may give rise to a right of termination or cancellation in connection with the Transaction. In addition, if key employees depart because of uncertainty about their future roles and the potential complexities
of the Transaction, SuperMedia’s and Dex One’s businesses could be harmed. In addition, the Merger Agreement restricts Dex One and SuperMedia from making certain acquisitions and taking other specified actions until the Transaction occurs without the consent of the other party. These restrictions may prevent Dex One and SuperMedia from pursuing attractive business opportunities that may arise prior to the completion of the Transaction.

5) The Merger Agreement limits Dex One’s ability to pursue alternatives to the Transaction

Each of Dex One and SuperMedia has agreed that it will not, among other things, solicit, initiate, encourage or facilitate, or engage in discussions, negotiations or agreements regarding, proposals to acquire 10% or more of the stock or assets of Dex One or SuperMedia, subject to limited exceptions, including that a party may take certain actions in the event it receives an unsolicited acquisition proposal that constitutes a superior proposal or is reasonably expected to lead to a superior proposal, and the party’s board of directors determines in good faith, after consultation with its outside legal counsel and financial advisor, that a failure to take action with respect to such takeover proposal would be inconsistent with its duties under applicable law. Each party has also agreed that its board of directors will not change its recommendation to its stockholders or approve any alternative agreement, subject to limited exceptions, including that, at any time prior to the applicable stockholder approval, the applicable board of directors may make a change in recommendation of the Transaction if such board concludes in good faith, after consultation with its outside legal counsel and financial advisor, that (1) the failure to take such action would be inconsistent with its duties under applicable laws, (2) if requested by the other party, its representatives shall have negotiated in good faith with the other party for three business days and (3) if such change in recommendation is related to an alternative acquisition proposal, that such proposal constitutes a superior proposal.


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6) Members of both Dex One’s and SuperMedia’s management and certain directors have interests in the Transaction that are different from, or in addition to, your interests

Executive officers of Dex One and SuperMedia negotiated the terms of the Merger Agreement, and the Dex One and SuperMedia boards approved the Transaction and recommended that their respective stockholders vote to approve and adopt the Merger Agreement and related Transactions or, in the alternative, the prepackaged bankruptcy plans. In considering these facts and the other information contained in this document, you should be aware that some members of both Dex One’s and SuperMedia’s management and certain members of their boards have economic interests in the Transaction that are different from, or in addition to, the interests of Dex One stockholders and SuperMedia stockholders generally. These interests include, among others, continued service as a director or an executive officer of Dex Media, ownership interests in Dex Media and
the accelerated vesting of certain equity awards and/or certain severance benefits, in connection with the Transaction. These interests, among others, may influence the directors and executive officers of Dex One and SuperMedia to support or approve the Transaction. In addition, some directors of each of Dex One and SuperMedia are associated with stockholders who are also debt holders of each of Dex One and SuperMedia, and therefore may have interests relating to the debt that are different from those relating to the equity.

7) Dex One stockholders will have a reduced ownership and voting interest after the Transaction and will exercise less influence over management

After the completion of the Transaction, the Dex One stockholders will own a smaller percentage of Dex Media than they currently own of Dex One. Upon completion of the Transaction, it is anticipated that Dex One stockholders will hold approximately 60% of the shares of common stock of Dex Media issued and outstanding immediately after the consummation of the Transaction. Consequently, Dex One stockholders, as a group, will have reduced ownership and voting power in Dex Media compared to their current ownership and voting power in Dex One.

8) The support of certain secured creditors of Dex One and SuperMedia for the necessary amendments to the applicable credit facilities is subject to the terms of support agreements between Dex One and certain of its secured creditors and SuperMedia and certain of its secured creditors, which are subject to termination

Dex One and SuperMedia have entered into support agreements with certain of their respective senior secured creditors. These support agreements provide, among other things, that the creditor parties will support the amendments to the Dex One or SuperMedia credit facilities and the Dex One or SuperMedia prepackaged bankruptcy plan, as applicable and will support the waiver of certain rights under the various credit agreements. The execution of the support agreements by those secured creditors is not a guarantee that the proposed financing amendments will become effective. As of the date of the filing of our Annual Report on Form 10-K, an insufficient number of creditors are party to the support agreement to cause the proposed financing amendments to be effective in an out of court process, and there is no assurance that Dex One or SuperMedia will ever obtain the support of the requisite numbers of creditors to do so. In addition, these support agreements are subject to automatic termination upon the occurrence of certain events, and to termination upon 10 business days’ notice (subject to cure) upon the occurrence of certain other events. If these support agreements are terminated, the senior secured lenders of Dex One or SuperMedia will have no obligation to support the financing amendments to the Dex One or SuperMedia credit facilities, as applicable, either through an out of court transaction or through a Chapter 11 process. The Transaction will not be consummated if the financing amendments are not approved.

9) Dex One, SuperMedia and Dex Media will incur significant Transaction and Transaction-related transition costs in connection with the Transaction

Dex One and SuperMedia expect that they and Dex Media will incur significant, non-recurring costs in connection with consummating the Transaction and integrating the operations of the two companies. Dex One and SuperMedia may incur additional costs to maintain employee morale and to retain key employees. Dex One and SuperMedia will also incur significant fees and expenses relating to amending existing credit facilities and legal, accounting and other Transaction fees and other costs associated with the Transaction. Some of these costs are payable regardless of whether the Transaction is completed. Upon termination of the Merger Agreement under specified circumstances, Dex One or SuperMedia may be required to pay the other party an expense reimbursement of up to a maximum amount of $7.5 million. Additionally, because the Transaction is being consummated through Chapter 11 Cases, each of Dex One and SuperMedia will incur significant, non-recurring costs in connection with the administration of the bankruptcy cases.


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10) Dex One and, subsequently, Dex Media must continue to retain, motivate and recruit executives and other key employees, which may be difficult in light of uncertainty regarding the Transaction, and failure to do so could negatively affect Dex Media

For the Transaction to be successful, during the period before the Transaction is completed, Dex One and SuperMedia must continue to retain, motivate and recruit executives and other key employees. Moreover, Dex Media must be successful at retaining and motivating key employees following the completion of the Transaction. Experienced employees at both Dex One and SuperMedia are in high demand and competition for their talents can be intense. Employees of both Dex One and SuperMedia may experience uncertainty about their future roles with Dex Media until, or even after, strategies with regard to Dex Media are announced or executed. The potential distractions of the Transaction may adversely affect the ability of Dex One, SuperMedia or, following completion of the Transaction, Dex Media to retain, motivate and recruit executives and other key employees and keep them focused on applicable strategies and goals. A failure by Dex One, SuperMedia or, following the
completion of the Transaction, Dex Media to attract, retain and motivate executives and other key employees during the period prior to or after the completion of the Transaction could have a negative impact on the businesses of Dex One, SuperMedia or Dex Media.

11) The market price for shares of Dex Media common stock may be affected by factors different from those affecting the market price for shares of SuperMedia common stock and Dex One common stock

Upon completion of the Transaction, holders of SuperMedia common stock and Dex One common stock will become holders of Dex Media common stock. The results of operations of Dex Media, as well as the market price of Dex Media common stock, may be affected by factors different from those currently affecting the results of operations and stock prices of SuperMedia and Dex One, including differences in stockholder composition, differences in Dex One’s and SuperMedia’s businesses and differences in Dex One’s and SuperMedia’s assets and capitalizations.

12) Upon the consummation of the Transaction, the Dex Media certificate of incorporation will include transfer restrictions on the Dex Media common stock and restrictions prohibiting the issuance of non-voting equity securities

The Merger Agreement provides that, upon the consummation of the Transaction, the Dex Media certificate of incorporation will include specific transfer restrictions on the Dex Media common stock to reduce the possibility of certain ownership changes occurring after the merger of Merger Sub with and into SuperMedia. These restrictions could impair the ability of certain stockholders to freely transfer shares of Dex Media common stock after the completion of the Transaction. In addition, the Dex Media certificate of incorporation will also include a provision prohibiting the issuance of non-voting equity securities to the extent necessary to satisfy the requirements of the Bankruptcy Code.

13) The shares of Dex Media common stock to be received by Dex One stockholders and SuperMedia stockholders as a result of the Transaction will have different rights from the shares of Dex One common stock and SuperMedia common stock

Upon the completion of the Transaction, both Dex One stockholders and SuperMedia stockholders will become Dex Media stockholders and their rights as stockholders will be governed by the certificate of incorporation and bylaws of Dex Media. The rights associated with both Dex One common stock and SuperMedia common stock are different from the rights associated with Dex Media common stock. In particular, there may be certain stock transfer restrictions on the Dex Media common stock, which will take effect upon the completion of the Transactions, which may help reduce, but not eliminate, the risk of unfavorable ownership changes.

14) Failure to complete the Transaction could negatively impact Dex One

If the Transaction is not completed, the ongoing business of Dex One may be adversely affected and there may be various consequences, including:

the adverse impact to the business of Dex One caused by the failure to pursue other beneficial opportunities due to the focus on the Transaction, without realizing any of the anticipated benefits of the Transaction;
the incurrence of substantial costs by Dex One in connection with the Transaction, without realizing any of the anticipated benefits of the Transaction;
if the Merger Agreement is terminated under certain circumstances, the payment by Dex One to SuperMedia in certain circumstances of an expense reimbursement of up to $7.5 million;
a negative impact on the market price of the common stock of Dex One;
the possibility of Dex One being unable to repay indebtedness when due and payable; and

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Dex One pursuing Chapter 11 or Chapter 7 proceedings resulting in recoveries for creditors and stockholders that are less than contemplated under the prepackaged bankruptcy plans or resulting in no recovery for certain creditors and stockholders.

15) Satisfying the conditions to, and completion of, the Transaction may take longer than, and could cost more than, Dex One and SuperMedia expect. Any delay in completing, or any additional conditions imposed in order to complete, the Transaction may materially and adversely affect the synergies and other benefits that Dex One and SuperMedia expect to achieve from the Transaction and the integration of their respective businesses

The Transaction is subject to a number of conditions beyond Dex One’s and SuperMedia’s control that may prevent, delay or otherwise materially adversely affect its completion. We cannot predict when or whether these conditions will be satisfied. Furthermore, the requirements for obtaining any required regulatory clearances and approvals could delay the completion of the Transaction for a significant period of time or prevent it from occurring altogether. Any delay in completing the Transaction could cause the combined company not to realize some or all of the synergies that we expect to achieve if the Transaction is successfully completed in the expected time frame.

16) The Transaction may not qualify as a tax-free reorganization within the meaning of Section 368(a) of the Code

If the Transaction is consummated, the parties intend that the SuperMedia Merger be treated as a “reorganization” within the meaning of Section 368(a) of the Code. However, such treatment is not free from doubt. In March of 2005, the Internal Revenue Service issued proposed regulations which, if finalized in their current form, would cause the SuperMedia Merger to be a fully taxable transaction. The proposed regulations purport to resolve an uncertainty under current law and would generally require that there be an “exchange of net value” in order for a transaction to qualify as a reorganization. In the context of a reverse triangular merger, the exchange of net value requirement in the proposed regulations is not met where the liabilities of the corporation whose stock is surrendered in the exchange (in this case, SuperMedia) are in excess of its assets. In the absence of conclusive authority requiring that there be an exchange of net value in order for a transaction to qualify as a reorganization, Dex One and SuperMedia intend to take the position that the SuperMedia Merger be treated as a reorganization. No opinion from legal counsel has been given regarding whether the Dex One or SuperMedia Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code, and neither Dex One nor SuperMedia have requested, nor do they intend to request, a ruling from the Internal Revenue Service regarding the U.S. federal income tax consequences of the Transaction. As a result, there can be no assurance that the Internal Revenue Service will not assert, or that a court would not sustain, a position contrary to the parties' intended treatment of the SuperMedia Merger.

Risks Related to the Prepackaged Bankruptcy Plans and Other Bankruptcy Law Considerations

1) The prepackaged bankruptcy plans may have a material adverse effect on Dex One’s and SuperMedia’s operations

The commencement of Chapter 11 Cases could adversely affect the relationships between Dex One and SuperMedia and their respective customers, employees, partners and others. There is a risk, due to uncertainty about Dex One’s and SuperMedia’s future, that, among other things:

Dex One’s and SuperMedia’s customers’ confidence in the abilities of Dex One and SuperMedia, respectively, to produce and deliver their products and services could erode, resulting in a significant decline in Dex One’s and SuperMedia’s revenues, profitability and cash flow;
it may become more difficult to retain, attract or replace key employees;
employees could be distracted from performance of their duties or more easily attracted to other career opportunities; and
Dex One’s and SuperMedia’s suppliers, vendors, and service providers could terminate their relationships with Dex One or SuperMedia, respectively, or require financial assurances or enhanced performance, subject to Dex One’s and SuperMedia’s assertions in the Bankruptcy Court of certain protections under the Bankruptcy Code.


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2) The Bankruptcy Court may not confirm the prepackaged bankruptcy plans or may require Dex One and SuperMedia to re-solicit votes with respect to the prepackaged bankruptcy plans

Neither Dex One nor SuperMedia can assure you that the prepackaged bankruptcy plans will be confirmed by the Bankruptcy Court. Section 1129 of the Bankruptcy Code, which sets forth the requirements for confirmation of a plan of reorganization, requires, among other things, a finding by the Bankruptcy Court that the plan of reorganization is “feasible,” that all claims and interests have been classified in compliance with the provisions of Section 1122 of the Bankruptcy Code, and that, under the plan of reorganization, each holder of a claim or interest within each impaired class either accepts the plan of reorganization or receives or retains cash or property of a value, as of the date the plan of reorganization becomes effective, that is not less than the value such holder would receive or retain if the debtor were liquidated under Chapter 7 of the Bankruptcy Code. There can be no assurance that the Bankruptcy Court will conclude that the feasibility test and other requirements of Section 1129 of the Bankruptcy Code have been met with respect to the prepackaged bankruptcy plans.

In addition, there can be no assurance that modifications to the prepackaged bankruptcy plans would not be required for confirmation, or that such modifications would not require a re-solicitation of votes on the prepackaged bankruptcy plans.

Moreover, the Bankruptcy Court could fail to approve the disclosure statement sent to Dex One’s and SuperMedia’s senior secured lenders and determine that the votes in favor of the prepackaged bankruptcy plans should be disregarded. Dex One and SuperMedia then would be required to recommence the solicitation process, which would include re-filing plans of reorganization and disclosure statements. Typically, this process involves a 60 to 90 day period and includes a court hearing for the required approval of a disclosure statement, followed (after bankruptcy court approval) by another solicitation of claim and interest holder votes for the plan of reorganization, followed by a confirmation hearing which the Bankruptcy Court will determine whether the requirements for confirmation have been satisfied, including the requisite claim and interest holder acceptances.

If the prepackaged bankruptcy plans are not confirmed, Dex One’s and SuperMedia’s reorganization cases may be converted into a case under Chapter 7 of the Bankruptcy Code, pursuant to which a trustee would be appointed or elected to liquidate either Dex One’s or SuperMedia’s assets, as applicable, for distribution in accordance with the priorities established by the Bankruptcy Code. Dex One and SuperMedia believe that liquidation under Chapter 7 of the Bankruptcy Code would result in, among other things, smaller distributions being made to creditors than those provided for in the prepackaged bankruptcy plans because of:

the likelihood that Dex One’s and SuperMedia’s assets would need to be sold or otherwise disposed of in a less orderly fashion over a short period of time;
additional administrative expenses involved in the appointment of a trustee; and
additional expenses and claims, some of which would be entitled to priority, which would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of Dex One’s and SuperMedia’s operations.

3) The Bankruptcy Court may find the solicitation of acceptances inadequate

Usually, votes to accept or reject a plan of reorganization are solicited after the filing of a petition commencing a Chapter 11 case. Nevertheless, a debtor may solicit votes prior to the commencement of a Chapter 11 case in accordance with Sections 1125(g) and 1126(b) of the Bankruptcy Code and Bankruptcy Rule 3018(b). The Federal Rules of Bankruptcy Procedure are referred to as the “Bankruptcy Rules.” Sections 1125(g) and 1126(b) of the Bankruptcy Code and Bankruptcy Rule 3018(b) require that:

solicitation comply with applicable non-bankruptcy law;
the plan of reorganization be transmitted to substantially all creditors and other interest holders entitled to vote; and
the time prescribed for voting is not unreasonably short.

With regard to solicitation of votes prior to the commencement of a bankruptcy case, if the Bankruptcy Court concludes that the requirements of Bankruptcy Rule 3018(b) have not been met, then the Bankruptcy Court could deem such votes invalid, whereupon the prepackaged bankruptcy plans could not be confirmed without a resolicitation of votes to accept or reject the prepackaged bankruptcy plans. While Dex One and SuperMedia believe that the requirements of Sections 1125(g) and 1126(b) of the Bankruptcy Code and Bankruptcy Rule 3018(b) will be met, there can be no assurance that the Bankruptcy Court will reach the same conclusion.



27



4) Even if Dex One and SuperMedia receive all necessary acceptances necessary for the prepackaged bankruptcy plans to become effective, either Dex One or SuperMedia may fail to meet all conditions precedent to effectiveness of the Dex One prepackaged bankruptcy plan or the SuperMedia prepackaged plan, as applicable

Although Dex One and SuperMedia believe that the effective date will occur very shortly after confirmation of the prepackaged bankruptcy plans, there can be no assurance as to such timing. The confirmation and effectiveness of the prepackaged bankruptcy plans are subject to certain conditions that may or may not be satisfied. Neither Dex One nor SuperMedia can assure you that all requirements for confirmation and effectiveness required under the prepackaged bankruptcy plans will be satisfied.

5) A claim or interest holder may object to, and the Bankruptcy Court may disagree with, either Dex One’s or SuperMedia’s classifications of Claims and Interests

Section 1122 of the Bankruptcy Code provides that a plan may place a claim or an interest in a particular class only if such claim is substantially similar to the other claims or interests of such class. Although Dex One and SuperMedia believe that the classifications of Claims and Interests under the prepackaged bankruptcy plans complies with the requirements set forth in the Bankruptcy Code, once any Chapter 11 Cases have been commenced, a Claim or Interest holder could challenge the classification. In such event, the cost of the prepackaged bankruptcy plans and the time needed to confirm the prepackaged bankruptcy plans may increase, and neither Dex One nor SuperMedia can assure you that the Bankruptcy Court will agree with its classification of Claims and Interests. If the Bankruptcy Court concludes that either or both of the classifications of Claims and Interests under the prepackaged bankruptcy plans do not comply with the requirements of the Bankruptcy Code, Dex One or SuperMedia may need to modify the Dex One prepackaged bankruptcy plan or the SuperMedia prepackaged plan, respectively. Such modification could require a re-solicitation of votes on either or both of the prepackaged bankruptcy plans. The prepackaged bankruptcy plans may not be confirmed if the Bankruptcy Court determines that either or both of Dex One’s or SuperMedia’s classifications of Claims and Interests is not appropriate.

6) The SEC, the United States Trustee, or other parties may object to the prepackaged bankruptcy plans on account of the third-party release provisions

Any party in interest, including the SEC and the United States Trustee, could object to either or both of the prepackaged bankruptcy plans on the grounds that the third-party releases are not given consensually or in a permissible non-consensual manner. In response to such an objection, the Bankruptcy Court could determine that the third-party releases are not valid under the Bankruptcy Code. If the Bankruptcy Court made such a determination, neither the Dex One prepackaged bankruptcy plan nor SuperMedia prepackaged bankruptcy plan, as applicable, could be confirmed without being modified to remove the third party release provisions. This could result in substantial delay in confirmation of either or both of the prepackaged bankruptcy plans or either or both of the prepackaged bankruptcy plans not being confirmed.

