NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except per share data and percentages and where otherwise indicated)
1. Business and Basis of Presentation
The consolidated financial statements include the accounts of Dex One Corporation and its direct and indirect wholly-owned subsidiaries (“Dex One,” “Successor Company,” “Company,” “Parent Company,” “we,” “us” and “our”) 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”), formally 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 for the eleven months ended December 31, 2010. All intercompany transactions and balances have been eliminated.
Dex One became the successor registrant to R.H. Donnelley Corporation (“RHD” or the “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 United States 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. See Note 3, “Fresh Start Accounting and Reorganization Items, Net” for information on the impact our emergence from reorganization and adoption of fresh start accounting had on our financial position and results of operations.
Business Overview
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 marketing consultants strive to be trusted advisors and offer local businesses 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 proprietary marketing solutions include our Dex published yellow pages directories, which we co-brand with other recognizable brands in the industry such as CenturyLink and YP, formerly AT&T ("YP" or "AT&T"), our Internet yellow pages site, DexKnows.com and our mobile application, Dex Mobile. Our growing list of marketing solutions also 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. 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.
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.
At the effective time of the Dex Merger, each share of Dex One common stock will be converted into
0.2
fully paid and nonassessable shares of common stock, par value
$0.001
per share, of Newdex (“Newdex Common Stock”), which reflects a
1
-for-
5
reverse stock split of Dex One's common stock. At the effective time of the SuperMedia Merger, each share of SuperMedia common stock will be converted into
0.4386
fully paid and nonassessable shares of Newdex Common Stock.
Immediately following the Mergers, Dex One's stockholders will hold approximately
60%
of the Newdex Common Stock and SuperMedia stockholders will hold approximately
40%
of the Newdex Common Stock.
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.
As a result of filing for Chapter 11, completion of the Mergers is now subject to certain conditions, including, among others: (i) the bankruptcy court having confirmed the pre-packaged plan of reorganization of such party substantially in the form provided in the Amended and Restated Merger Agreement, (ii) Dex One and SuperMedia, and certain of their respective subsidiaries, having entered into a tax sharing agreement and a shared services agreement, and (iii) authorization having been obtained for the listing of the Newdex Common Stock to be issued as consideration in the Mergers on the New York Stock Exchange or the NASDAQ Stock Market. The Company's Registration Statement on Form S-4 used to register the Newdex Common Stock was declared effective by the Securities and Exchange Commission ("SEC") on January 31, 2013.
The Amended and Restated Merger Agreement provides that, upon consummation of the Mergers, the chairman of the board of directors of Dex Media will be the current director and chairman of Dex One, and the President and Chief Executive Officer of Dex Media will be the current Chief Executive Officer of SuperMedia. The Amended and Restated Merger Agreement further provides that, upon consummation of the Mergers, the board of directors of Dex Media will consist of
ten
directors, comprising (i) the
five
current non-employee Dex One directors, (ii)
four
current non-employee SuperMedia directors designated by SuperMedia, and (iii) the President and Chief Executive Officer of Dex Media.
The Amended and Restated Merger Agreement may be terminated by either Dex One or SuperMedia in certain circumstances, including, among others, if the Mergers are not consummated on or before June 30, 2013. If the Amended and Restated Merger Agreement is terminated by either party, it may be required under certain circumstances specified in the Amended and Restated Merger Agreement to pay the other party an expense reimbursement up to a maximum amount of
$7.5 million
.
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 additional information on the terms and conditions of the Amended and Restated Merger Agreement.
Upon completion, the Mergers will be accounted for as a business combination using the acquisition method of accounting in accordance with Accounting Standards Codification ("ASC") Topic 805,
Business Combinations
("FASB ASC 805"), with Dex One identified as the accounting acquirer. Dex One is considered the acquiring entity for accounting purposes based on certain criteria including, but not limited to, the following: (1) upon consummation of the Mergers, Dex One stockholders will hold approximately
60%
of the common stock of Dex Media as compared to
40%
held by SuperMedia stockholders and (2) Dex One's current chairman of the board of directors will continue to serve as the chairman of the board of directors of Dex Media.