7) Contingencies may affect distributions to holders of allowed Claims and Interests

The distributions available to holders of allowed Claims and Interests under the prepackaged bankruptcy plans can be affected by a variety of contingencies, including whether the Bankruptcy Court orders certain allowed claims to be subordinated to other allowed claims. The occurrence of any and all such contingencies could affect distributions under the prepackaged bankruptcy plans.

8) Other parties in interest might be permitted to propose alternative plans of reorganization that may be less favorable to certain of Dex One’s and SuperMedia’s constituencies than the prepackaged bankruptcy plans

Other parties in interest could seek authority from the Bankruptcy Court to propose an alternative plan of reorganization. Under the Bankruptcy Code, a debtor-in-possession initially has the exclusive right to propose and solicit acceptances of a plan of reorganization for a period of 120 days from the filing. However, such exclusivity period can be reduced or terminated upon order of the Bankruptcy Court. If such an order were to be entered, other parties in interest would then have the opportunity to propose alternative plans of reorganization.


28


If other parties in interest were to propose an alternative plan of reorganization following expiration or termination of Dex One’s and SuperMedia’s exclusivity periods, such a plan may be less favorable to existing equity interest holders and may seek to exclude these holders from retaining any equity under their plan. Alternative plans of reorganization also may treat less favorably the claims of a number of other constituencies, including the senior secured creditors, Dex One’s and SuperMedia’s employees and Dex One’s and SuperMedia’s trading partners and customers. Dex One and SuperMedia consider maintaining relationships with their senior secured creditors, common stockholders, employees and trading partners and customers as critical to maintaining the value of Dex Media following consummation of the Transaction, and have sought to treat those constituencies accordingly. However, proponents of alternative plans of reorganization may not share Dex One’s and SuperMedia’s assessments and may seek to impair the claims of such constituencies to a greater degree. If there were competing plans of reorganization, Dex One’s and SuperMedia’s reorganization cases likely would become longer, more complicated and much more expensive. If this were to occur, or if Dex One’s or SuperMedia’s employees or other constituencies important to Dex One’s or SuperMedia’s business reacted adversely to an alternative plan of reorganization, the adverse consequences discussed in the first risk factor in this section discussing risks related to the prepackaged bankruptcy plans also could occur.

9) Dex One’s or SuperMedia’s business may be negatively affected if Dex One or SuperMedia is unable to assume its executory contracts

An executory contract is a contract on which performance remains due to some extent by both parties to the contract. The prepackaged bankruptcy plans provide for the assumption of all executory contracts and unexpired leases, unless designated on a schedule of rejected contracts. Dex One and SuperMedia intend to preserve as much of the benefit of their existing contracts and leases as possible. However, with respect to some limited classes of executory contracts, including licenses with respect to patents or trademarks, either Dex One or SuperMedia may need to obtain the consent of the counterparty to maintain the benefit of the contract. There is no guarantee that such consent either would be forthcoming or that conditions would not be attached to any such consent that makes assuming the contracts unattractive. Either Dex One or SuperMedia, as applicable, then would be required to either forego the benefits offered by such contracts or to find alternative arrangements to replace them.

10) Material transactions could be set aside as fraudulent conveyances or preferential transfers

Certain payments received by stakeholders prior to the bankruptcy filing could be challenged under applicable debtor/creditor or bankruptcy laws as either a “fraudulent conveyance” or a “preferential transfer.” A fraudulent conveyance occurs when a transfer of a debtor’s assets is made with the intent to defraud creditors or in exchange for consideration that does not represent reasonably equivalent value to the property transferred. A preferential transfer occurs upon a transfer of property of the debtor while the debtor is insolvent for the benefit of a creditor on account of an antecedent debt owed by the debtor that was made on or within 90 days before the date of filing of the bankruptcy petition or one year before the date of filing of the petition, if the creditor, at the time of such transfer was an insider. If any transfer was challenged in the Bankruptcy Court and found to have occurred with regard to any of Dex One’s or SuperMedia’s material transactions, a bankruptcy court could order the recovery of all amounts received by the recipient of the transfer.

11) Either Dex One or SuperMedia may be unsuccessful in obtaining first day orders to permit it to pay its key suppliers and its employees, or to continue to perform customer programs, in the ordinary course of business

Dex One and SuperMedia have tried to address potential concerns of their key customers, vendors, employees and other parties in interest that might arise from the filing of the prepackaged bankruptcy plans through a variety of provisions incorporated into or contemplated by the prepackaged bankruptcy plans, including Dex One’s and SuperMedia’s intentions to seek appropriate court orders to permit Dex One and SuperMedia to pay their pre-petition and post petition accounts payable to parties in interest in the ordinary course. However, there can be no guarantee that either Dex One or SuperMedia will be successful in obtaining the necessary approvals of the Bankruptcy Court for such arrangements or for every party in interest Dex One or SuperMedia may seek to treat in this manner, and, as a result, Dex One’s and SuperMedia’s businesses might suffer.


29


12) Neither Dex One nor SuperMedia can predict the amount of time that it will spend in bankruptcy for the purpose of implementing the Dex One prepackaged bankruptcy plan or the SuperMedia prepackaged bankruptcy plan, respectively, and a lengthy bankruptcy proceeding could disrupt Dex One’s or SuperMedia’s business, as well as impair the prospect for reorganization on the terms contained in the prepackaged bankruptcy plans

While both Dex One and SuperMedia expect that Chapter 11 Cases filed solely for the purpose of implementing the prepackaged bankruptcy plans will be of short duration and would not be unduly disruptive to the either Dex One’s or SuperMedia’s business, neither Dex One nor SuperMedia can be certain that this necessarily will be the case. Although the prepackaged bankruptcy plans are designed to minimize the length of the bankruptcy proceedings, it is impossible to predict with certainty the amount of time that either Dex One or SuperMedia may spend in bankruptcy, and neither Dex One nor SuperMedia can be certain that either the Dex One prepackaged bankruptcy plan or the SuperMedia prepackaged bankruptcy plan would be confirmed. Even if confirmed on a timely basis, a bankruptcy proceeding to confirm the prepackaged bankruptcy plans could itself have an adverse effect on either Dex One’s or SuperMedia’s business. There is a risk, due to uncertainty about Dex One’s and SuperMedia’s futures, that, among other things:

customers could move to Dex One’s and SuperMedia’s competitors, including competitors that have comparatively greater financial resources and that are in comparatively less financial distress;
employees could be distracted from performance of their duties or more easily attracted to other career opportunities; and
business partners could terminate their relationship with either Dex One or SuperMedia or demand financial assurances or enhanced performance, any of which could impair either Dex One’s or SuperMedia’s prospects.

A lengthy bankruptcy proceeding also would involve additional expenses and divert the attention of management from the operation of Dex One’s and SuperMedia’s businesses, as well as create concerns for employees, suppliers and customers.

The disruption that bankruptcy proceedings would have upon Dex One’s and SuperMedia’s businesses could increase with the length of time it takes to complete the proceeding. If either Dex One or SuperMedia is unable to obtain confirmation of either the Dex One prepackaged bankruptcy plan or the SuperMedia prepackaged bankruptcy plan on a timely basis, because of a challenge to either the Dex One prepackaged bankruptcy plan or the SuperMedia prepackaged bankruptcy plan or otherwise, either Dex One or SuperMedia may be forced to operate in bankruptcy for an extended period of time while it tries to develop a different reorganization plan that can be confirmed. A protracted bankruptcy case could increase both the probability and the magnitude of the adverse effects described above.

13) Either Dex One or SuperMedia may seek to amend, waive, modify or withdraw either the Dex One prepackaged bankruptcy plan or the SuperMedia prepackaged bankruptcy plan, respectively, at any time prior to the confirmation of the prepackaged bankruptcy plans

Dex One and SuperMedia reserve the right, prior to the confirmation or substantial consummation thereof, subject to the provisions of Section 1127 of the Bankruptcy Code and applicable law and the Dex One support agreement and the SuperMedia support agreement, respectively, to amend the terms of the Dex One prepackaged bankruptcy plan or the SuperMedia prepackaged bankruptcy plan, respectively, or waive any conditions thereto if and to the extent such amendments or waivers are necessary or desirable to consummate the prepackaged bankruptcy plans. The potential impact of any such amendment or waiver on the holders of Claims and Interests cannot presently be foreseen but may include a change in the economic impact of the prepackaged bankruptcy plans on some or all of the proposed classes or a change in the relative rights of such classes. All holders of Claims and Interests will receive notice of such amendments or waivers required by applicable law and the Bankruptcy Court. If, after receiving sufficient acceptances, but prior to confirmation of the prepackaged bankruptcy plans, either Dex One or SuperMedia seeks to modify the Dex One prepackaged bankruptcy plan or the SuperMedia prepackaged bankruptcy plan, as applicable, the previously solicited acceptances will be valid only if (1) all classes of adversely affected creditors and interest holders accept the modification in writing or (2) the Bankruptcy Court determines, after notice to designated parties, that such modification was de minimis or purely technical or otherwise did not adversely change the treatment of holders accepting Claims and Interests or is otherwise permitted by the Bankruptcy Code.


30


14) Dex One or SuperMedia may object to the amount or classification of a claim or interest

Except as otherwise provided in the prepackaged bankruptcy plans, Dex One and SuperMedia reserve the right to object to the amount or classification of any claim or interest under either the Dex One prepackaged bankruptcy plan or SuperMedia prepackaged bankruptcy plan, respectively. The estimates set forth in this document cannot be relied on by any holder of a claim or interest where such claim or interest is subject to an objection. Any holder of a claim or interest that is subject to an objection thus may not receive its expected share of the estimated distributions described in this document.

15) The Bankruptcy Court may not approve Dex One’s or SuperMedia’s use of cash collateral

If the Chapter 11 Cases are filed, Dex One and SuperMedia will ask the Bankruptcy Court to authorize Dex One and SuperMedia, respectively, to use cash collateral to fund the Chapter 11 Cases. Such access to cash collateral will provide liquidity during the pendency of the Chapter 11 Cases. There can be no assurance that the Bankruptcy Court will approve such use of cash collateral on the terms requested. Moreover, if the Chapter 11 Cases take longer than expected to conclude, either Dex One or SuperMedia may exhaust their available cash collateral. There can be no assurance that either Dex One or SuperMedia will be able to obtain an extension of the right to use cash collateral, in which case, the liquidity necessary for the orderly functioning of either Dex One’s and SuperMedia’s businesses may be impaired materially.

16) The confirmation and consummation of the prepackaged bankruptcy plans could be delayed

Dex One and SuperMedia estimate that the process of obtaining confirmation of the prepackaged bankruptcy plans by the Bankruptcy Court will last approximately 30 to 60 days from the date of the commencement of the Chapter 11 Cases, but it could last considerably longer if, for example, confirmation is contested or the conditions to confirmation or consummation are not satisfied or waived.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

31



ITEM 2. PROPERTIES

The following table details the location and general character of the material properties used by the Company to conduct its business as of March 1, 2013:

Property Location
 
Approximate Square Footage
 

Purpose
 

Lease Expiration
Lone Tree, CO (1)
 
143,000

 
Sales and Administration
 
2014
Cary, NC
 
105,000

 
Corporate Headquarters
 
2016
Overland Park, KS (1)(2)
 
64,000

 
Sales and Operations
 
2016
Morrisville, NC (1)(2)
 
56,000

 
Operations and Information Technology
 
2015
Maple Grove, MN (1)
 
28,000

 
Sales and Operations
 
2014
Beaverton, OR (1)
 
27,000

 
Sales and Operations
 
2013
Phoenix, AZ (1)
 
26,000

 
Sales and Operations
 
2013
Bristol, TN (2)
 
25,000

 
Sales and Operations
 
Owned
Santa Monica, CA (3)
 
22,000

 
Digital Operations
 
2014
Tinley Park, IL (2)
 
21,000

 
Sales and Operations
 
2014
Omaha, NE (1)
 
20,000

 
Sales
 
2015
Lombard, IL (2)
 
20,000

 
Sales and Operations
 
2016
 
(1) Represents facilities utilized by Dex Media, Inc., our direct wholly-owned subsidiary, and its direct and indirect subsidiaries, to conduct their operations. The Company intends to extend the leases and reduce the square footage of the Beaverton, OR and Phoenix, AZ properties that expire in 2013.
(2) Represents facilities utilized by R.H. Donnelley Inc., our direct wholly-owned subsidiary, and its direct subsidiaries, to conduct their operations.
(3) Represents facilities utilized by Dex One Digital and other employees involved in our interactive business.

We also lease space for additional operations, administrative and sales offices. We believe that these facilities are adequate for current and future operations.

ITEM 3. LEGAL PROCEEDINGS

We are subject to various lawsuits, claims, and regulatory and administrative proceedings arising out of our business covering matters such as general commercial, governmental regulations, intellectual property, employment, tax and other actions. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on our results of operations, cash flows or financial position.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.



32


PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Registrant’s Common Equity and Related Stockholder Matters

During the years ended December 31, 2012 and 2011, Dex One’s common stock was traded on the New York Stock Exchange (“NYSE”) under the symbol “DEXO.” On December 4, 2012, the NYSE notified the Company that we had fallen below one of the NYSE's continued listing standards, as the Company had not maintained an average closing price of its common stock over a consecutive 30 trading-day period equal to or exceeding $1.00 per share. On January 3, 2013, the NYSE notified the Company that we were back in compliance with the $1.00 per share continued listing requirement.

On February 27, 2013, the NYSE notified Dex One that it had commenced proceedings to delist the Company's common stock from the NYSE because the Company did not meet its continued listing standard that requires us to maintain an average total market capitalization over a consecutive 30 trading-day period equal to or exceeding $100 million. The Company has filed an appeal with the NYSE regarding this determination. During the appeal process, the Company anticipates that its common stock will continue to trade on the NYSE bearing the indicator "BC" until it is either delisted or becomes compliant. Please refer to our Current Report on Form 8-K filed with the SEC on February 28, 2013 for additional information.

On March 1, 2013, the closing bid or ask market price of Dex One common stock was $1.79 and there were four registered holders of record of our common stock.
 The table below presents the high and low sales price of the Company’s common stock for each quarter of the last two years.
 
2012
 
2011
 
High
 
Low
 
High
 
Low
 
 
 
 
 
 
 
 
1st Quarter
$
2.32

 
$
1.17

 
$
9.42

 
$
3.87

2nd Quarter
$
1.38

 
$
0.73

 
$
5.09

 
$
1.61

3rd Quarter
$
1.96

 
$
0.99

 
$
2.96

 
$
0.54

4th Quarter
$
1.89

 
$
0.72

 
$
1.92

 
$
0.36


Dex One did not pay any common stock dividends during the years ended December 31, 2012 and 2011.

Our various debt instruments contain financial restrictions that place limitations on our ability to pay dividends in the future. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for additional information regarding these instruments and agreements and relevant limitations thereunder.

Share Repurchases
No shares of Dex One common stock were repurchased during the fourth quarter of 2012.


33


Equity Compensation Plan Information
Under the Dex One Equity Incentive Plan (“EIP”), certain employees and non-employee directors of the Company are eligible to receive stock options, stock appreciation rights (“SARs”), limited stock appreciation rights in tandem with stock options, restricted stock and restricted stock units. Under the EIP, 5.6 million shares of our common stock were authorized for grant. To the extent that shares of our common stock are not issued or delivered by reason of (i) the expiration, termination, cancellation or forfeiture of such award, with certain exceptions such as shares acquired from employees to satisfy minimum tax obligations related to the vesting of restricted stock awards or (ii) the settlement of such award in cash, then such shares of our common stock shall again be available under the EIP. Stock awards will typically be granted at the closing market value of our common stock at the date of the grant, become exercisable in ratable installments or otherwise, over a period of one to four years from the date of grant, and may be exercised up to a maximum of ten years from the date of grant. The Company’s Compensation & Benefits Committee determines termination, vesting and other relevant provisions at the date of the grant.

The following table sets forth securities outstanding under existing equity compensation plans, as well as securities remaining available for future issuance under those plans, in each case as of December 31, 2012.

Equity Compensation Plan Information








Plan category


(a)
Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights
 



(b)
Weighted-average Exercise Price of Outstanding Options, Warrants and Rights
 
(c)
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a))
Equity compensation plans not approved by security holders:
 
 
 
 
 
EIP (1)
2,025,508

 
$
7.80

 
1,420,766

CEO Stock-Based Awards (2)
800,000

 
19.94

 

Other stock-based awards (3)
50,000

 
6.97

 

Total
2,875,508

 
$
11.17

 
1,420,766

 
(1) 
The EIP was approved by the Bankruptcy Court pursuant to the Plan of Reorganization in January 2010.

(2)  
On September 13, 2010, Mr. Mockett was awarded 200,000 shares of the Company's common stock in the form of a restricted stock award with a grant price of $9.62 per share, which was the closing price of the Company’s common stock on September 13, 2010, that will vest ratably over three years. On September 13, 2010, he was also granted a fair market value option to purchase 200,000 shares of the Company's common stock at an exercise price of $9.75 per share, which was the closing price of the Company's common stock on September 3, 2010, that will vest ratably over four years, and fully vested premium priced options to purchase 600,000 shares of the Company's common stock, a third of which shares have an exercise price of $15 per share, a third of which shares have an exercise price of $23 per share, and a third of which shares have an exercise price of $32 per share (collectively, the “CEO Stock-Based Awards”). All of the CEO Stock-Based Awards have a grant date for accounting and reporting purposes of September 13, 2010, which represents the date on which the grant date determination provisions outlined in FASB ASC 718, Compensation - Stock Compensation, were satisfied.

(3) 
Represents other stock-based awards granted to an executive officer that are not included under the EIP.


34


Stockholder Return Performance Graph

The following performance graph compares the cumulative total stockholder return on the Company's common stock for the period February 1, 2010 (the first day our new common stock began trading on the NYSE following our emergence from Chapter 11) through December 31, 2012 with the returns of the Russell 2000 Index and the S&P 400 Advertising Index, assuming an investment of $100 on February 1, 2010 and the reinvestment of all dividends. Since RHD's common stock was cancelled in connection with our restructuring, stock performance prior to February 1, 2010 does not provide a meaningful comparison and is not being provided.
 
 
2/1/10
3/31/10
6/30/10
9/30/10
12/31/10
3/31/11
6/30/11
9/30/11
12/31/11
3/31/12
6/30/12
9/30/12
12/31/12
Dex One
$
100.00

$
83.19

$
56.62

$
36.59

$
22.23

$
14.42

$
7.54

$
1.67

$
4.95

$
4.23

$
2.76

$
3.72

$
4.71

Russell 2000 Index
$
100.00

$
118.38

$
87.09

$
109.50

$
133.79

$
124.31

$
90.94

$
56.59

$
91.37

$
107.69

$
95.03

$
123.14

$
128.76

S&P 400 Advertising Index
$
100.00

$
111.39

$
100.04

$
110.98

$
128.63

$
138.46

$
135.81

$
105.73

$
121.61

$
136.28

$
131.06

$
137.46

$
139.41




35


ITEM 6.
SELECTED FINANCIAL DATA

The following selected financial data is derived from the Company’s and the Predecessor Company’s audited consolidated financial statements. The information set forth below should be read in conjunction with the audited consolidated financial statements and related notes in Item 8,“Financial Statements and Supplementary Data,” with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 1A, “Risk Factors.”     
 
Successor Company
 
 
Predecessor Company
 
Years Ended December 31,
Eleven Months Ended December 31, 2010 (1)
 
 
One Month Ended January 31, 2010 (1)
Years Ended December 31,
(in thousands, except share and per share data)
2012
2011
2009
2008
Statements of Comprehensive Income (Loss) Data:
 
 
 
 
 
 
 
 
Net revenue
$
1,300,009

$
1,480,623

$
830,887

 
 
$
160,372

$
2,202,447

$
2,616,811

Impairment charges (2)

(801,074
)
(1,159,266
)
 
 

(7,337,775
)
(3,870,409
)
Operating income (loss)
125,729

(430,367
)
(1,294,256
)
 
 
64,074

(6,797,503
)
(3,005,717
)
Gain on sale of assets, net (3)    

13,437


 
 



Gain on debt repurchases, net (4)      
139,555



 
 


265,166

Reorganization items, net (5)    



 
 
7,793,132

(94,768
)

Net income (loss)
$
62,401

$
(518,964
)
$
(923,592
)
 
 
$
6,920,009

$
(6,453,293
)
$
(2,298,327
)
 
 
 
 
 
 
 
 
 
Earnings (Loss) Per Share:
 
 
 
 
 
 
 
 
Basic
$
1.23

$
(10.35
)
$
(18.46
)
 
 
$
100.27

$
(93.67
)
$
(33.41
)
Diluted
$
1.23

$
(10.35
)
$
(18.46
)
 
 
$
100.21

$
(93.67
)
$
(33.41
)
 
 
 
 
 
 
 
 
 
Shares Used in Computing Earnings (Loss) Per Share:
 
 
 
 
 
 
 
 
Basic
50,643

50,144

50,020

 
 
69,013

68,896

68,793

Diluted
50,653

50,144

50,020

 
 
69,052

68,896

68,793

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
Total assets (6)    
$
2,835,418

$
3,460,204

$
4,488,848

 
 
$
5,913,482

$
4,498,794

$
11,880,709

Long-term debt, including current maturities (6)
2,009,638

2,510,357

2,737,221

 
 
3,264,578

3,554,776

9,622,256

Liabilities subject to compromise (6)



 
 

6,352,813


Shareholders’ equity (deficit) (6)
40,609

(9,867
)
525,916

 
 
1,450,784

(6,919,048
)
(493,375
)
(1)
As a result of our emergence from Chapter 11 on the Effective Date, financial information for Dex One is presented as of and for the eleven months ended December 31, 2010. Financial information for the Predecessor Company is presented as of and for the one month ended January 31, 2010. See Item 8, “Financial Statements and Supplementary Data” – Note 3, “Fresh Start Accounting and Reorganization Items, Net” for additional information.
(2)
During the year ended December 31, 2011, we recognized a goodwill impairment charge of $801.1 million.
We recognized a non-goodwill intangible asset impairment charge associated with trade names and trademarks, technology, local customer relationships and other from our former Business.com reporting unit of $21.6 million and a goodwill impairment charge of $1,137.6 million, for a total impairment charge of $1,159.3 million during the eleven months ended December 31, 2010.
See Item 8, “Financial Statements and Supplementary Data” - Note 2, “Summary of Significant Accounting Policies – Identifiable Intangible Assets and Goodwill” for additional information on the impairment charges recorded during 2011 and 2010.
The Predecessor Company recognized a non-goodwill intangible asset impairment charge of $7,337.8 million during the year ended December 31, 2009 associated with directory services agreements, advertiser relationships, third party contracts and network platforms acquired in prior acquisitions.
The Predecessor Company recognized a goodwill impairment charge of $3,123.8 million and non-goodwill intangible asset and other long-lived asset impairment charges totaling $746.6 million associated with local and national customer relationships and tradenames and technology acquired in prior acquisitions, for a total impairment charge of $3,870.4 million during the year ended December 31, 2008.

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(3)  
On February 14, 2011, we completed the sale of substantially all net assets of Business.com, including long-lived assets, domain names, trademarks, brands, intellectual property, related content and technology platform. As a result, we recognized a gain on the sale of these assets of $13.4 million during the first quarter of 2011.
(4)  
As a result of financing activities conducted during 2012, the Company recorded gains on debt repurchases of $139.6 million during the year ended December 31, 2012. See Item 8, "Financial Statements and Supplementary Data" - Note 1, "Business and Basis of Presentation - Significant Financing Developments" for additional information.
As a result of financing activities conducted during 2008, the Predecessor Company recorded a gain on debt repurchases of $265.2 million during the year ended December 31, 2008.
(5) 
Reorganization items directly associated with the process of reorganizing the business under Chapter 11 have been recorded on a separate line item on the consolidated statement of comprehensive income (loss). The Predecessor Company recorded $7.8 billion of net reorganization items during the one month ended January 31, 2010 comprised of a $4.5 billion gain on reorganization / settlement of liabilities subject to compromise and fresh start accounting adjustments of $3.3 billion. For the year ended December 31, 2009, the Predecessor Company recorded $94.8 million of net reorganization items. See Item 8, “Financial Statements and Supplementary Data” – Note 3, “Fresh Start Accounting and Reorganization Items, Net” for additional information.
(6)
The significant decline in total assets and shareholders’ deficit as of December 31, 2009 and 2008 is a direct result of the impairment charges noted above. The significant decline in long-term debt, including current maturities, at December 31, 2009 is a direct result of the Predecessor Company’s senior notes, senior discount notes and senior subordinated notes (“Notes in Default”), which were reclassed to liabilities subject to compromise on the consolidated balance sheet at December 31, 2009. See Item 8, “Financial Statements and Supplementary Data” – Note 3, “Fresh Start Accounting and Reorganization Items, Net” for additional information.


ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Item should be read in conjunction with the audited consolidated financial statements and notes thereto that are included in Item 8, “Financial Statements and Supplementary Data.” Unless otherwise indicated or as the context may otherwise indicate, the terms “Dex One,” “Successor Company,” “Company,” “Parent Company,” “we,” “us” and “our” refer to Dex One Corporation and its direct and indirect wholly-owned subsidiaries subsequent to the Effective Date, which is defined below. The financial information set forth in this Annual Report, unless otherwise indicated or as the context may otherwise indicate, reflects the consolidated results of operations and financial position of Dex One as of and for the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010.

Dex One became the successor registrant to R.H. Donnelley Corporation (“RHD” “Predecessor Company,” “we,” “us” and “our” for operations prior to January 29, 2010, the “Effective Date”) upon emergence from Chapter 11 proceedings under Title 11 of the U.S. Bankruptcy Code (“Chapter 11” or the "Bankruptcy Code") on the Effective Date. The financial information set forth in this Annual Report, unless otherwise indicated or as the context may otherwise indicate, reflects the consolidated results of operations and financial position of RHD as of and for the one month ended January 31, 2010.

On May 28, 2009, the Predecessor Company and its subsidiaries filed voluntary petitions for Chapter 11 relief in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). On January 12, 2010, the Bankruptcy Court entered the Findings of Fact, Conclusions of Law, and Order Confirming the Joint Plan of Reorganization for the Predecessor Company and its subsidiaries (the “Plan”). The Plan became effective in accordance with its terms on the Effective Date. See our Annual Report on Form 10-K for the year ended December 31, 2010 for detailed information on matters associated with the Chapter 11 proceedings.


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Recent Trends and Developments Related to Our Business

Agreement and Plan of Merger

On August 20, 2012, Dex One entered into an Agreement and Plan of Merger (the “Merger Agreement”) with SuperMedia Inc., (“SuperMedia”), Newdex, Inc., a direct wholly owned subsidiary of the Company ("Newdex"), and Spruce Acquisition Sub, Inc., a direct wholly owned subsidiary of Newdex (“Merger Sub”) (collectively, the "Merger Entities"), providing for the business combination of Dex One and SuperMedia. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, (i) Dex One will merge with and into Newdex, with Newdex as the surviving entity (the “Dex Merger”) and (ii) immediately following consummation of the Dex Merger, Merger Sub will merge with and into SuperMedia, with SuperMedia as the surviving entity and becoming a direct wholly owned subsidiary of Newdex (the “SuperMedia Merger” and together with the Dex Merger, the “Mergers”). As a result of the Mergers, Newdex, as successor to Dex One, will be renamed Dex Media, Inc. (“Dex Media”) and become a newly listed company.

On December 5, 2012, the Merger Entities entered into an Amended and Restated Agreement and Plan of Merger (the “Amended and Restated Merger Agreement”), which upholds the basic economic terms and strategic merits of the Mergers included in the original Merger Agreement, and, among other things, (i) extends the date on which a party may unilaterally terminate the Amended and Restated Merger Agreement from December 31, 2012 to June 30, 2013, (ii) reduces the number of directors of Dex Media after the effectiveness of the Mergers from eleven to ten, and (iii) provides that if either Dex One or SuperMedia is unable to obtain the requisite consents to the Mergers from its stockholders and to the contemplated amendments to its respective financing agreements from its senior secured lenders, the Mergers may be effected through voluntary pre-packaged plans under Chapter 11 of the Bankruptcy Code. Because we were unable to obtain the requisite consents to the contemplated amendments to our financing agreements from our senior secured lenders to effectuate the Mergers, the Company voluntarily filed a pre-packaged bankruptcy under Chapter 11 on March 18, 2013. See "Filing of Voluntary Petitions in Chapter 11" below.
Completion of the Mergers is subject to certain conditions stated in the Amended and Restated Merger Agreement. See Item 8, "Financial Statements and Supplementary Data" - Note 1, "Business and Basis of Presentation - Agreement and Plan of Merger" for summarized information on the Amended and Restated Merger Agreement. In addition, please refer to the Amended and Restated Merger Agreement filed with a Current Report on Form 8-K with the Securities and Exchange Commission ("SEC") on December 6, 2012 for detailed information on the terms and conditions of the Amended and Restated Merger Agreement. See Item 1A, "Rick Factors” for risks and uncertainties associated with the proposed merger.

Support and Limited Waiver Agreement
On December 5, 2012, Dex One also entered into a Support and Limited Waiver Agreement (the “Support Agreement”) with certain lenders, administrative agents and collateral agents under its senior secured credit facilities. Under the Support Agreement, Dex One has agreed, consistent with its obligations under the Amended and Restated Merger Agreement, to take any and all reasonably necessary and appropriate actions (i) in furtherance of the Mergers and the financing amendments to its senior secured credit facilities, (ii) to distribute a disclosure statement to its lenders under the senior secured credit facilities and solicit their votes to accept Dex One's pre-packaged plan of reorganization, and (iii) if Dex One elects to effect the Mergers and financing amendments through a Chapter 11 case, to file for Chapter 11 and seek confirmation of its pre-packaged plan by the bankruptcy court.
See Item 8, "Financial Statements and Supplementary Data" - Note 1, "Business and Basis of Presentation - Support and Limited Waiver Agreement" for summarized information on the Support Agreement. In addition, please refer to the Support Agreement filed with a Current Report on Form 8-K with the SEC on December 6, 2012 for detailed information on the terms and conditions of the Support Agreement.


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Filing of Voluntary Petitions in Chapter 11
On March 18, 2013 (the "Petition Date"), Dex One and certain of its subsidiaries (collectively, the “Debtors”) filed voluntary petitions in the Bankruptcy Court seeking Chapter 11 relief under the provisions of the Bankruptcy Code. The Chapter 11 cases are being jointly administered under the caption In re Dex One Corporation, et al. (the “Chapter 11 Cases”). The Debtors will continue to operate their businesses and manage their properties as debtors in possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. In connection with the Chapter 11 Cases, the Company has made information available on its website, www.DexOne.com, including its proposed plan of reorganization and disclosure statement describing the terms of the plan of reorganization and other information concerning the Company.

The filing of the Chapter 11 Cases triggered an event of default that rendered the remaining financial obligations under the Company's $300.0 million Initial Aggregate Principal Amount of 12%/14% Senior Subordinated Notes due 2017 (“Dex One Senior Subordinated Notes”) and senior secured credit facilities automatically and immediately due and payable. The Debtors believe that any efforts to enforce the financial obligations under the Dex One Senior Subordinated Notes and senior secured credit facilities are stayed as a result of the filing of the Chapter 11 Cases in the Bankruptcy Court.

We anticipate confirmation of our plan of reorganization by the Bankruptcy Court, emergence from the Chapter 11 proceedings and consummation of the Mergers to occur in the first half of 2013, although there can be no assurance that these objectives will occur within the expected timeframe or at all. See Item 1A, "Rick Factors” for risks and uncertainties associated with the prepackaged bankruptcy plans and other bankruptcy law considerations.

Going Concern

Item 8, "Financial Statements and Supplementary Data" - Note 1, "Business and Basis of Presentation - Going Concern” contains a statement indicating that certain events could impact our ability to continue as a going concern. The assessment of our ability to continue as a going concern was made by management considering, among other factors: (1) the Company's voluntary Chapter 11 bankruptcy filing on March 18, 2013 and the impact it has or could have on our outstanding debt, (2) the Company's highly leveraged capital structure and the current maturity date of our senior secured credit facilities of October 24, 2014, and (3) the significant negative impact on our operating results and cash flows associated with our print products primarily as a result of (i) customer attrition, (ii) declines in overall advertising spending by our customers, (iii) the significant impact of the weak local business conditions on consumer spending in our clients' markets, (iv) an increase in competition and more fragmentation in local business search and (v) the migration of customers to digital marketing solutions. These circumstances and events raise substantial doubt as to whether the Company will be able to continue as a going concern for a reasonable period of time.
Since filing for Chapter 11 was done solely to effectuate the contemplated amendments to our financing agreements and the Mergers and we expect that no unsecured creditors of the Company will be impacted as a result of filing Chapter 11 as stated in our plan of reorganization, we anticipate that filing for Chapter 11 will not significantly impact our financial position, results of operations and cash flows through the Chapter 11 proceedings. If the Bankruptcy Court's stay on the acceleration provisions of our outstanding debt remains in effect until our emergence from Chapter 11 as expected, our current financial projections indicate that management expects to be able to continue to generate cash flows from operations in amounts sufficient to fund operations and meet debt service requirements through the Chapter 11 proceedings and for at least the next 12-15 months.
Management's objectives for the proposed merger and contemplated amendments to our financing agreements position the Company to operate as a going concern upon emergence from Chapter 11 and for a reasonable period of time thereafter. However, no assurances can be made that these objectives will be attained.
See Item 1A, "Rick Factors” for risks and uncertainties associated with the Company's ability to continue as a going concern.


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Significant Financing Developments

On March 20, 2012, the Company announced the commencement of a cash tender offer to purchase the maximum aggregate principal amount of our outstanding Dex One Senior Subordinated Notes for $26.0 million. See Item 8, "Financial Statements and Supplementary Data" - Note 1, "Business and Basis of Presentation - Significant Financing Developments" for additional information on the cash tender offer to repurchase the Dex One Senior Subordinated Notes. On April 19, 2012, under the terms and conditions of the Offer to Purchase, the Company utilized cash on hand of $26.5 million to repurchase $98.2 million aggregate principal amount of Dex One Senior Subordinated Notes, representing 27% of par value ("Note Repurchases"). The Note Repurchases have been accounted for as an extinguishment of debt resulting in a non-cash, pre-tax gain of $70.8 million during the year ended December 31, 2012 consisting of the difference between the par value and purchase price of the Dex One Senior Subordinated Notes, offset by fees associated with the Note Repurchases. The following table provides the calculation of the net gain on Note Repurchases for the year ended December 31, 2012:
 
Year Ended December 31, 2012
Dex One Senior Subordinated Notes (repurchased at 27% of par)
$
98,222

Total purchase price
(26,520
)
Fees associated with the Note Repurchases
(910
)
Net gain on Note Repurchases
$
70,792


On March 9, 2012, R.H. Donnelley Inc. ("RHDI"), Dex Media East, Inc. ("DME Inc.") and Dex Media West, Inc. ("DMW Inc.") each entered into the First Amendment (the "Amendments") to the amended and restated RHDI credit facility (“RHDI Amended and Restated Credit Facility”), the amended and restated DME Inc. credit facility (“Dex Media East Amended and Restated Credit Facility”) and the amended and restated DMW Inc. credit facility (“Dex Media West Amended and Restated Credit Facility”) (collectively, the "Credit Facilities"), respectively, with certain financial institutions. The Amendments permit RHDI, DME Inc. and DMW Inc. to make open market repurchases and retire loans under their respective Credit Facilities at a discount to par through December 31, 2013, provided that such discount is acceptable to those lenders who choose to participate. See Item 8, "Financial Statements and Supplementary Data" - Note 1, "Business and Basis of Presentation - Significant Financing Developments" for additional information on the Amendments and the offers to repurchase loans under the respective Credit Facilities.

On March 23, 2012, RHDI, DME Inc. and DMW Inc. collectively utilized cash on hand of $69.5 million to repurchase loans under the Credit Facilities of $142.1 million ("Credit Facility Repurchases"). The Credit Facility Repurchases have been accounted for as an extinguishment of debt resulting in a non-cash, pre-tax gain of $68.8 million during the year ended December 31, 2012, consisting of the difference between the par value and purchase price of the Credit Facilities, offset by accelerated amortization of fair value adjustments to our Credit Facilities that were recognized in conjunction with our adoption of fresh start accounting and fees associated with the Credit Facility Repurchases. The following table provides detail of the Credit Facility Repurchases and the calculation of the net gain on Credit Facility Repurchases for the year ended December 31, 2012:
 
Year Ended December 31, 2012
RHDI Amended and Restated Credit Facility (repurchased at 43.5% of par)
$
91,954

Dex Media East Amended and Restated Credit Facility (repurchased at 53.0% of par)
23,585

Dex Media West Amended and Restated Credit Facility (repurchased at 64.0% of par)
26,593

Total Credit Facilities repurchased
142,132

Total purchase price
(69,519
)
Accelerated amortization of fair value adjustments to Credit Facilities
(2,002
)
Fees associated with the Credit Facility Repurchases
(1,848
)
Net gain on Credit Facility Repurchases
$
68,763


The Note Repurchases and the Credit Facility Repurchases are hereby collectively referred to as the "Debt Repurchases." The net gains on Debt Repurchases for the year ended December 31, 2012 were $139.6 million.


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Results of Operations

As discussed in “Results of Operations” below, we continue to experience lower revenues, advertising sales and bookings related to our print products primarily as a result of declines in new and recurring business, including both renewal and incremental sales to existing advertisers, mainly driven by (1) customer attrition, (2) declines in overall advertising spending by our customers, (3) the significant impact of the weak local business conditions on consumer spending in our clients’ markets, (4) an increase in competition and more fragmentation in local business search and (5) the migration of customers to digital marketing solutions. However, despite the challenges associated with our print products, we have seen growth in our digital revenues, advertising sales and bookings driven by new partnerships, a focus on providing targeted solution bundled packages to our customers, new digital products and services and the migration of customers to digital marketing solutions. These advancements have helped partially offset the decline in print revenues, advertising sales and bookings.

The Company currently projects that these challenging conditions associated with our print products will continue for the foreseeable future, and, as such, our print revenues, advertising sales and bookings, as well as overall operating results, cash flow and liquidity, will continue to be adversely impacted. Therefore, the Company’s historical operating results will not be indicative of future operating performance. In addition, our long-term financial forecast does not anticipate material improvements in local business conditions in the near future.

As more fully described below in “Results of Operations – Net Revenues,” our method of recognizing print revenue under the deferral and amortization method results in delayed recognition of advertising sales whereby recognized revenues reflect the amortization of advertising sales consummated in prior periods as well as advertising sales consummated in the current period. Accordingly, the Company’s projected decline in print advertising sales will result in a decline in print revenues recognized in future periods. In addition, any improvements in local business conditions will not have a significant immediate impact on our print revenues.

Our Plan

As more fully described in Item 1, “Business,” we are a marketing solutions company that helps local businesses and consumers connect. Our proprietary and affiliate provided marketing solutions combine multiple media platforms, which drive large volumes of consumer leads to our customers and assist our customers with managing their messaging to those consumers. Our proprietary marketing solutions include our Dex published yellow pages directories, our Internet yellow pages site, DexKnows.com and our mobile application, Dex Mobile. Our digital lead generation solutions are powered by our search engine marketing product, DexNet, which extends our customers’ reach to our leading Internet and mobile partners to attract consumers searching for local businesses, products and services within our markets.