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.
The lenders party to the Support Agreement have agreed, subject to certain conditions, (i) to support and take reasonable action in furtherance of the proposed financing amendments and the Support Agreement, (ii) to timely vote to accept Dex One's pre-packaged plan and (iii) in the event Dex One elects to effect the Mergers and the financing amendments through Chapter 11 cases, (a) to support approval of Dex One's lender disclosure statement and confirmation of Dex One's pre-packaged plan, (b) to support certain relief Dex One will request from the bankruptcy court upon filing for bankruptcy, (c) to refrain from taking any action inconsistent with the confirmation of Dex One's pre-packaged plan and (d) not to propose, support, solicit or participate in the formulation of any plan other than Dex One's pre-packaged plan.
The Support Agreement will terminate automatically upon the occurrence of certain circumstances or events as noted in the Support Agreement. Upon the termination date of the Support Agreement, all votes of lenders to the Support Agreement cast to accept Dex One's pre-packaged plan and signature pages to Dex One's financing amendments will be withdrawn and deemed null and void for all purposes, unless a lender provides notice within five business days that such lender's vote will continue to be effective.
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.
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.
Going Concern
The Company's financial statements are 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. The accompanying historical consolidated financial statements do not include any adjustments that might be necessary if the Company is unable 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.
As noted above, 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 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. Under these circumstances, this raises substantial doubt as to whether the Company will be able to continue as a going concern for a reasonable period of time. Accordingly, we have classified all of our outstanding debt as current obligations as of December 31, 2012.
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. However, no assurances can be made that our expectations noted above regarding the results or impact of the Chapter 11 proceedings will occur or that our business will generate sufficient cash flows from operations to enable us to fund the Company's cash requirements since the current information used in our financial projections could change in the future as a result of changes in estimates and assumptions as well as risks noted above and in Item 1A, “Risk Factors.”
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.
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
. The Offer to Purchase included a purchase price range of
$270
to
$300
per
$1,000
principal amount of the Dex One Senior Subordinated Notes plus an amount in cash in lieu of the accrued and unpaid interest calculated at a rate of
12%
per annum on the aggregate principal amount of the Dex One Senior Subordinated Notes from March 31, 2012 to, but not including, the payment date. The cash tender offer expired on April 19, 2012. 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, 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. Repurchases may be made with existing cash on hand, subject to certain restrictions and terms noted in the Amendments. RHDI, DME Inc. and DMW Inc. are under no obligation to make such repurchases at any time throughout the term noted in the Amendments.
On March 14, 2012, under the terms and conditions of the Amendments, RHDI commenced an offer to utilize up to
$40 million
to repurchase loans under the RHDI Amended and Restated Credit Facility at a price of
41.5%
to
45.5%
of par, DME Inc. commenced an offer to utilize up to
$12.5 million
to repurchase loans under the Dex Media East Amended and Restated Credit Facility at a price of
50.5%
to
54.5%
of par and DMW Inc. commenced an offer to utilize up to
$23.5 million
to repurchase loans under the Dex Media West Amended and Restated Credit Facility at a price of
60.0%
to
64.0%
of par. The offers expired on March 21, 2012. 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 of
$139.6 million
is included in "Gain on debt repurchases, net" on the consolidated statement of comprehensive income (loss).
Predecessor Company - Chapter 11 Filing and Emergence from Bankruptcy
On May 28, 2009, the Predecessor Company and its subsidiaries filed voluntary petitions for Chapter 11 relief in 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.
Labor Unions
Approximately
30%
of our employees 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”) or the Communication Workers of America (“CWA”). Our collective bargaining agreement with the IBEW expires in May 2015 and our collective bargaining agreement with the CWA expires in March 2016.
2. Summary of Significant Accounting Policies
Revenue Recognition
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 customers, renewal rates of existing customers, 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. The Company also offers its customers the ability to purchase digital marketing solutions for shorter time frames than our standard
one
year contract.