In conjunction with the Company's continuous evaluation of strategic alternatives in response to the challenging industry and economic environment we face, in August 2012, we announced the proposed merger between Dex One and SuperMedia. The purpose of this proposed transaction is to increase market share and improve our competitive position while benefiting from improved operating scale, significant service and cost synergies and enhanced cash flow, preserving access to tax attributes to offset future taxable income, and to better position the combined entity to retire debt with amended and extended credit facilities. See "Recent Trends and Developments Related to Our Business - Agreement and Plan of Merger” above for additional information on the proposed merger.

The Company continues to work on improving the value we deliver to our customers by (1) providing targeted solution bundles that combine offline and online media platforms, which includes our Dex Guaranteed Actions ("DGA") program and (2) expanding the number of platforms and media through which we deliver their message to consumers. Our growing list of marketing solutions includes local business and market analysis, message and image creation, target market identification, advertising and digital profile creation, web sites, mobile web sites, reputation management, network display ads, online video development and promotion, keyword optimization strategies and programs, distribution strategies, social media marketing and tracking and reporting. In addition, as the Company continues to transition to a compete-and-collaborate business model, we believe that partnerships will enable us to offer a broader and more robust array of products and services to our customers without the risks, capital investment, and ongoing maintenance associated with in-house development.


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We also continue to invest in our business and our people through strategic programs, initiatives and technology such as: (1) the Dex One Account Management System, which provides the ability for customers to log in and make real-time changes to their online marketing as well as view real-time performance data and also enables our marketing consultants to construct proposals on their mobile devices wherever they may be, (2) the Dex One Sales Academy, which provides initial training, ongoing knowledge and skills enhancement, and additional support to marketing consultants throughout the business, (3) the Digital Mastery Training Program, which focuses on advanced product knowledge and selling strategies and provides additional development for our marketing consultants, (4) the Digital Media Learning Program, which provides our marketing consultants the resources needed to obtain a Google sales certification, and (5) sales force technology, with the use of WebEx virtual sales presentations for our telephone marketing consultants and the purchase of iPads for our premise marketing consultants. We recently made a strategic change to centralize the telephone marketing consultants from our local markets to three inside sales center locations in Overland Park, Kansas, Denver, Colorado and Omaha, Nebraska. In these locations we expect to be able to leverage scale of resources for greater efficiency and focus equally across the geography we serve as well as out of market opportunities. We also expect to be able to utilize state of the art telephone technology to increase reach, contact rates and efficiencies. The Overland Park center was fully staffed in 2011 and the Denver and Omaha centers were fully staffed during 2012. We believe these strategic investments will help us drive incremental revenue over time.

We continue to actively manage expenses and are considering and acting upon various initiatives and opportunities to streamline operations and reduce our cost structure. One such initiative centers around print product optimization ("PPO") and the evaluation of all print related expenses and processes. The focus of PPO includes initiatives such as transforming our print product's design and content as well as distribution optimization. We believe that PPO will drive significant savings in annual print costs while continuing to provide valuable products and quality service to our customers. We also continue to assess our organizational structure to ensure it properly supports our base of business and is optimized to compete in a rapidly evolving marketplace.

The Company's strategic objective is to build on our existing strengths and assets to maximize value for our shareholders and other constituents. Despite the challenging industry and economic environment we face, the Company has taken significant steps towards reducing its leverage by obtaining the Amendments to our Credit Facilities in March 2012, which resulted in the repurchase of $142.1 million of loans under our Credit Facilities at a purchase price of $69.5 million. In addition, in April 2012 we repurchased $98.2 million aggregate principal amount of Dex One Senior Subordinated Notes for a purchase price of $26.5 million. We retain the option of making additional repurchases of our outstanding debt below par in the future, as permitted.
Impairment and Useful Life Analysis

The Company reviews the carrying value of definite-lived intangible assets and other long-lived assets whenever events or circumstances indicate that their carrying amount may not be recoverable. Based on our evaluation during the year ended December 31, 2012, we concluded that the carrying amounts of our definite-lived intangible assets and other long-lived assets were recoverable.

The Company evaluates the remaining useful lives of definite-lived intangible assets and other long-lived assets whenever events or circumstances indicate that a revision to the remaining period of amortization is warranted. If the estimated remaining useful lives change, the remaining carrying amount of the intangible assets and other long-lived assets would be amortized prospectively over that revised remaining useful life. The Company evaluated the remaining useful lives of its definite-lived intangible assets and other long-lived assets as of December 31, 2012 by considering, among other things, the effects of obsolescence, demand, competition, which takes into consideration the price premium benefit we have over competing independent publishers in our markets as a result of directory services agreements acquired in prior acquisitions, and other economic factors, including the stability of the industry in which we operate, known technological advances, legislative actions that result in an uncertain or changing regulatory environment, and expected changes in distribution channels. Based on our evaluation of these factors as of December 31, 2012, the Company has determined that the estimated useful lives of intangible assets presented in Item 8, “Financial Statements and Supplementary Data” - Note 2, “Summary of Significant Accounting Policies – Identifiable Intangible Assets and Goodwill” reflect the period they are expected to contribute to future cash flows and are therefore deemed appropriate. During the first quarter of 2012, the Company performed the same evaluation of the remaining useful lives of its definite-lived intangible assets and other long-lived assets. Based on our evaluation of these factors during the first quarter 2012, the Company determined that the estimated useful lives of our directory services agreements, local and national customer relationships and tradenames and trademarks no longer reflected the period they were expected to contribute to future cash flows. Therefore, the Company reduced the estimated useful lives of these intangible assets. As a result of reducing the estimated useful lives of the intangible assets noted above, the Company experienced an increase in amortization expense of $161.6 million during 2012.


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If industry and local business conditions in our markets deteriorate in excess of current estimates, potentially resulting in further declines in advertising sales and operating results, and / or if the trading value of our debt and equity securities continue to decline significantly, we will be required to assess the recoverability and useful lives of our intangible assets and other long-lived assets. These factors, including changes to assumptions used in our impairment analysis as a result of these factors, could result in future impairment charges, a reduction of remaining useful lives associated with our intangible assets and other long-lived assets and acceleration of amortization expense.

Fresh Start Accounting
The Company adopted fresh start accounting and reporting on February 1, 2010 (“Fresh Start Reporting Date”). Our net revenues and operating results were significantly impacted during 2010 by our adoption of fresh start accounting on the Fresh Start Reporting Date. See “Results of Operations - Factors Affecting Comparability” below for additional information on the impact of fresh start accounting and the Company’s presentation of Non-GAAP Combined Adjusted results for 2010.

Labor Unions
Our unionized employees are represented by either the International Brotherhood of Electrical Workers of America (“IBEW”) or the Communication Workers of America (“CWA”). Dex Media’s collective bargaining agreement with the IBEW expires in May 2015 and Dex Media’s collective bargaining agreement with the CWA expires in March 2016.

Climate Change
There is a growing concern about global climate change and the emissions of carbon dioxide. This concern has led to the possibility of federal climate change legislation as well as litigation relating to greenhouse gas emissions. While we cannot predict the impact of any proposed legislation until final, we do not believe current regulation or litigation related to global climate change is likely to have a material impact on our business, future financial position, results of operations and cash flow. Accordingly, our current financial projections do not include any impact of climate change regulation or litigation.

Healthcare Reform Legislation
During March 2010, the Patient Protection and Affordable Care Act and the Healthcare and Education Reconciliation Act of 2010 were signed into law. There has been no significant impact on our financial position, results of operations or cash flows as a result of this new legislation and we do not anticipate any significant impact in the foreseeable future.

Segment Reporting
For the periods covered by this annual report, management reviews and analyzes its business of providing marketing solutions as one operating segment.

New Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders' equity. ASU 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 ("ASU 2011-12"). ASU 2011-12 defers the effective date of provisions included in ASU 2011-05 that require entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement where net income is presented and the statement where other comprehensive income is presented for both interim and annual financial statements. ASU 2011-12 further states that entities must continue to report reclassification adjustments out of accumulated comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. Effective January 1, 2012, the Company adopted the applicable provisions included in ASU 2011-05 and elected to present a single continuous statement of comprehensive income.

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In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or as a separate disclosure in the notes to the financial statements, provided that all the information is presented in a single location, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. Generally Accepted Accounting Principles ("GAAP") to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. ASU 2013-02 is effective for interim and annual reporting periods beginning after December 15, 2012 and as such the Company will adopt ASU effective January 1, 2013.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04’). ASU 2011-04 was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards. ASU 2011-04 clarifies the FASB’s intent about the application of existing fair value measurement and disclosure requirements, changes certain fair value measurement principles and enhances fair value disclosure requirements. Effective January 1, 2012, the Company adopted the disclosure provisions included in ASU 2011-04. The adoption of ASU 2011-04 had no impact on our financial position or results of operations.

We have reviewed other accounting pronouncements that were issued as of December 31, 2012, which the Company has not yet adopted, and do not believe that these pronouncements will have a material impact on our financial position or operating results.

Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires management to estimate the effect of various matters that are inherently uncertain as of the date of the financial statements. Each of these estimates varies in regard to the level of judgment involved and its potential impact on the Company’s and the Predecessor Company’s reported financial results. Estimates are deemed critical when a different estimate could have reasonably been used or when changes in the estimate are reasonably likely to occur from period to period, and could materially impact the Company’s and the Predecessor Company’s financial condition, changes in financial condition or results of operations. The Company’s significant accounting policies as of December 31, 2012 are discussed in Item 8, “Financial Statements and Supplementary Data” - Note 2, “Summary of Significant Accounting Policies.” The critical estimates inherent in these accounting policies as of December 31, 2012 are discussed below. Management believes the current assumptions and other considerations used to estimate these amounts in the Company’s consolidated financial statements are appropriate.

Identifiable Intangible Assets and Goodwill

Identifiable Intangible Assets

Our intangible assets have originated from prior acquisitions and consist of (a) directory services agreements, (b) local and national customer relationships, (c) trademarks and trade names and (d) technology, advertising commitments and other. These intangible assets are being amortized over their estimated useful lives in a manner that best reflects the economic benefit derived from such assets.

The Company reviews the carrying value of definite-lived intangible assets and other long-lived assets whenever events or circumstances indicate that their carrying amount may not be recoverable. The Company reviewed the following information, estimates and assumptions during the year ended December 31, 2012 to determine if the carrying amounts of our definite-lived intangible assets and other long-lived assets were recoverable:
Historical financial information, including revenue, profit margins, customer attrition data and price premiums enjoyed relative to competing independent publishers;
Long-term financial projections, including, but not limited to, revenue trends and profit margin trends;
Intangible asset and other long-lived asset carrying values and any changes in current and future use;
Trading values of our debt and equity securities; and
Other Company-specific information.


44


Based on our evaluation during the year ended December 31, 2012, we concluded that the carrying amounts of our definite-lived intangible assets and other long-lived assets were recoverable.

At December 31, 2012, the net carrying value of our intangible assets totaled $1,832.7 million. Amortization expense related to the Company’s intangible assets was $349.4 million, $187.1 million and $167.0 million for the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010, respectively. Amortization expense of the Predecessor Company for the one month ended January 31, 2010 was $15.6 million. Had the aggregate net book value of our intangible assets as of December 31, 2012 been impaired by 1%, net income for the year ended December 31, 2012 would have been adversely impacted by approximately $20.2 million. See Item 8, “Financial Statements and Supplementary Data” - Note 2, “Summary of Significant Accounting Policies – Identifiable Intangible Assets and Goodwill” for additional information on our intangible assets. The combined weighted average useful life of our identifiable intangible assets at December 31, 2012 is 9 years. The weighted average useful lives and amortization methodology for each of our identifiable intangible assets at December 31, 2012 are shown in the following table:

Intangible Asset
Remaining Weighted Average
Useful Lives
Amortization Methodology
Directory services agreements
9 years
Income forecast method (1)
Local customer relationships
8 years
Income forecast method (1)
National customer relationships
8 years
Income forecast method (1)
Trade names and trademarks
8 years
Straight-line method
Technology, advertising commitments and other
5 years
Income forecast method (1)
(1)
These identifiable intangible assets are being amortized under the income forecast method, which assumes the value derived from these intangible assets is greater in the earlier years and steadily declines over time.

The Company evaluates the remaining useful lives of definite-lived intangible assets and other long-lived assets whenever events or circumstances indicate that a revision to the remaining period of amortization is warranted. If the estimated remaining useful lives change, the remaining carrying amount of the intangible assets and other long-lived assets would be amortized prospectively over that revised remaining useful life. The Company evaluated the remaining useful lives of its definite-lived intangible assets and other long-lived assets as of December 31, 2012 by considering, among other things, the effects of obsolescence, demand, competition, which takes into consideration the price premium benefit we have over competing independent publishers in our markets as a result of directory services agreements acquired in prior acquisitions, and other economic factors, including the stability of the industry in which we operate, known technological advances, legislative actions that result in an uncertain or changing regulatory environment, and expected changes in distribution channels. Based on our evaluation of these factors as of December 31, 2012, the Company has determined that the estimated useful lives of intangible assets presented above reflect the period they are expected to contribute to future cash flows and are therefore deemed appropriate. Had the remaining useful lives of the intangible assets been shortened by 10%, net income for the year ended December 31, 2012 would have been adversely impacted by $26.5 million.

During the first quarter of 2012, the Company performed the same evaluation of the remaining useful lives of its definite-lived intangible assets and other long-lived assets. Based on our evaluation of these factors during the first quarter 2012, the Company determined that the estimated useful lives of our directory services agreements, local and national customer relationships and tradenames and trademarks no longer reflected the period they were expected to contribute to future cash flows. Therefore, the Company reduced the estimated useful lives of these intangible assets. See Item 8, “Financial Statements and Supplementary Data” - Note 2, “Summary of Significant Accounting Policies – Identifiable Intangible Assets and Goodwill” for additional information. As a result of reducing the estimated useful lives of the intangible assets noted above, the Company experienced an increase in amortization expense of $161.6 million during 2012.


45


Goodwill
Goodwill of $2.1 billion was recorded in connection with the Company’s adoption of fresh start accounting as discussed in Item 8, “Financial Statements and Supplementary Data” - Note 3, “Fresh Start Accounting and Reorganization Items, Net” and represented the excess of the reorganization value of Dex One over the fair value of identified tangible and intangible assets. As of December 31, 2012, the Company has no recorded goodwill at any of its reporting units. Historically, goodwill was not amortized but was subject to impairment testing on an annual basis as of October 31st or more frequently if indicators of potential impairment existed. Goodwill was tested for impairment at the reporting unit level, which represents one level below an operating segment in accordance with FASB Accounting Standards Codification ("ASC") 350, Intangibles – Goodwill and Other (“FASB ASC 350”). As of December 31, 2012, the Company’s reporting units are RHDI, DME Inc and DMW Inc.

Impairment Evaluation

During the second quarter of 2011, the Company concluded there were indicators of impairment and as a result, we performed an impairment test of our goodwill and an impairment recoverability test of our definite-lived intangible assets and other long-lived assets. The testing results of our definite-lived intangible assets and other long-lived assets indicated they were recoverable and thus no impairment test was required. Based upon the testing results of our goodwill, we determined that the remaining goodwill assigned to each of our reporting units was fully impaired and thus recognized an aggregate goodwill impairment charge of $801.1 million during the year ended December 31, 2011. Please refer to our Annual Report on From 10-K for the year ended December 31, 2011 for additional information including the methodology, estimates and assumptions used in our impairment testing.

During the three months ended September 30, 2010 and June 30, 2010, the Company concluded that there were indicators of impairment and as a result, we performed impairment tests of our goodwill, definite-lived intangible assets and other long-lived assets as of September 30, 2010 and June 30, 2010. The testing results of our definite-lived intangible assets and other long-lived assets resulted in a non-goodwill intangible asset impairment charge of $4.3 million and $17.3 million during the three months ended September 30, 2010 and June 30, 2010, respectively, for a total non-goodwill intangible asset impairment charge of $21.6 million during the eleven months ended December 31, 2010 associated with trade names and trademarks, technology, local customer relationships and other from our former Business.com reporting unit. The Company also recognized a goodwill impairment charge of $385.3 million and $752.3 million during the three months ended September 30, 2010 and June 30, 2010, respectively, for a total goodwill impairment charge of $1,137.6 million during the eleven months ended December 31, 2010 resulting from our impairment testing, which was recorded in each of our reporting units. The sum of the goodwill and non-goodwill intangible asset impairment charges totaled $1,159.3 million for the eleven months ended December 31, 2010.
Please refer to our Annual Report on Form 10-K for the year ended December 31, 2010 for additional information including the methodology, estimates and assumptions used in our impairment testing for these periods as well as for our annual impairment test of goodwill as of October 31, 2010.

During the fourth quarter of 2010, the Company recognized a reduction in goodwill of $158.4 million related to the finalization of cancellation of indebtedness income and tax attribute reduction calculations required to be performed at December 31, 2010 associated with fresh start accounting.

The change in the carrying amount of goodwill since it was established in fresh start accounting on the Fresh Start Reporting Date is as follows:
Balance at February 1, 2010
 
 
$
2,097,124

Goodwill impairment charges during 2010
(1,137,623
)
 
 
Reduction in goodwill during 2010
(158,427
)
 
 
Total adjustment to goodwill during 2010
 
 
(1,296,050
)
Goodwill impairment charge during the second quarter of 2011
 
 
(801,074
)
Balance at December 31, 2011
 
 
$


If industry and local business conditions in our markets deteriorate in excess of current estimates, potentially resulting in further declines in advertising sales and operating results, and / or if the trading value of our debt and equity securities continue to decline significantly, we will be required to assess the recoverability and useful lives of our intangible assets and other long-lived assets. These factors, including changes to assumptions used in our impairment analysis as a result of these factors, could result in future impairment charges, a reduction of remaining useful lives associated with our intangible assets and other long-lived assets and acceleration of amortization expense.


46


Fresh Start Accounting
The Company adopted fresh start accounting and reporting on the Fresh Start Reporting Date in accordance with FASB ASC 852, Reorganizations (“FASB ASC 852”), as the holders of existing voting shares immediately before confirmation of the Plan received less than 50% of the voting shares of the emerging entity and the reorganization value of the Company’s assets immediately before the date of confirmation was less than the post-petition liabilities and allowed claims. Under FASB ASC 852, the reorganization value represents the fair value of the entity before considering liabilities and approximates the amount a willing buyer would pay for the assets of the Company immediately after restructuring. The reorganization value is allocated to the respective fair value of assets. The excess reorganization value over the fair value of identified tangible and intangible assets is recorded as goodwill. Liabilities, other than deferred taxes, are stated at present values of amounts expected to be paid.

Fair values of our assets and liabilities represented our best estimates based on independent appraisals and valuations. Where the foregoing were not available, industry data and trends or references to relevant market rates and transactions were used. These estimates and assumptions were subject to significant uncertainties beyond our reasonable control.

See our Annual Report on Form 10-K for the year ended December 31, 2010 for detailed information on the critical estimates, assumptions and methodologies used in determining the Company’s enterprise value and reorganization value and the fair values of our assets and liabilities in fresh start accounting, as well as the impact of emergence from reorganization and fresh start accounting on our financial position, results of operations and cash flows.

Income Taxes
We account for income taxes under the asset and liability method in accordance with FASB ASC 740, Income Taxes (“FASB ASC 740”).
Our deferred income tax liabilities and assets reflect temporary differences between amounts of assets and liabilities for financial and tax reporting. We adjust our deferred income tax liabilities and assets, as appropriate, to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We establish a valuation allowance to offset any deferred income tax assets if, based on the available evidence, it is more likely than not that some or all of the deferred income tax assets will not be realized.

We recognize uncertain income tax positions taken or expected to be taken on tax returns at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense.

See Item 8, “Financial Statements and Supplementary Data” - Note 7, “Income Taxes,” for more information regarding our (provision) benefit for income taxes.
In the ordinary course of business, there may be many transactions and calculations where the ultimate tax outcome is uncertain. The calculation of tax liabilities involves uncertainties in the application of complex tax laws. The Company recognizes potential liabilities for anticipated tax audit issues based on an estimate of the ultimate resolution of whether, and the extent to which, additional taxes will be due. Although the Company believes the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals.
As part of the Company’s financial reporting process, we must assess the likelihood that our deferred income tax assets can be recovered. Unless recovery is more likely than not, the provision for taxes must be increased by recording a reserve in the form of a valuation allowance for the deferred income tax assets that are not likely to be recovered. In this process, certain relevant criteria are evaluated including the existence of deferred income tax liabilities that can be used to absorb deferred income tax assets and taxable income in future years. The Company’s judgment regarding future taxable income may change due to future market conditions, changes in U.S. tax laws and other factors. These changes, if any, may require material adjustments to deferred income tax assets and an accompanying adjustment to net income (loss) in the period when such determinations are made.

In addition, the Company operates in multiple taxing jurisdictions and is subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. The Company maintains a liability for estimated income tax exposures and in our opinion adequate provision for income taxes has been made for all years.


47


Allowance for Doubtful Accounts and Sales Claims
The Company records revenue net of an allowance for sales claims. In addition, the Company records a provision for bad debts. The provision for bad debts and allowance for sales claims are estimated based on historical experience. The Company also evaluates the current condition of customer balances, bankruptcy filings, any change in credit policy, historical charge-off patterns, recovery rates and other data when determining an allowance for doubtful accounts reserve. The Company reviews these estimates periodically to assess whether additional adjustment is needed based on economic events or other circumstances, including actual experience at the end of the billing and collection cycle. The Company believes that the allowance for doubtful accounts and sales claims is adequate to cover anticipated losses under current conditions; however, significant deterioration in any of the factors noted above or in the overall economy could materially change these expectations. The provisions for sales claims and doubtful accounts are estimated based on a percentage of revenue. Accordingly, an additional 1% change in either of these allowance percentages would have impacted net income for the year ended December 31, 2012 by approximately $14.4 million.
 
Pension Benefits
The Company’s pension plan obligations and related assets of the defined benefit pension plans are presented in Item 8, “Financial Statements and Supplementary Data” - Note 9, “Benefit Plans.” Plan assets consist primarily of marketable equity and debt instruments and are valued using market quotations. The determination of plan obligations and annual pension expense requires management to make a number of assumptions. Key assumptions in measuring the plan obligations include the discount rate and the long-term expected return on plan assets. For the years ended December 31, 2012 and 2011, eleven months ended December 31, 2010 and one month ended January 31, 2010, the Company and the Predecessor Company utilized a yield curve to determine the appropriate discount rate for each of the defined benefit pension plans based on the individual plans’ expected future cash flows. Asset returns are based upon the long-term anticipated average rate of earnings expected on invested funds of the plan.

The following assumptions were used in determining the Company’s net periodic benefit expense (income) for the Dex One Retirement Plan and Dex Media Pension Plan, which are defined in Item 8, "Financial Statements and Supplementary Data" - Note 9, "Benefit Plans":
 
Dex One Retirement Plan
Dex Media Pension Plan
 
Years Ended December 31,
Eleven Months Ended December 31, 2010
May 1, 2012 through December 31, 2012
January 1, 2012 through April 30, 2012
June 1, 2011 through December 31, 2011
January 1, 2011 through May 31, 2011
Eleven Months Ended December 31, 2010
 
2012
2011
Weighted average discount rate
4.51%
5.30%
5.70%
4.22%
4.38%
4.95%
5.06%
5.70%
Expected return on plan assets
7.50%
8.00%
8.00%
7.50%
7.50%
8.00%
8.00%
8.00%

The following assumptions were used in determining the Predecessor Company’s net periodic benefit income for the Dex One Retirement Plan and Dex Media Pension Plan:
 
Dex One Retirement Plan
Dex Media Pension Plan
 
One Month Ended January 31, 2010
Weighted average discount rate
5.70%
5.70%
Expected return on plan assets
8.00%
8.00%

Net periodic pension expense recognized by the Company during the year ended December 31, 2012 was $1.9 million. A 1% increase in the discount rate would affect net income for the year ended December 31, 2012 by less than $0.1 million and a 1% decrease in the discount rate would affect net income for the year ended December 31, 2012 by approximately $1.8 million. A 1% increase or decrease in the long-term rate of return on plan assets would affect net income for the year ended December 31, 2012 by approximately $2.0 million. Net periodic pension expense (income) recognized by the Company and the Predecessor Company during the year ended December 31, 2011, eleven months ended December 31, 2010 and one month ended January 31, 2010 was $1.0 million, $(3.5) million and $(0.1) million, respectively.


48


On December 31, 2012 and April 30, 2012, settlements of the Dex Media Pension Plan and Dex One Pension Benefit Equalization Plan ("PBEP") occurred as a result of restructuring activities. At that time, year-to-date lump sum payments to participants exceeded the sum of the service cost plus interest cost components of the net periodic benefit cost for the period. These settlements resulted in the recognition of an actuarial loss of $3.7 million for the year ended December 31, 2012.

On December 31, 2011, settlements of the Dex One Retirement Plan and Dex Media Pension Plan occurred and on May 31, 2011, settlements of the Dex Media Pension Plan occurred. These settlements resulted in the recognition of actuarial losses of $2.7 million for the year ended December 31, 2011. During the second quarter of 2010, we recognized a one-time curtailment gain of $3.8 million associated with the departure of the Company’s former Chief Executive Officer.

Stock-Based Compensation
The fair value of our stock options and stock appreciation rights (“SARs”) that do not have a market condition is calculated using the Black-Scholes model at the time the stock-based awards are granted. The fair value of our stock options and SARs that have a market condition is calculated using the Monte Carlo model at the time the stock-based awards are granted. The use of the Black-Scholes and Monte Carlo models require significant judgment and the use of estimates, particularly for assumptions such as expected volatility, risk-free interest rates and expected lives to value stock-based awards, forfeiture rates to recognize stock-based compensation expense, and derived service periods for allocation of stock-based compensation expense associated with stock-based awards that have a market condition. The Company granted 0.4 million, 1.8 million and 2.1 million stock options and SARs during the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010, respectively. The Company granted 0.7 million, 0.6 million and 0.2 million shares of restricted stock and/or restricted stock units during the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010, respectively. The Predecessor Company did not grant any stock options, SARs or restricted stock during the one month ended January 31, 2010. The Company used an estimated weighted average forfeiture rate in determining stock-based compensation expense of 6.4%, 6.3% and 8.9% for the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010, respectively. The Predecessor Company used an estimated weighted average forfeiture rate in determining stock-based compensation expense of 10.2% for January 2010. The following assumptions were used in valuing stock-based awards and for recognition and allocation of stock-based compensation expense for the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010, respectively:
 
Years Ended December 31,
Eleven Months Ended December 31, 2010
 
2012
2011
Expected volatility
63.8
%
43.0
%
37.3
%
Risk-free interest rate
1.2
%
2.9
%
2.6
%
Expected life
6.3 Years

8.9 Years

7.1 Years

Derived service period (grants using Monte Carlo model)
N/A

3.6 Years

3.6 Years

Forfeiture rate
6.4
%
6.3
%
8.9
%
Dividend yield
%
%
%

Since the Company recently emerged from bankruptcy, we do not have sufficient Company-specific historical data in order to determine certain assumptions used for valuing stock-based awards. As such, the Company utilized Company-specific historical data as well as peer and competitive company data in order to estimate the expected volatility assumption used for valuing stock-based awards during the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010. The expected life represents the period of time that stock-based awards granted are expected to be outstanding. The Company estimated the expected life by using the simplified method permitted by Staff Accounting Bulletin No. 110, Use of a Simplified Method in Developing Expected Term of Share Options, as these stock-based awards satisfied the “plain vanilla” criteria. The simplified method calculates the expected life as the average of the vesting and contractual terms of the award. The risk-free interest rate is based on applicable U.S. Treasury yields that approximate the expected life of stock-based awards granted by the Company. During the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010, the Company used actual voluntary turnover data to estimate a weighted average forfeiture rate. The Predecessor Company used historical data to estimate a weighted average forfeiture rate for the one month ended January 31, 2010. Estimated forfeitures are adjusted to the extent actual forfeitures differ, or are expected to materially differ, from such estimates. Derived service periods associated with stock-based awards that have a market condition were calculated by determining the average time until the Company’s stock price reached the given exercise price across the Monte Carlo simulations. For simulations where the stock price did not reach the exercise price, the Company has excluded such paths.


49


These assumptions reflect our best estimates, but they involve inherent uncertainties based on certain conditions generally outside of our control. As a result, if other assumptions had been used, total stock-based compensation expense could have been materially impacted. Furthermore, if we use different assumptions for future grants, stock-based compensation expense could be materially impacted in future periods.

See Item 8, “Financial Statements and Supplementary Data” - Note 2, “Summary of Significant Accounting Policies – Stock-Based Awards” and Note 8, “Stock Incentive Plans” for additional information.

Fair Value of Financial Instruments
At December 31, 2012 and 2011, the fair value of cash and cash equivalents, accounts receivable, net and accounts payable and accrued liabilities approximated their carrying value based on the net short-term nature of these instruments. All of the Company’s assets and liabilities were fair valued as of the Fresh Start Reporting Date in connection with our adoption of fresh start accounting. See our Annual Report on Form 10-K for the year ended December 31, 2010 for detailed information on the methodology and assumptions used to value our assets and liabilities in conjunction with our adoption of fresh start accounting. Estimates of fair value may be affected by assumptions made and, accordingly, are not necessarily indicative of the amounts the Company could realize in a current market exchange.

FASB ASC 820, Fair Value Measurements and Disclosures (“FASB ASC 820”) defines fair value, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and expands disclosures about fair value measurements. FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy, which gives the highest priority to quoted prices in active markets, is comprised of the following three levels:

Level 1 – Unadjusted quoted market prices in active markets for identical assets and liabilities.

Level 2 – Observable inputs other than Level 1 inputs such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions, or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Prices or valuations that require inputs that are both significant to the measurement and unobservable.

As required by FASB ASC 820, assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The Company had interest rate swaps with a notional amount of $300.0 million and $500.0 million at December 31, 2012 and 2011, respectively, and interest rate caps with a notional amount of $200.0 million and $400.0 million at December 31, 2012 and 2011, respectively, that are measured at fair value on a recurring basis. The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2012 and 2011, respectively, and the level within the fair value hierarchy in which the fair value measurements were included.
 
Fair Value Measurements Using Significant Other Observable Inputs (Level 2) 
Derivatives:
December 31, 2012
December 31, 2011
Interest Rate Swap – Liabilities
$
(413
)
$
(2,694
)
Interest Rate Cap – Assets
$

$
5


There were no transfers of assets or liabilities into or out of Levels 1, 2 or 3 during the years ended December 31, 2012 or 2011. The Company has established a policy of recognizing transfers between levels in the fair value hierarchy as of the end of a reporting period.

The Company’s long-term debt obligations are not measured at fair value on a recurring basis, however we present the fair value of the Dex One Senior Subordinated Notes and Credit Facilities in Item 8, “Financial Statements and Supplementary Data” - Note 5, “Long-Term Debt.” The Company has utilized quoted market prices, where available, to compute the fair market value of these long-term debt obligations at December 31, 2012 and 2011. The Dex One Senior Subordinated Notes are categorized within Level 1 of the fair value hierarchy and our Credit Facilities are categorized within Level 2 of the fair value hierarchy.

50



Valuation Techniques – Interest Rate Swaps and Interest Rate Caps
Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date.

Fair value for our derivative instruments was derived using pricing models based on a market approach. Pricing models take into account relevant observable market inputs that market participants would use in pricing the asset or liability. The pricing models used to determine fair value for each of our derivative instruments incorporate specific contract terms for valuation inputs, including effective dates, maturity dates, interest rate swap pay rates, interest rate cap rates and notional amounts, as disclosed and presented in Item 8, “Financial Statements and Supplementary Data” - Note 6, “Derivative Financial Instruments,” interest rate yield curves, and the creditworthiness of the counterparty and the Company. Counterparty credit risk and the Company’s credit risk could have a material impact on the fair value of our derivative instruments, our results of operations or financial condition in a particular reporting period. At December 31, 2012, the impact of applying counterparty credit risk and/or the Company's credit risk in determining the fair value of our derivative instruments was not material.

Many pricing models do not entail material subjectivity because the methodologies employed do not necessitate significant judgment, and the pricing inputs are observed from actively quoted markets, as is the case for our derivative instruments. The pricing models used by the Company are widely accepted by the financial services industry. As such and as noted above, our derivative instruments are categorized within Level 2 of the fair value hierarchy.

Fair Value Control Processes– Interest Rate Swaps and Interest Rate Caps
The Company employs control processes to validate the fair value of its derivative instruments derived from the pricing models. These control processes are designed to assure that the values used for financial reporting are based on observable inputs wherever possible. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable.

Benefit Plan Assets
The fair value of the assets held in the Dex One Retirement Account Master Trust (“Master Trust”) at December 31, 2012 and 2011, by asset category, is as follows:
 
Fair Value Measurements at December 31, 2012
 
 
Quoted Prices in Active Markets for Identical Assets
Using Significant Other Observable Inputs
 
Total
(Level 1)
             (Level 2)
Cash and cash equivalents
$
1,450

$
1,450

$

U.S. Government securities (a)
23,309


23,309

Common/collective trusts (b)
62,031


62,031

Corporate debt (c)
17,806


17,806

Corporate stock (d)
17,234

17,234


Registered investment companies (e)
21,298

21,298


Fixed income and equity futures (g)
1,005

1,005


Credit default swaps (h)
12


12

Collective Fund - Group Trust (i)
33,828


33,828

Total
$
177,973

$
40,987

$
136,986



51


 
Fair Value Measurements at December 31, 2011
 
 
Quoted Prices in Active Markets for Identical Assets
Using Significant Other Observable Inputs
 
Total
(Level 1)
             (Level 2)
Cash and cash equivalents
$
15

$
15

$

U.S. Government securities (a)
18,686


18,686

Common/collective trusts (b)
66,188


66,188

Corporate debt (c)
21,146


21,146

Corporate stock (d)
18,476

18,476


Registered investment companies (e)
19,631

19,631


Real estate investment trust (f)
127

127


Fixed income and equity futures (g)
1,066

1,066


Credit default swaps (h)
95


95

Collective Fund - Group Trust (i)
28,928


28,928

Total
$
174,358

$
39,315

$
135,043


(a)
This category includes investments in U.S. Government bonds, government mortgage-backed securities, index-linked government bonds, guaranteed commercial paper, short-term treasury bills and notes. Fair value for these assets is determined using a bid evaluation process of observable, market based inputs effective as of the last business day of the plan year.
(b)
This category includes investments in two common/collective funds of which 78% is invested in stocks comprising the Russell 1000 equity index and the remaining 22% is comprised of short-term investments at December 31, 2012 and 82% is invested in stocks comprising the Russell 1000 equity index and the remaining 18% is comprised of short-term investments at December 31, 2011. Fair value for these assets is calculated based upon a compilation of observable market information.
(c)
This category includes investments in corporate bonds, commercial mortgage-backed and asset-backed securities and collateralized mortgage obligations. Fair value for these assets is determined using a bid evaluation process of observable, market based inputs effective as of the last business day of the plan year.
(d)
This category includes investments in small cap stocks across diverse industries. Fair value for these assets is determined using quoted market prices on a recognized securities exchange at the last reported trading price on the last business day of the plan year.
(e)
This category is comprised of one mutual fund that invests in intermediate term fixed income instruments such as treasuries and high grade corporate bonds. Fair value for these assets is determined using quoted market prices on a recognized securities exchange at the last reported trading price on the last business day of the plan year.
(f)
This category is comprised of a healthcare real estate investment trust. Fair value for these assets is determined based on traded market prices.
(g)
This category includes investments in 5, 10 and 20 year U.S. Treasury bond futures and equity index futures. Fair value for these assets is determined based on settlement prices recognized in an active market or exchange.
(h)
This category includes investments in credit default swaps. Fair value for these assets is determined based on a mid evaluation process using observable, market based inputs.
(i)
This category includes investments in passively managed funds composed of international stocks across diverse industries. Fair value for these assets is calculated based upon a compilation of observable market information.
The Asset Management Committee (“AMC”) as appointed by the Compensation and Benefits Committee of the Company’s Board of Directors is a named fiduciary of the plan in matters relating to plan investments and asset management. The AMC has the authority to appoint, retain, monitor and remove any custodian or investment manager and is responsible for establishing and maintaining a funding and investment policy for the Master Trust.
See Item 8, “Financial Statements and Supplementary Data” - Note 9, “Benefit Plans,” for further information regarding our benefit plans.


52


RESULTS OF OPERATIONS

Year Ended December 31, 2012 compared to Year Ended December 31, 2011

Net Revenues

The components of our net revenues for the years ended December 31, 2012 and 2011 were as follows:

 
Years Ended December 31,
 
 
(amounts in millions)
2012
2011
$ Change
% Change
Gross advertising revenues
$
1,294.2

$
1,475.0

$
(180.8
)
(12.3
)%
Sales claims and allowances
(13.3
)
(15.9
)
2.6

16.4

Net advertising revenues
1,280.9

1,459.1

(178.2
)
(12.2
)
Other revenues
19.1

21.5

(2.4
)
(11.2
)
Total
$
1,300.0

$
1,480.6

$
(180.6
)
(12.2
)%

Our advertising revenues are earned primarily from the sale of advertising in yellow pages directories we publish. Advertising revenues also include revenues from our Internet-based marketing solutions including online directories, such as DexKnows.com and DexNet. Advertising revenues are affected by several factors, including changes in the quantity, size and characteristics of advertisements, acquisition of new clients, renewal rates of existing clients, premium advertisements sold, changes in advertisement pricing, the introduction of new marketing solutions, an increase in competition and more fragmentation in the local business search market and general economic factors. Revenues with respect to print advertising and Internet-based marketing solutions that are sold with print advertising are recognized under the deferral and amortization method whereby revenues are initially deferred when a directory is published, net of sales claims and allowances, and recognized ratably over the directory’s life, which is typically 12 months. Revenues with respect to Internet-based marketing solutions that are sold standalone, such as DexNet, are recognized ratably over the life of the contract commencing when they are first delivered or fulfilled. Revenues with respect to our marketing solutions that are performance-based are recognized as the service is delivered or fulfilled.

Gross advertising revenues of $1,294.2 million for the year ended December 31, 2012 declined $180.8 million, or 12.3%, from gross advertising revenues of $1,475.0 million for the year ended December 31, 2011. The decline in gross advertising revenues for the year ended December 31, 2012 is related to our print products, primarily as a result of continuing declines in new and recurring business, mainly driven by (1) customer attrition, (2) declines in overall advertising spending by our customers, (3) the significant impact of the weak local business conditions on consumer spending in our customers’ markets, (4) an increase in competition and more fragmentation in local business search and (5) the migration of customers to digital marketing solutions. The decline in gross advertising revenues is also a result of recognizing approximately one month of revenues from Business.com in 2011 with no comparable revenues in 2012. Declines in print advertising revenues are partially offset by increased advertising revenues associated with our digital marketing solutions, driven by new partnerships, a focus on providing targeted solution bundled packages to our customers, new digital products and services and the migration of customers to digital marketing solutions.

Expenses

The components of our expenses for the years ended December 31, 2012 and 2011 were as follows:
 
Years Ended December 31,
 
 
(amounts in millions)
2012
2011
$ Change
% Change
Production and distribution expenses
$
283.7

$
287.2

$
(3.5
)
(1.2
)%
Selling and support expenses
344.5

426.8

(82.3
)
(19.3
)
General and administrative expenses
127.4

144.1

(16.7
)
(11.6
)
Depreciation and amortization expenses
418.7

251.8

166.9

66.3

Impairment charges

801.1

(801.1
)
(100.0
)
Total
$
1,174.3

$
1,911.0

$
(736.7
)
(38.6
)%


53


Certain costs directly related to the selling and production of directories are initially deferred and then amortized ratably over the life of the directories under the deferral and amortization method of accounting to match revenue recognized relating to such directories, with cost recognition commencing in the month directory distribution is substantially complete. These costs are specifically identifiable to a particular directory and include sales commissions and print, paper and initial distribution costs. Sales commissions include amounts paid to employees for sales to local customers and to certified marketing representatives ("CMRs"), which act as our channel to national clients. All other expenses, such as sales person salaries, sales manager compensation, sales office occupancy, publishing and information technology services, are not specifically identifiable to a particular directory and are recognized as incurred. Our costs recognized in a reporting period consist of: (i) costs incurred in that period and fully recognized in that period; (ii) costs incurred in a prior period, a portion of which is amortized and recognized in the current period; and (iii) costs incurred in the current period, a portion of which is amortized and recognized in the current period and the balance of which is deferred until future periods. Consequently, there will be a difference between costs recognized in any given period and costs incurred in the given period, which may be significant.

Production and Distribution Expenses

Production and distribution expenses for the year ended December 31, 2012 were $283.7 million compared to production and distribution expenses of $287.2 million for the year ended December 31, 2011. The primary components of the $3.5 million, or 1.2%, decrease in production and distribution expenses for the year ended December 31, 2012 were as follows:
(amounts in millions)
Year Ended December 31, 2012
Lower print, paper and distribution expenses
$
(25.0
)
Higher Internet production and distribution expenses
27.4

All other, net
(5.9
)
Total decrease in production and distribution expenses for the year ended December 31, 2012
$
(3.5
)

Print, paper and distribution expenses for the year ended December 31, 2012 declined $25.0 million compared to print, paper and distribution expenses for the year ended December 31, 2011 primarily due to lower page volumes associated with declines in print advertisements, as well as ongoing PPO initiatives to reduce print-related costs.

Internet production and distribution expenses for the year ended December 31, 2012 increased $27.4 million compared to Internet production and distribution expenses for the year ended December 31, 2011 primarily due to increased DexNet traffic costs driven by higher sales volume and cost per click rates. The increase in Internet production and distribution expenses is also attributable to higher volume in other digital products and services.

The decrease in All other, net for the year ended December 31, 2012 of $5.9 million is primarily due to declines in other print-related expenses resulting from ongoing PPO initiatives.

Selling and Support Expenses

Selling and support expenses for the year ended December 31, 2012 were $344.5 million compared to selling and support expenses of $426.8 million for the year ended December 31, 2011. The primary components of the $82.3 million, or 19.3%, decrease in selling and support expenses for the year ended December 31, 2012 were as follows:
(amounts in millions)
Year Ended December 31, 2012
Lower commissions and salesperson expenses
$
(32.2
)
Lower bad debt expense
(19.7
)
Lower advertising expenses
(9.2
)
Lower directory publishing expenses
(6.8
)
Lower marketing expenses
(5.4
)
Lower billing, credit and collection expenses
(3.7
)
All other, net
(5.3
)
Total decrease in selling and support expenses for the year ended December 31, 2012
$
(82.3
)


54


Commissions and salesperson expenses for the year ended December 31, 2012 declined $32.2 million compared to commissions and salesperson expenses for the year ended December 31, 2011 primarily due to lower print advertising sales and its effect on variable-based commissions, as well as lower headcount and related expenses.

Bad debt expense for the year ended December 31, 2012 declined $19.7 million compared to bad debt expense for the year ended December 31, 2011 primarily due to effective credit and collections practices, which have driven improvements in our accounts receivable portfolio, as well as lower billing volumes associated with declines in advertisers and advertising sales.

Advertising expenses for the year ended December 31, 2012 declined $9.2 million compared to advertising expenses for the year ended December 31, 2011 primarily due to a reduction in media spend.

Directory publishing expenses for the year ended December 31, 2012 declined $6.8 million compared to directory publishing expenses for the year ended December 31, 2011 primarily due to declines in print advertisements and lower headcount.

Marketing expenses for the year ended December 31, 2012 declined $5.4 million compared to marketing expenses for the year ended December 31, 2011 primarily due to lower headcount.

Billing, credit and collection expenses for the year ended December 31, 2012 declined $3.7 million compared to billing, credit and collection expenses for the year ended December 31, 2011 primarily due to lower headcount.

General and Administrative Expenses
 
General and administrative (“G&A”) expenses for the year ended December 31, 2012 were $127.4 million compared to G&A expenses of $144.1 million for the year ended December 31, 2011. The primary components of the $16.7 million, or 11.6%, decrease in G&A expenses for the year ended December 31, 2012 were as follows:
(amounts in millions)
Year Ended December 31, 2012
Restructuring charges incurred in 2011
$
(25.0
)
Lower general corporate expenses
(9.7
)
Merger transaction and integration expenses
11.8

Severance and related expenses incurred in 2012
6.0

All other, net
0.2

Total decrease in G&A expenses for the the year ended December 31, 2012
$
(16.7
)

During the fourth quarter of 2010, the Company initiated a restructuring plan that included headcount reductions, consolidation of responsibilities and vacating leased facilities, which continued into 2011 (“Restructuring Actions”). As a result of the Restructuring Actions, the Company recognized a restructuring charge of $25.0 million during the year ended December 31, 2011. There were no restructuring charges recognized in conjunction with the Restructuring Actions during the year ended December 31, 2012.

General corporate expenses for the year ended December 31, 2012 declined $9.7 million compared to general corporate expenses for the year ended December 31, 2011 due to lower headcount and related expenses and lower professional fees.

During the year ended December 31, 2012, the Company recognized merger transaction and integration expenses of $11.8 million related to the proposed merger between Dex One and SuperMedia.

During the year ended December 31, 2012, the Company recognized severance and related expenses of $6.0 million that were unrelated to the Restructuring Actions.


55


Depreciation and Amortization Expenses

Depreciation and amortization expenses for the year ended December 31, 2012 were $418.7 million compared to depreciation and amortization expenses of $251.8 million for the year ended December 31, 2011. Amortization of intangible assets was $349.4 million for the year ended December 31, 2012 compared to $187.1 million for the year ended December 31, 2011. The significant increase in intangible asset amortization expense for the year ended December 31, 2012 is a result of accelerated amortization expense due to the reduction in estimated useful lives of our directory services agreements, local and national customer relationships and tradenames and trademarks during the first quarter of 2012. See Item 8, "Financial Statements and Supplementary Data" - Note 2 - "Summary of Significant Accounting Policies - Identifiable Intangible Assets and Goodwill" for additional information. Depreciation of fixed assets and amortization of computer software was $69.2 million for the year ended December 31, 2012 compared to $64.7 million for the year ended December 31, 2011. The increase in depreciation of fixed assets and amortization of computer software for the year ended December 31, 2012 is primarily due to software development capital projects placed into service during 2012 as well as accelerated depreciation expense associated with the closure of facilities and disposal of assets during 2012.

Impairment Charges

During the second quarter of 2011, the Company concluded there were indicators of impairment and as a result, we performed an impairment test of our goodwill and an impairment recoverability test of our definite-lived intangible assets and other long-lived assets. The testing results of our definite-lived intangible assets and other long-lived assets indicated they were recoverable and thus no impairment test was required. Based upon the testing results of our goodwill, we determined that the remaining goodwill assigned to each of our reporting units was fully impaired and thus recognized an aggregate goodwill impairment charge of $801.1 million during the year ended December 31, 2011. Please refer to our Annual Report on From 10-K for the year ended December 31, 2011 for additional information including the methodology, estimates and assumptions used in our impairment testing.

Operating Income (Loss)

Operating income (loss) was $125.7 million for the year ended December 31, 2012 compared to $(430.4) million for the year ended December 31, 2011. The change in operating income (loss) for the year ended December 31, 2012 is primarily due to goodwill impairment charge recognized in the second quarter of 2011. The change in operating income (loss) for the year ended December 31, 2012 is also a result of continuing declines in print revenues as well as the increase in depreciation and amortization expenses described above, partially offset by declines in operating expenses also described above.

Gain on Debt Repurchases, Net

As a result of the Debt Repurchases, we recognized non-cash, pre-tax gains of $139.6 million during the year ended December 31, 2012. See Item 8, "Financial Statements and Supplementary Data" - Note 1 - "Business and Basis of Presentation - Significant Financing Developments" for additional information.

Gain on Sale of Assets, Net

On February 14, 2011, we completed the sale of substantially all net assets of Business.com, including long-lived assets, domain names, trademarks, brands, intellectual property, related content and technology platform. As a result, we recognized a gain on the sale of these assets of $13.4 million during the year ended December 31, 2011.

Interest Expense, Net

Net interest expense of the Company was $196.0 million for the year ended December 31, 2012 compared to $226.8 million for the year ended December 31, 2011. The decrease in net interest expense for the year ended December 31, 2012 is primarily due to lower outstanding debt as a result of mandatory and accelerated debt repayments, partially offset by an increase in net interest expense as a result of the Company's election to make paid-in-kind ("PIK") interest payments on the Dex One Senior Subordinated Notes for the semi-annual interest periods ending September 30, 2012 and March 31, 2012.
   
Certain costs associated with the Credit Facility Repurchases have been capitalized and are included in other non-current assets on the consolidated balance sheets. These costs will be amortized to interest expense over the terms of the related debt agreements using the effective interest method. Amortization of deferred financing costs included in interest expense was $1.7 million for the year ended December 31, 2012.


56


In conjunction with our adoption of fresh start accounting and reporting on the Fresh Start Reporting Date, an adjustment was established to record our outstanding debt at fair value on the Fresh Start Reporting Date. This fair value adjustment will be amortized as an increase to interest expense over the remaining term of the respective debt agreements using the effective interest method and does not impact future scheduled interest or principal payments. Amortization of the fair value adjustment included as an increase to interest expense was $24.5 million and $27.8 million for the years ended December 31, 2012 and 2011, respectively.

During the first quarter of 2010, we entered into interest rate swap and interest rate cap agreements that are not designated as cash flow hedges. The Company’s interest expense includes income of $2.3 million and $3.4 million for the years ended December 31, 2012 and 2011, respectively, resulting from the change in fair value of these interest rate swaps and interest rate caps.

Income Taxes

Our quarterly income tax (provision) benefit for income taxes is measured using an estimated annual effective tax rate for the period, adjusted for discrete items that occurred within the periods presented.
For the year ended December 31, 2012, we recorded an income tax (provision) of $(6.9) million, which represents an effective tax rate of (10%). The effective tax rate for the year ended December 31, 2012 differs from the federal statutory rate of 35.0% primarily due to changes in recorded valuation allowances, the impact of state income taxes and changes in deferred tax liabilities related to the stock basis of subsidiaries (IRC Section 1245 recapture), the impact of non-deductible interest expense related to our Credit Facilities, and other adjustments related to the filing of our consolidated tax return.
The income tax (provision) of $(6.9) million for the year ended December 31, 2012 is comprised of a federal tax benefit of $1.4 million and a state tax (provision) of $(8.3) million. The federal tax benefit of $1.4 million is comprised of a current tax benefit of $4.7 million, primarily related to alternative minimum tax relief, and a deferred tax (provision) of $(3.3) million, primarily due to changes in deferred tax liabilities relating to the stock basis of subsidiaries (Internal Revenue Code ("IRC") Section 1245 recapture) during the year ended December 31, 2012. The state tax (provision) of $(8.3) million is comprised of a current tax (provision) of $(4.5) million, primarily related to the suspension of net operating loss carryforwards in certain states, and a deferred tax (provision) of $(3.8) million, primarily due to changes in liabilities relating to the stock basis of subsidiaries (IRC Section 1245 recapture) during the year ended December 31, 2012.

The Debt Repurchases resulted in a tax gain of $141.5 million for the year ended December 31, 2012. Generally, the discharge of a debt obligation for an amount less than the adjusted issue price creates cancellation of debt income ("CODI"), which must be included in the taxpayer's taxable income. However, in accordance with IRC Section 108, in lieu of recognizing taxable income from CODI, the Company is required to reduce existing tax attributes. As a result, the Company recognized an estimated decrease in deferred tax assets relating to net operating losses and the basis of amortizable and depreciable property of approximately $54.6 million for the year ended December 31, 2012. These decreases were offset by a decrease in recorded valuation allowance during the year ended December 31, 2012.

The Company recorded a decrease in its valuation allowance during the year ended December 31, 2012 as a result of the Debt Repurchases (discussed above). In addition, our valuation allowance was decreased during the year ended December 31, 2012 as a result of the reduction in estimated useful lives of certain intangible assets, which was a change in circumstances that resulted in a change in judgment about the Company's ability to realize deferred tax assets in future years. The resulting change in income tax expense allocated to the year ended December 31, 2012 relating to the changes in valuation allowance is a decrease of $38.9 million, which reduces our effective tax rate for the year ended December 31, 2012 by approximately 56.2%.

The Company recorded deferred tax liabilities related to the change in the excess of the financial statement carrying amount over the tax basis of investments in certain subsidiaries (IRC Section 1245 recapture) as a result of the Debt Repurchases and a reduction of existing tax attributes (discussed above). The resulting increase to income tax expense for the year ended December 31, 2012 was $10.0 million, which increased our effective tax rate by 14.5%.

The Company recorded an income tax (provision) of $(5.6) million related to non-deductible interest expense associated with our Credit Facilities during year ended December 31, 2012, which increased our effective tax rate by 8.1%.
For the year ended December 31, 2011, we recorded an income tax benefit of $124.8 million, which represents an effective tax rate of 19.4%. The effective tax rate for the year ended December 31, 2011 differs from the federal statutory rate of 35.0% primarily due to state income taxes, non-deductible goodwill impairment, changes in deferred tax liabilities related to the stock basis of subsidiaries (IRC Section 1245 recapture), changes in recorded valuation allowances, decreases in the liability for unrecognized tax benefits and other adjustments related to the filing of our consolidated federal income tax return.

57


The income tax benefit of $124.8 million for the year ended December 31, 2011 is comprised of a federal tax benefit of $92.9 million and a state tax benefit of $31.8 million. The federal tax benefit of $92.9 million is comprised of a current tax benefit of $19.0 million, primarily related to decreases in the liability for unrecognized tax benefits, and a deferred tax benefit of $74.0 million, due to changes in temporary differences related to goodwill impairment, changes in deferred tax liabilities relating to the stock basis of subsidiaries (IRC Section 1245 recapture), and changes in recorded valuation allowances during the year ended December 31, 2011. The state tax benefit of $31.8 million is comprised of a current tax (provision) of $(2.9) million, primarily related to the suspension of net operating loss carryforwards in certain states, and a deferred tax benefit of $34.7 million, primarily due to changes in temporary differences related to goodwill impairment and changes in liabilities relating to the stock basis of subsidiaries (IRC Section 1245 recapture) during the year ended December 31, 2011.

The Company recorded a goodwill impairment charge of $801.1 million during the second quarter of 2011, of which $457.2 million related to non-deductible goodwill. Impairment of non‑deductible goodwill reduced the income tax benefit of the impairment by $177.2 million and decreased our effective tax rate by 27.5% for the year ended December 31, 2011. The goodwill impairment charge recognized during the second quarter of 2011 gave rise to a deferred tax asset whose realization did not meet a more-likely-than-not threshold, therefore requiring a valuation allowance. In addition, changes in deferred tax assets and liabilities primarily related to the filing of our 2010 consolidated federal tax return resulted in increases to the valuation allowance during the year ended December 31, 2011. The resulting increase in income tax expense for the year ended December 31, 2011 was $51.2 million, which decreased our effective tax rate by 8.0% for the year ended December 31, 2011.

Upon emergence from bankruptcy, the Company recorded deferred tax liabilities related to the excess of the financial statement carrying amount over the tax basis of investments in certain subsidiaries (IRC Section 1245 recapture). The goodwill impairment charge reduced the financial statement carrying amount of investments in certain subsidiaries, which also caused a reduction in these deferred tax liabilities. The resulting reduction in income tax expense for the year ended December 31, 2011 related to the change in these deferred tax liabilities was $81.1 million, which increased our effective tax rate by 12.6% for the year ended December 31, 2011.

On June 15, 2011, the federal statute of limitations closed for a tax year in which a prior uncertain tax position related to revenue recognition was established. As a result, the Company decreased its liability for unrecognized tax benefits associated with this federal and state uncertain tax position by $28.2 million and recorded a tax benefit of $24.0 million for the year ended December 31, 2011, which increased our effective tax rate by 3.7% for the year ended December 31, 2011.

During the year ended December 31, 2011, the Company increased its liability for unrecognized tax benefits by $5.2 million, primarily related to uncertainty in the realization of certain tax attributes available for reduction under IRC Section 108, which reduced our income tax benefit by $5.1 million and decreased our effective tax rate by 0.8% for the year ended December 31, 2011.

During the third quarter of 2011, the Company increased its liability for unrecognized tax benefits by $1.8 million related to the exclusion of non-business income in the state of Illinois. In the fourth quarter of 2011, the Company reached settlement with the state of Illinois and eliminated the related liability for unrecognized tax benefits. 

Net Income (Loss) and Earnings (Loss) Per Share

Net income (loss) was $62.4 million for the year ended December 31, 2012 compared to $(519.0) million for the year ended December 31, 2011. The change in net income (loss) for the year ended December 31, 2012 is primarily due the goodwill impairment charge and corresponding income tax benefit recognized in the second quarter of 2011. The change in net income (loss) for the year ended December 31, 2012 is also a result of the net gains on Debt Repurchases and declines in operating expenses described above, offset by continuing declines in print revenues as well as the increase in depreciation and amortization expenses described above. Basic and diluted earnings (loss) per share (“EPS”) was $1.23 and $(10.35) for the years ended December 31, 2012 and 2011, respectively. See Item 8, "Financial Statements and Supplementary Data" - Note 2, “Summary of Significant Accounting Policies – Earnings (Loss) Per Share” for further details and computations of basic and diluted EPS.


58


Non-GAAP Statistical Measures

Advertising sales is a non-GAAP statistical measure and consists of sales of advertising in print directories distributed during the period and Internet-based products and services with respect to which such advertising first appeared publicly during the period. It is important to distinguish advertising sales from net revenues, which under GAAP are recognized under the deferral and amortization method. Advertising sales in current periods will be recognized as gross advertising revenues in future periods as a result of the deferral and amortization method of revenue recognition. Advertising sales for the year ended December 31, 2012 were $1,194.3 million representing a decline of $195.6 million, or 14.1%, from advertising sales of $1,389.9 million for the year ended December 31, 2011.

In order to provide more visibility into what the Company will book as revenue in the future, we are presenting an additional non-GAAP statistical measure called bookings, which represent sales activity associated with our print directories and Internet-based marketing solutions during the period. Bookings associated with our local customers represent signed contracts during the period. Bookings associated with our national customers represent what has been published or fulfilled during the period. Bookings for the year ended December 31, 2012 were $1,122.6 million representing a decline of $171.4 million, or 13.2%, from bookings of $1,294.0 million for the year ended December 31, 2011.

The decrease in advertising sales and bookings for the year ended December 31, 2012 is related to our print products and is a result of continuing declines in new and recurring business, mainly driven by (1) customer attrition, (2) declines in overall advertising spending by our customers, (3) the significant impact of the weak local business conditions on consumer spending in our customers’ markets, (4) an increase in competition and more fragmentation in local business search and (5) the migration of customers to digital marketing solutions. Declines in print advertising sales and bookings are partially offset by increased advertising sales and bookings associated with our digital marketing solutions, driven by new partnerships, a focus on providing targeted solution bundled packages to our customers, new digital products and services and the migration of customers to digital marketing solutions.

2011 compared to 2010

Factors Affecting Comparability

Fresh Start Accounting Adjustments – Non-GAAP Analysis
The Successor Company adopted fresh start accounting and reporting on the Fresh Start Reporting Date. The financial statements as of the Fresh Start Reporting Date report the results of Dex One with no beginning retained earnings or accumulated deficit. Any presentation of Dex One represents the financial position and results of operations of a new reporting entity and is not comparable to the prior period presented by the Predecessor Company. The financial statements for the one month ended January 31, 2010 do not include the effect of any changes in the Predecessor Company’s capital structure or changes in the fair value of assets and liabilities as a result of fresh start accounting.

As a result of the deferral and amortization method of revenue recognition, recognized gross advertising revenues reflect the amortization of advertising sales consummated in prior periods as well as in the current period. The adoption of fresh start accounting had a significant impact on the financial position and results of operations of the Successor Company commencing on the Fresh Start Reporting Date. Consistent with the Predecessor Company’s historical application of the acquisition method of accounting for business combinations included in FASB ASC 805, Business Combinations, fresh start accounting precluded us from recognizing advertising revenue and certain expenses associated with advertising sales fulfilled prior to the Fresh Start Reporting Date. Thus, our reported results for the eleven months ended December 31, 2010 were not indicative of our underlying operating and financial performance and are not comparable to any current period presentation. The adoption of fresh start accounting did not have any impact on cash flows from operations.

Accordingly, management has provided a non-GAAP analysis below that compares GAAP results of the Successor Company for the year ended December 31, 2011 to Non-GAAP Combined Adjusted Results for the year ended December 31, 2010 for net revenues through depreciation and amortization expenses on the consolidated statements of comprehensive income (loss).


59


Non-GAAP Combined Adjusted Results (1) combines GAAP results of the Successor Company for the eleven months ended December 31, 2010 and GAAP results of the Predecessor Company for the one month ended January 31, 2010 and (2) adjusts these combined amounts to (i) eliminate the fresh start accounting impact on revenue and certain related expenses noted above and (ii) exclude cost-uplift recorded under fresh start accounting. Deferred directory costs that are included in prepaid expenses and other current assets on the consolidated balance sheet, such as print, paper, distribution and commissions, relate to directories that have not yet been published. Deferred directory costs have been recorded at fair value, determined as (a) the estimated billable value of the published directory less (b) the expected costs to complete the directory, plus (c) a normal profit margin. This incremental fresh start accounting adjustment to step up the recorded value of the deferred directory costs to fair value is hereby referred to as “cost-uplift.” Cost-uplift has been amortized over the terms of the applicable directories, not to exceed twelve months, and has been allocated between production and distribution expenses and selling and support expenses based upon the category of the deferred directory costs that were fair valued. Fresh start accounting had an immaterial impact on our results of operations for the year ended December 31, 2011 and therefore, we have not adjusted our GAAP results for this period in the non-GAAP analysis below.

Management believes that the presentation of Non-GAAP Combined Adjusted Results will help financial statement users better understand the material impact fresh start accounting had on the Successor Company’s results of operations for the eleven months ended December 31, 2010 and also offers a non-GAAP normalized comparison to GAAP results of the Successor Company for the year ended December 31, 2011. The Non-GAAP Combined Adjusted Results presented below are reconciled to the most comparable GAAP measures. While the Non-GAAP Combined Adjusted Results exclude the effects of fresh start accounting, it must be noted that the Non-GAAP Combined Adjusted Results are not comparable to the Successor Company’s GAAP results for the year ended December 31, 2011 and should not be treated as such.

Impairment Charges– Non-GAAP Analysis
The Successor Company has removed the goodwill impairment charge recognized during the second quarter of 2011 totaling $801.1 million from GAAP results for year ended December 31, 2011 and as such, we are presenting Non-GAAP Adjusted Results for impairment charges and operating income (loss) on the consolidated statement of comprehensive income (loss) for this period below. The Successor Company has also removed the goodwill and non-goodwill intangible asset impairment charges totaling $1,159.3 million from GAAP results for the eleven months ended December 31, 2010 and as such, we are presenting Non-GAAP Combined Adjusted Results for impairment charges and operating income (loss) on the consolidated statement of comprehensive income (loss) for this period below.

GAAP Analysis
In order to emphasize the importance of GAAP results, Management has also provided a separate GAAP analysis below for the following periods:
GAAP results of the Successor Company for line items below operating income (loss) on the consolidated statements of comprehensive income (loss) for the year ended December 31, 2011, as management believes these line items should not be combined or compared for the non-GAAP analysis noted above based upon distinct differences in their composition between the Successor Company and Predecessor Company and the reporting periods presented; and
GAAP results of the Successor Company and Predecessor Company for the eleven months ended December 31, 2010 and one month ended January 31, 2010, respectively, as line items above operating income (loss) on the consolidated statements of comprehensive income (loss) comprise Non-GAAP Combined Adjusted Results and are included in the non-GAAP analysis noted above and line items below operating income (loss) should not be combined or compared for reasons discussed above.

This GAAP analysis includes a discussion of results for each individual reporting period, however does not provide a comparison of results between the individual reporting periods due to the reasons discussed above.


60


GAAP Results (Net Revenues Through Depreciation and Amortization Expenses) and Non-GAAP Adjusted Results (Impairment Charges and Operating Income (Loss)) for the Year Ended December 31, 2011 compared to Non-GAAP Combined Adjusted Results for the Year Ended December 31, 2010

Net Revenues
The components of our GAAP net revenues for the year ended December 31, 2011 and non-GAAP combined adjusted net revenues for the year ended December 31, 2010 were as follows:
 
Successor Company
Successor Company
Predecessor Company
 
 
Non-GAAP Combined Adjusted
 
 
(amounts in millions)
Year Ended December 31, 2011
Eleven Months Ended December 31, 2010
One Month Ended January 31, 2010
Fresh Start Adjustments
 
Year Ended December 31, 2010
$ Change
% Change
Gross advertising revenues
$
1,475.0

$
824.4

$
161.4

$
799.3

(1) 
$
1,785.1

$
(310.1
)
(17.4
)%
Sales claims and allowances
(15.9
)
(9.9
)
(3.5
)
(14.0
)
(1) 
(27.4
)
11.5

42.0

Net advertising revenues
1,459.1

814.5

157.9

785.3

 
1,757.7

(298.6
)
(17.0
)
Other revenues
21.5

16.4

2.5

5.6

(1) 
24.5

(3.0
)
(12.2
)
Total
$
1,480.6

$
830.9

$
160.4

$
790.9

 
$
1,782.2

$
(301.6
)
(16.9
)%
(1)
Represents gross advertising revenues, sales claims and allowances and other revenues for advertising sales fulfilled prior to the Fresh Start Reporting Date, which would have been recognized during the eleven months ended December 31, 2010 absent our adoption of fresh start accounting required under GAAP.

GAAP gross advertising revenues for the year ended December 31, 2011 decreased $310.1 million, or 17.4% from non-GAAP combined adjusted gross advertising revenues for the year ended December 31, 2010. The decline in GAAP gross advertising revenues for the year ended December 31, 2011 is related to our print products, primarily as a result of continuing declines in new and recurring business, mainly driven by (1) customer attrition, (2) declines in overall advertising spending by our customers, (3) the significant impact of the weak local business conditions on consumer spending in our customers’ markets, (4) an increase in competition and more fragmentation in local business search and (5) the migration of customers to digital marketing solutions. The decline in GAAP gross advertising revenues is also a result of recognizing approximately one month of revenues from Business.com in 2011 compared to a full year of revenues in 2010 due to the sale of substantially all net assets of Business.com in February 2011, as well as not recognizing revenues in 2011 associated with a certified marketing representative (“CMR”) who was under financial distress and was winding down its operations. Declines in GAAP print advertising revenues are partially offset by increased GAAP advertising revenues associated with our digital marketing solutions, driven by new partnerships entered into in 2011, a focus on providing targeted solution bundled packages to our customers, new digital products and services introduced in 2011, as well as the migration of customers to digital marketing solutions.

GAAP sales claims and allowances for the year ended December 31, 2011 decreased $11.5 million, or 42.0% from non-GAAP combined adjusted sales claims and allowances for the year ended December 31, 2010. The decline in GAAP sales claims and allowances for the year ended December 31, 2011 is primarily due to lower claims experience as a result of process improvements and operating efficiencies, which improved print copy quality in certain of our markets, as well as lower advertising sales volume.


61


Expenses
The components of our GAAP and non-GAAP adjusted expenses for the year ended December 31, 2011 and non-GAAP combined adjusted expenses for year ended December 31, 2010 were as follows:
 
Successor Company
 
 
Non-GAAP
Adjusted
Successor Company
Predecessor Company
 
 
Non-GAAP Combined Adjusted
 
 
(amounts in millions)
Year Ended December 31, 2011
Adjustment
 
Year Ended December 31, 2011
Eleven Months Ended December 31, 2010
One Month Ended January 31, 2010
Fresh Start and Other Adjustments
 
Year Ended December 31, 2010
$ Change
% Change
Production and distribution expenses
$
287.2

$

 
$
287.2

$
213.3

$
26.9

$
81.3

(1) 
$
321.5

$
(34.3
)
(10.7
)%
Selling and support expenses
426.8


 
426.8

386.1

40.9

79.0

(1) 
506.0

(79.2
)
(15.7
)
General and administrative expenses
144.1


 
144.1

148.8

8.3


 
157.1

(13.0
)
(8.3
)
Depreciation and amortization expenses
251.8


 
251.8

217.7

20.2


 
237.9

13.9

5.8

Impairment charges
801.1

(801.1
)
(2) 

1,159.3


(1,159.3
)
(2) 



Total
$
1,911.0

$
(801.1
)
 
$
1,109.9

$
2,125.2

$
96.3

$
(999.0
)
 
$
1,222.5

$
(112.6
)
(9.2
)%
(1) 
Represents (a) certain deferred expenses for advertising sales fulfilled prior to the Fresh Start Reporting Date, which would have been recognized during the eleven months ended December 31, 2010 absent our adoption of fresh start accounting required under GAAP and (b) the exclusion of cost-uplift recorded under fresh start accounting.
(2)  
The goodwill impairment charge has been removed from GAAP results for the year ended December 31, 2011. The goodwill and non-goodwill intangible asset impairment charges have been removed from GAAP results for the eleven months ended December 31, 2010.

Production and Distribution Expenses
GAAP production and distribution expenses for the year ended December 31, 2011 were $287.2 million compared to non-GAAP combined adjusted production and distribution expenses of $321.5 million for the year ended December 31, 2010. The primary components of the $34.3 million, or 10.7%, decrease in GAAP production and distribution expenses for the year ended December 31, 2011 were as follows:
(amounts in millions)
Year Ended December 31, 2011
Lower Internet production and distribution expenses
$
(23.9
)
Lower print, paper and distribution expenses
(10.8
)
All other, net
0.4

Total decrease in GAAP production and distribution expenses for the year ended December 31, 2011
$
(34.3
)

GAAP Internet production and distribution expenses for the year ended December 31, 2011 declined $23.9 million compared to non-GAAP combined adjusted Internet production and distribution expenses for the year ended December 31, 2010. The decline in GAAP Internet production and distribution expenses is primarily a result of recognizing approximately one month of expenses from Business.com in 2011 compared to a full year of expenses in 2010 due to the sale of substantially all net assets of Business.com in February 2011. These declines are partially offset by increased purchased traffic costs that direct traffic to our website driven by higher cost per click rates.

GAAP print, paper and distribution expenses for the year ended December 31, 2011 declined $10.8 million compared to non-GAAP combined adjusted print, paper and distribution expenses for the year ended December 31, 2010 primarily due to lower page volumes associated with declines in print advertisements.


62


Selling and Support Expenses
GAAP selling and support expenses for the year ended December 31, 2011 were $426.8 million compared to non-GAAP combined adjusted selling and support expenses of $506.0 million for the year ended December 31, 2010. The primary components of the $79.2 million, or 15.7%, decrease in GAAP selling and support expenses for the year ended December 31, 2011 were as follows:
(amounts in millions)
Year Ended
December 31, 2011
Lower commissions and salesperson expenses
$
(21.7
)
Lower marketing expenses
(19.3
)
Lower bad debt expense
(13.0
)
Lower advertising expenses
(11.1
)
Lower directory publishing expenses
(6.5
)
Lower billing, credit and collection expenses
(4.7
)
All other, net
(2.9
)
Total decrease in GAAP selling and support expenses for the year ended December 31, 2011
$
(79.2
)

GAAP commissions and salesperson expenses for the year ended December 31, 2011 decreased $21.7 million compared to non-GAAP combined adjusted commissions and salesperson expenses for the year ended December 31, 2010, primarily due to lower advertising sales and its effect on variable-based commissions, lower headcount and declines in commissions associated with a CMR who is under financial distress and is winding down its operations, partially offset by an increase in salesperson training expenses.

GAAP marketing expenses for the year ended December 31, 2011 declined $19.3 million compared to non-GAAP combined adjusted marketing expenses for the year ended December 31, 2010, due to lower headcount and reduced interactive marketing spend, primarily related to the sale of substantially all net assets of Business.com in February 2011 as noted above.

GAAP bad debt expense for the year ended December 31, 2011 declined $13.0 million compared to non-GAAP combined adjusted bad debt expense for the year ended December 31, 2010, primarily due to effective credit and collections practices, which have driven improvement in our accounts receivable portfolio, as well as lower billing volumes associated with declines in advertisers and advertising sales, partially offset by write-off experience associated with the CMR referenced above and its impact on allowance factors. GAAP bad debt expense for the year ended December 31, 2011 represented 3.5% of our net revenue, compared to 3.7% for the non-GAAP combined adjusted year ended December 31, 2010.

GAAP advertising expenses for the year ended December 31, 2011 decreased $11.1 million compared to non-GAAP combined adjusted advertising expenses for the year ended December 31, 2010, primarily due to a reduction in media spend in 2011.

GAAP directory publishing expenses for the year ended December 31, 2011 declined $6.5 million compared to non-GAAP combined adjusted directory publishing expenses for the year ended December 31, 2011, primarily due to declines in print advertisements and lower headcount.

GAAP billing, credit and collection expenses for the year ended December 31, 2011 declined $4.7 million compared to non-GAAP combined adjusted billing, credit and collection expenses for the year ended December 31, 2011, primarily due to lower headcount.


63


General and Administrative Expenses
GAAP G&A expenses for the year ended December 31, 2011 were $144.1 million compared to non-GAAP combined adjusted G&A expenses of $157.1 million for the year ended December 31, 2010. The primary components of the $13.0 million, or 8.3%, decrease in GAAP G&A expenses for the year ended December 31, 2011 were as follows:
(amounts in millions)
Year Ended
December 31, 2011
Expenses associated with departure of Chief Executive Officer in 2010
$
(9.5
)
Lower information technology (“IT”) expenses
(5.0
)
Higher restructuring expenses
6.4

All other, net
(4.9
)
Total decrease in GAAP G&A expenses for the year ended December 31, 2011
$
(13.0
)

During the non-GAAP combined adjusted year ended December 31, 2010, we recognized expenses of $9.5 million associated with the departure of our former Chief Executive Officer. There were no comparable expenses recognized during the year ended December 31, 2011.

GAAP IT expenses for the year ended December 31, 2011 declined $5.0 million compared to non-GAAP combined adjusted IT expenses for the year ended December 31, 2010, primarily due to lower headcount.

During the fourth quarter of 2010 we commenced the Restructuring Actions, which continued throughout 2011. As a result of the Restructuring Actions, the Company recognized a restructuring charge of $25.0 million during the year ended December 31, 2011. During the fourth quarter of 2010, the Company recorded a restructuring charge of $18.6 million associated with the Restructuring Actions. This represents an increase in restructuring expenses of $6.4 million for the year ended December 31, 2011.

The decrease in All other, net for the year ended December 31, 2011 of $4.9 million is primarily due to declines in general corporate expenses, primarily related to lower headcount and lower professional dues and fees.

Depreciation and Amortization Expenses
GAAP depreciation and amortization expenses for the year ended December 31, 2011 were $251.8 million, compared to combined depreciation and amortization expenses of $237.9 million for the year ended December 31, 2010. GAAP amortization of intangible assets was $187.1 million for the year ended December 31, 2011, compared to combined amortization of intangible assets of $182.6 million for the year ended December 31, 2010. The increase in GAAP intangible asset amortization expense for the year ended December 31, 2011 is primarily a result of additional amortization expense associated with revisions to our long-term forecast that had a direct impact on the timing of amortization expense associated with intangible assets that are amortized using the income forecast method. See below for additional information. The income forecast amortization methodology assumes the value derived from our intangible assets and associated amortization expense is greater in the earlier years and steadily declines over time. This increase in GAAP intangible asset amortization expense is offset by not recognizing any amortization expense for Business.com intangible assets in 2011, as these intangible assets were fully impaired during 2010, as well as the impact of the income forecast amortization methodology discussed above.

In conjunction with our impairment testing as of May 31, 2011, the Company evaluated the remaining useful lives of identifiable intangible assets and other long-lived assets. Based on this evaluation, the Company determined that the estimated useful lives of intangible assets continued to be deemed appropriate as of May 31, 2011. However, revisions to our long-term forecast, which was used for our impairment testing as of May 31, 2011, had a direct impact on the timing of amortization expense associated with intangible assets that are amortized using the income forecast method. The Company experienced an increase in amortization expense of $34.3 million during 2011 resulting from these changes.

GAAP depreciation of fixed assets and amortization of computer software was $64.7 million for the year ended December 31, 2011 compared to combined depreciation of $55.3 million for the year ended December 31, 2010. The increase in GAAP depreciation expense for the year ended December 31, 2011 is primarily due to software development capital projects placed into service during the later part of 2010 and first half of 2011, as well as accelerated depreciation expense related to facilities that have been abandoned as a result of the Restructuring Actions.


64


Impairment Charges
Based upon the continued decline in the trading value of our debt and equity securities, revisions made to our long-term forecast and changes in management, the Company concluded there were indicators of impairment as of May 31, 2011. As a result, we performed impairment tests of our goodwill, definite-lived intangible assets and other long-lived assets as of May 31, 2011. The impairment testing results for recoverability of our definite-lived intangible assets and other long-lived assets indicated they were recoverable and thus no impairment test was required as of May 31, 2011. Based upon the testing results of our goodwill, we determined that the remaining goodwill assigned to each of our reporting units was fully impaired and thus recognized an aggregate goodwill impairment charge of $801.1 million during second quarter of 2011, which was recorded at each of our reporting units. As of December 31, 2011, the Company has no recorded goodwill at any of its reporting units.

During the three months ended September 30, 2010 and June 30, 2010, the Company concluded that there were indicators of impairment and as a result, we performed impairment tests of our goodwill, definite-lived intangible assets and other long-lived assets as of September 30, 2010 and June 30, 2010. The testing results of our definite-lived intangible assets and other long-lived assets resulted in a non-goodwill intangible asset impairment charge of $4.3 million and $17.3 million during the three months ended September 30, 2010 and June 30, 2010, respectively, for a total non-goodwill intangible asset impairment charge of $21.6 million during the eleven months ended December 31, 2010 associated with trade names and trademarks, technology, local customer relationships and other from our former Business.com reporting unit. The Company also recognized a goodwill impairment charge of $385.3 million and $752.3 million during the three months ended September 30, 2010 and June 30, 2010, respectively, for a total goodwill impairment charge of $1,137.6 million during the eleven months ended December 31, 2010 resulting from our impairment testing, which was recorded in each of our reporting units. The sum of the goodwill and non-goodwill intangible asset impairment charges totaled $1,159.3 million for the eleven months ended December 31, 2010.

Please refer to our Annual Reports on Form 10-K for the year ended December 31, 2011 and year ended December 31, 2010 for additional information including the methodology, estimates and assumptions used in our impairment testing for these periods.

Operating Income (Loss)
Non-GAAP adjusted operating income (loss) for the year ended December 31, 2011 and non-GAAP combined adjusted operating income (loss) for the year ended December 31, 2010 was as follows:
 
Successor Company
 
 
Non-GAAP
Adjusted
Successor Company
Predecessor Company
 
 
Non-GAAP Combined Adjusted
 
 
(amounts in millions)
Year Ended
December 31, 2011
Adjustment
 
Year Ended
December 31, 2011
Eleven Months Ended December 31, 2010
One Month Ended January 31, 2010
Fresh Start and Other Adjustments
 
Year Ended December 31, 2010
$
Change
%
Change
Total
$
(430.4
)
$
801.1

(2) 
$
370.7

$
(1,294.3
)
$
64.1

$
1,789.9

(1) 
$
559.7

$
(189.0
)
(33.8
)%
(1)
Represents the net effect of (a) eliminating gross advertising revenues, sales claims and allowances, other revenues and certain deferred expenses for advertising sales fulfilled prior to the Fresh Start Reporting Date, which would have been recognized during the eleven months ended December 31, 2010 absent our adoption of fresh start accounting required under GAAP, (b) the exclusion of cost-uplift recorded under fresh start accounting, and (c) the exclusion of the goodwill and non-goodwill intangible asset impairment charges during the eleven months ended December 31, 2010.
(2)
The goodwill impairment charge has been removed from GAAP results for the year ended December 31, 2011.

Non-GAAP adjusted operating income for the year ended December 31, 2011 of $370.7 million compares to non-GAAP combined adjusted operating income of $559.7 million for the year ended December 31, 2010. The decrease in non-GAAP adjusted operating income for the year ended December 31, 2011 is primarily due to continuing declines in print revenue as well as the increase in depreciation and amortization expenses described above, partially offset by the operating expense trends also described above.


65


GAAP Results for the Year Ended December 31, 2011, Eleven Months Ended December 31, 2010 (Successor Company) and One Month Ended January 31, 2010 (Predecessor Company)

Successor Company - Year Ended December 31, 2011

Gain on Sale of Assets
On February 14, 2011, we completed the sale of substantially all net assets of Business.com, including long-lived assets, domain names, trademarks, brands, intellectual property, related content and technology platform. As a result, we recognized a gain on the sale of these assets of $13.4 million during the year ended December 31, 2011.

Interest Expense, Net
Net interest expense of the Company was $226.8 million for the year ended December 31, 2011. Net interest expense is trending downward due to lower outstanding debt as a result of mandatory and accelerated debt repayments.

In conjunction with our adoption of fresh start accounting and reporting on the Fresh Start Reporting Date, an adjustment was established to record our outstanding debt at fair value on the Fresh Start Reporting Date. This fair value adjustment will be amortized as an increase to interest expense over the remaining term of the respective debt agreements using the effective interest method and does not impact future scheduled interest or principal payments. Amortization of the fair value adjustment included as an increase to interest expense was $27.8 million for the year ended December 31, 2011.

During the first quarter of 2010, we entered into interest rate swap and interest rate cap agreements that are not designated as cash flow hedges. The Company’s interest expense includes income of $3.4 million for the year ended December 31, 2011 resulting from the change in fair value of these interest rate swaps and interest rate caps.

Income Taxes
For the year ended December 31, 2011, we recorded an income tax benefit of $124.8 million, which represents an effective tax rate of 19.4%. The effective tax rate for the year ended December 31, 2011 differs from the federal statutory rate of 35.0% primarily due to state income taxes, non-deductible goodwill impairment, changes in deferred tax liabilities related to the stock basis of subsidiaries (Internal Revenue Code ("IRC") Section 1245 recapture), changes in recorded valuation allowances, decreases in the liability for unrecognized tax benefits and other adjustments related to the filing of our consolidated federal income tax return.
The income tax benefit of $124.8 million for the year ended December 31, 2011 is comprised of a federal tax benefit of $92.9 million and a state tax benefit of $31.8 million. The federal tax benefit of $92.9 million is comprised of a current tax benefit of $18.9 million, primarily related to decreases in the liability for unrecognized tax benefits, and a deferred tax benefit of $74.0 million, due to changes in temporary differences related to goodwill impairment, changes in deferred tax liabilities relating to the stock basis of subsidiaries (IRC Section 1245 recapture), and changes in recorded valuation allowances during the year ended December 31, 2011. The state tax benefit of $31.8 million is comprised of a current tax provision of $(2.9) million, primarily related to the suspension of net operating loss carryforwards in certain states, and a deferred tax benefit of $34.7 million, primarily due to changes in temporary differences related to goodwill impairment and changes in liabilities relating to the stock basis of subsidiaries during the year ended December 31, 2011.

The Company recorded a goodwill impairment charge of $801.1 million during the second quarter of 2011, of which $457.2 million related to non-deductible goodwill. Impairment of non‑deductible goodwill reduced the income tax benefit of the impairment by $177.2 million and decreased our effective tax rate by 27.5% for the year ended December 31, 2011.

The goodwill impairment charge recognized during the second quarter of 2011 gave rise to a deferred tax asset whose realization did not meet a more-likely-than-not threshold, therefore requiring a valuation allowance. In addition, changes in deferred tax assets and liabilities primarily related to the filing of our 2010 consolidated federal tax return resulted in increases to the valuation allowance during the year ended December 31, 2011. The resulting increase in income tax expense for the year ended December 31, 2011 was $51.2 million, which decreased our effective tax rate by 8.0% for the year ended December 31, 2011.

66


Upon emergence from bankruptcy, the Company recorded deferred tax liabilities related to the excess of the financial statement carrying amount over the tax basis of investments in certain subsidiaries (IRC Section 1245 recapture). The goodwill impairment charge reduced the financial statement carrying amount of investments in certain subsidiaries, which also caused a reduction in these deferred tax liabilities. The resulting reduction in income tax expense for the year ended December 31, 2011 related to the change in these deferred tax liabilities was $81.1 million, which increased our effective tax rate by 12.6% for the year ended December 31, 2011.
On June 15, 2011, the federal statute of limitations closed for a tax year in which a prior uncertain tax position related to revenue recognition was established. As a result, the Company decreased its liability for unrecognized tax benefits associated with this federal and state uncertain tax position by $28.2 million and recorded a tax benefit of $24.0 million for the year ended December 31, 2011, which increased our effective tax rate by 3.7% for the year ended December 31, 2011.

During the year ended December 31, 2011, the Company increased its liability for unrecognized tax benefits by $5.2 million, primarily related to uncertainty in the realization of certain tax attributes available for reduction under IRC Section 108, which reduced our income tax benefit by $5.1 million and decreased our effective tax rate by 0.8% for the year ended December 31, 2011.

During the third quarter of 2011, the Company increased its liability for unrecognized tax benefits by $1.8 million related to the exclusion of non-business income in the state of Illinois. In the fourth quarter of 2011, the Company reached settlement with the state of Illinois and eliminated the related liability for unrecognized tax benefits. 

Net Loss and Loss Per Share
Net loss of $(519.0) million for the year ended December 31, 2011 was directly impacted by the goodwill impairment charge and revenue and expense trends described above, partially offset by the income tax benefit described above. Basic and diluted earnings (loss) per share (“EPS”) was $(10.35) for the year ended December 31, 2011. See Item 8, “Financial Statements and Supplementary Data” - Note 2, “Summary of Significant Accounting Policies – Earnings (Loss) Per Share” for further details and computations of basic and diluted EPS.

Successor Company – Eleven Months Ended December 31, 2010

Net Revenues
The components of our net revenues for the eleven months ended December 31, 2010 were as follows:
(amounts in millions)
Eleven Months Ended December 31, 2010
 
 
Gross advertising revenues
$
824.4

Sales claims and allowances
(9.9
)
Net advertising revenues
814.5

Other revenues
16.4

Total
$
830.9


Gross advertising revenues were $824.4 million for the eleven months ended December 31, 2010 and exclude $799.3 million of gross advertising revenues resulting from our adoption of fresh start accounting. Gross advertising revenues were impacted by continuing declines in advertising sales related to our print products primarily as a result of declines in new and recurring business, mainly driven by (1) customer attrition, (2) declines in overall advertising spending by our customers, (3) the significant impact of the weak local business conditions on consumer spending in our customers’ markets, (4) an increase in competition and more fragmentation in local business search and (5) the migration of customers to digital marketing solutions.

Sales claims and allowances were $9.9 million for the eleven months ended December 31, 2010 and exclude $14.0 million of sales claims and allowances resulting from our adoption of fresh start accounting. Sales claims and allowances were affected by lower claims experience due to process improvements and operating efficiencies, which improved print copy quality in certain of our markets, as well as lower advertising sales volume.


67


Other revenues were $16.4 million for the eleven months ended December 31, 2010 and exclude $5.6 million of other revenues resulting from our adoption of fresh start accounting. Other revenues include late fees received on outstanding customer balances, barter revenues, commissions earned on sales contracts with respect to advertising placed into other publishers’ directories, and sales of directories and certain other advertising-related products.

Expenses
The components of our total expenses for the eleven months ended December 31, 2010 were as follows:
(amounts in millions)
Eleven Months Ended
December 31, 2010
 
 
Production and distribution expenses
$
213.3

Selling and support expenses
386.1

General and administrative expenses
148.8

Depreciation and amortization
217.7

Impairment charges
1,159.3

Total
$
2,125.2


Production and Distribution Expenses
Total production and distribution expenses were $213.3 million for the eleven months ended December 31, 2010. Production and distribution expenses are comprised of items such as print, paper and distribution expenses, Internet production and distribution expenses and amortization of cost-uplift associated with print, paper and distribution expenses resulting from our adoption of fresh start accounting. As a result of our adoption of fresh start accounting, production and distribution expenses for the eleven months ended December 31, 2010 exclude the amortization of deferred directory costs under the deferral and amortization method for directories published before the Fresh Start Reporting Date totaling $88.8 million and include amortization of cost-uplift of $7.5 million. Print paper and distribution expenses were impacted by lower page volumes associated with declines in print advertisements and negotiated price reductions in our print and paper expenses. Internet production and distribution expenses were affected by a reduction in DexNet customers, purchasing efficiencies and lower headcount, partially offset by increased purchased traffic costs incurred to direct traffic to our online properties.

Selling and Support Expenses
Total selling and support expenses were $386.1 million for the eleven months ended December 31, 2010. Selling and support expenses are comprised of items such as bad debt expense, commissions and salesperson expenses, directory publishing expenses, billing, credit and collection expense, occupancy expenses, advertising expense and amortization of cost uplift associated with commissions resulting from our adoption of fresh start accounting. Due to our adoption of fresh start accounting, selling and support expenses for the eleven months ended December 31, 2010 exclude the amortization of deferred directory costs under the deferral and amortization method for directories published before the Fresh Start Reporting Date totaling $83.8 million and include amortization of cost-uplift of $4.8 million. Bad debt expense was impacted by lower write-off experience resulting from effective credit and collections practices, which have driven improvement in our accounts receivable portfolio, as well as lower billing volumes associated with declines in advertisers, partially offset by an increase to the bad debt provision for delinquent balances associated with a CMR. If customers fail to pay within specified credit terms, we may cancel their advertising in future directories, which could impact our ability to collect past due amounts as well as adversely impact our advertising sales and revenue trends. Commissions and salesperson expenses were affected by lower advertising sales and its effect on variable-based commissions, as well as lower headcount. Directory publishing expenses were affected by declines in print advertisements and lower headcount. Occupancy expenses were impacted by the renegotiation of our leased properties and reduction in the amount of leased square footage during the bankruptcy process.


68


General and Administrative Expenses
G&A expenses were $148.8 million for the eleven months ended December 31, 2010. G&A expenses are comprised of items such as restructuring expenses, general corporate expenses, incentive compensation expense and IT expenses. G&A related incentive compensation expense pertains to expense associated with a SARs grant made on March 1, 2010 to certain employees, including executive officers, common stock issued to members of the Company’s Board of Directors on March 1, 2010, common stock issued to members of the Executive Oversight Committee on September 13, 2010, the stock based awards granted to Mr. Mockett on September 13, 2010 and compensation expense associated with the Company’s Long-Term Incentive Program (“2009 LTIP”), which includes accelerated compensation expense associated with the departure of our former Chief Executive Officer.

Depreciation and Amortization
Depreciation and amortization expense was $217.7 million for the eleven months ended December 31, 2010. Amortization of intangible assets was $167.0 million for the eleven months ended December 31, 2010 and was impacted by the increase in fair value of our intangible assets and the establishment of the estimated useful lives resulting from our adoption of fresh start accounting. Depreciation of fixed assets and amortization of computer software was $50.7 million for the eleven months ended December 31, 2010 and was affected by the increase in fair value of our fixed assets and computer software resulting from our adoption of fresh start accounting as well as capital projects placed into service during the eleven months ended December 31, 2010.

Impairment Charges
Based upon the decline in the trading value of our debt and equity securities and changes in management, among other indicators, the Company performed impairment tests of its goodwill, definite-lived intangible assets and other long-lived assets as of September 30, 2010 and June 30, 2010. The testing results of our definite-lived intangible assets and other long-lived assets resulted in an impairment charge associated with trade names and trademarks, technology, local customer relationships and other from our former Business.com reporting unit of $4.3 million and $17.3 million during the three months ended September 30, 2010 and June 30, 2010, respectively, for a total non-goodwill intangible asset impairment charge of $21.6 million during the eleven months ended December 31, 2010. The testing results of our goodwill resulted in an impairment charge of $385.3 million and $752.3 million during the three months ended September 30, 2010 and June 30, 2010, respectively, for a total goodwill impairment charge of $1,137.6 million during the eleven months ended December 31, 2010. The sum of the goodwill and non-goodwill intangible asset impairment charges totaled $1,159.3 million for the eleven months ended December 31, 2010.

Operating Loss
Operating loss was $(1,294.3) million for the eleven months ended December 31, 2010. Under fresh start accounting, most deferred net revenues related to directories published prior to the Fresh Start Reporting Date have been eliminated however, only certain deferred direct expenses related to these directories have been eliminated. Expenses that are not directly associated with net revenues from these directories will continue to be recognized as period expenses subsequent to the Fresh Start Reporting Date. As such, fresh start accounting has had a disproportionate adverse effect on reported net revenues versus expenses in determining operating loss for the eleven months ended December 31, 2010. Each month subsequent to the Fresh Start Reporting Date until the impact of fresh start accounting expires in the first quarter of 2011, the ratio of reported net revenue to expense will increase. Operating loss for the eleven months ended December 31, 2010 was directly impacted by the goodwill and non-goodwill intangible asset impairment charges noted above, the significant effects of fresh start accounting as well as the revenue and expense trends described above.

Interest Expense, Net
Net interest expense was $249.5 million for the eleven months ended December 31, 2010. In conjunction with our adoption of fresh start accounting and reporting on the Fresh Start Reporting Date, an adjustment was established to record our outstanding debt at fair value on the Fresh Start Reporting Date. This fair value adjustment will be amortized as an increase to interest expense over the remaining term of the respective debt agreements using the effective interest method and does not impact future scheduled interest or principal payments. Amortization of the fair value adjustment included as an increase to interest expense was $29.3 million for the eleven months ended December 31, 2010.

During the first quarter of 2010, we entered into interest rate swap and interest rate cap agreements that are not designated as cash flow hedges. The Company’s interest expense for the eleven months ended December 31, 2010 includes expense of $8.2 million resulting from the change in fair value of these interest rate swaps and interest rate caps.


69


Income Taxes
The effective tax rate on loss before income taxes is 40.2% for the eleven months ended December 31, 2010. Our effective tax rate benefit of 40.2% is higher than the federal statutory tax rate of 35.0% primarily due to increases in income tax benefits from the recognition of an unrecognized tax position offset, in part, by an increase in income tax expense related to a non-deductible impairment charge.

The income tax benefit of $620.1 million for the eleven months ended December 31, 2010 is comprised of a federal tax benefit of $567.7 million and a state tax benefit of $52.4 million. The federal tax benefit of $567.7 million is comprised of a current tax provision of $(1.3) million, primarily related to unrecognized tax benefits, and a deferred tax benefit of $569.0 million, primarily related to current year net operating loss, recognition of an unrecognized tax position and goodwill impairment charges during the eleven months ended December 31, 2010. The state tax benefit of $52.4 million is comprised of a current tax benefit of $3.8 million, primarily related to expected state tax refunds, and a deferred tax benefit of $48.6 million, primarily related to the recognition of an unrecognized tax position during the eleven months ended December 31, 2010.

During 2009, the Predecessor Company accrued an unrecognized tax benefit for the uncertainty surrounding a potential ownership change under IRC Section 382 that occurred prior to the date on which it made a “check-the-box” election for two of its subsidiaries. The date of the change in ownership was in question since as of the December 31, 2009 balance sheet date, the Predecessor Company was unable to confirm the actual date of the ownership change until all SEC Forms 13-G were filed. However, based upon the closing of the SEC filing period for Schedules 13-G and review of these schedules filed through February 15, 2010, the Company determined that it was more likely than not that certain “check-the-box” elections were effective prior to the date of the 2009 ownership change under Section 382. As a result, the Company recorded a tax benefit for the reversal of a liability for unrecognized tax benefit of $352.3 million in the Company’s statement of comprehensive income (loss) for the eleven months ended December 31, 2010, which significantly impacted our effective tax rate for the period.

As a result of the goodwill and non-goodwill intangible asset impairment charges during the eleven months ended December 31, 2010, we recognized a non-deductible adjustment to our effective tax rate of 19.5%, or $299.9 million.

See Item 8, “Financial Statements and Supplementary Data” - Note 7, “Income Taxes” for additional information.

Net Loss and Loss Per Share
Net loss of $(923.6) million for the eleven months ended December 31, 2010 was directly impacted by the goodwill and non-goodwill intangible asset impairment charges noted above, as well as the significant effects of fresh start accounting and the revenue and expense trends described above, partially offset by the income tax benefit recorded for the eleven months ended December 31, 2010 as noted above. Basic and diluted EPS was $(18.46) for the eleven months ended December 31, 2010. See Item 8, “Financial Statements and Supplementary Data” - Note 2, “Summary of Significant Accounting Policies – Earnings (Loss) Per Share” for further details and computations of basic and diluted EPS.

Predecessor Company – One Month Ended January 31, 2010

Net Revenues
The components of the Predecessor Company’s net revenues for the one month ended January 31, 2010 were as follows:

(amounts in millions)
One Month Ended
January 31, 2010
Gross advertising revenues
$
161.4

Sales claims and allowances
(3.5
)
Net advertising revenues
157.9

Other revenues
2.5

Total
$
160.4



70


Gross advertising revenues were $161.4 million for the one month ended January 31, 2010. Gross advertising revenues were impacted by continuing declines in advertising sales related to our print products, primarily as a result of declines in new and recurring business, mainly driven by (1) customer attrition, (2) declines in overall advertising spending by our customers, (3) the significant impact of the weak local business conditions on consumer spending in our customers’ markets, (4) an increase in competition and more fragmentation in local business search and (5) the migration of customers to digital marketing solutions.

Sales claims and allowances were $3.5 million for the one month ended January 31, 2010. Sales claims and allowances were affected by lower claims experience due to process improvements and operating efficiencies, which improved print copy quality in certain of our markets, as well as lower advertising sales volume.

Other revenues were $2.5 million for the one month ended January 31, 2010. Other revenues include late fees received on outstanding customer balances, barter revenues, commissions earned on sales contracts with respect to advertising placed into other publishers’ directories, and sales of directories and certain other advertising-related products.

Expenses
The components of the Predecessor Company’s total expenses for the one month ended January 31, 2010 were as follows:
(amounts in millions)
One Month Ended January 31, 2010
Production and distribution expenses
$
26.9

Selling and support expenses
40.9

General and administrative expenses
8.3

Depreciation and amortization
20.2