More specifically, we recognize revenue when all of the following criteria have been met:
|
|
•
|
Persuasive evidence of an arrangement exists
: This criterion is satisfied with the execution of a signed contract between the Company and our client. This contract includes specifications that must be adhered to over the term of the agreement by both parties.
|
|
|
•
|
Delivery has occurred
: This criterion is satisfied for our print marketing solutions when physical distribution of a given print directory is substantially complete. This criterion is satisfied for our Internet-based marketing solutions upon fulfillment.
|
|
|
•
|
The fee is fixed or determinable
: This criterion is satisfied with the execution of a signed contract between the Company and our client including the final negotiated price.
|
|
|
•
|
Collectability is reasonably assured
: This criterion is satisfied by performing credit evaluations of our customers before the signed contract is executed or by requiring our customers to prepay in full for our marketing solutions. Reasonable assurance of collection is also evidenced by a review of the client’s payment history.
|
Revenue and deferred revenue from the sale of advertising is recorded net of an allowance for sales claims, estimated based primarily on historical experience. We update this estimate as information or circumstances indicate that the estimate may no longer represent the amount of claims we may incur in the future. The Company recorded sales claims allowances of
$13.3 million
,
$15.9 million
and
$9.9 million
for the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010, respectively. The Predecessor Company recorded sales claims allowances of
$3.5 million
for the one month ended January 31, 2010.
We enter into multiple-deliverable revenue arrangements that may include any combination of our print or Internet-based marketing solutions and that are designed specifically to meet the needs of our customers. Our print and Internet-based marketing solutions are also sold on a stand-alone basis. The timing of delivery or fulfillment of our marketing solutions in a multiple-deliverable arrangement may differ, whereby the fulfillment of Internet-based marketing solutions typically precedes delivery of our print marketing solutions due to the length of time required to produce the final print product. In addition, multiple print directories included in a multiple-deliverable arrangement may be published at different times throughout the year. We limit the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery or fulfillment of other marketing solutions included in a multiple-deliverable arrangement. Our print and Internet-based marketing solutions are not inter-dependent. We account for multiple arrangements with a single client as one arrangement if the contractual terms and/or substance of those arrangements indicate that they may be so closely related that they are, in effect, parts of a single arrangement.
We evaluate each deliverable in a multiple-deliverable revenue arrangement to determine whether they represent separate units of accounting using the following criteria:
|
|
•
|
The delivered item(s) has value to the customer on a stand-alone basis; and
|
|
|
•
|
If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company.
|
All of our print and Internet-based marketing solutions qualify as separate units of accounting since they are sold on a stand-alone basis and we allocate multiple-deliverable arrangement consideration to each deliverable based on its relative selling price, which is determined using vendor specific objective evidence (“VSOE”). Our sales contracts generally do not include any provisions for cancellation, termination, right of return or refunds that would significantly impact recognized revenue.
The objective of VSOE is to determine the price at which a company would transact a sale if the product or service were sold on a stand-alone basis. In determining VSOE, we require that a substantial majority of our selling prices are consistent with our normal pricing and discounting policies, which have been established by management having relevant authority, for the specific marketing solution when sold on a stand-alone basis. We ensure this consistency by performing an analysis on an annual basis or more often if necessary. In determining relative selling prices of our marketing solutions sold on a stand-alone basis, we consider, among other things, (1) the geographies in which our marketing solutions are sold, (2) economic factors, (3) local business conditions, (4) competition in our markets, (5) advertiser and consumer behavior and classifications, (6) gross margin objectives and (7) historical pricing practices. Selling prices are analyzed on a more frequent basis if changes in any of these factors have a material impact on our pricing and discounting policies. There have been no changes to our selling prices or methods used to determine VSOE that had a significant effect on the allocation of total arrangement consideration during the year ended December 31, 2012. However, we may modify our pricing and discounting policies or implement new go-to-market strategies in the future, which could result in changes in selling prices, the methodology used to determine VSOE or use of another method in the selling price hierarchy to allocate arrangement consideration.
For multiple-deliverable arrangements entered into prior to January 1, 2011, the effective date of Accounting Standards Update (“ASU”) 2009-13,
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force
(“ASU 2009-13”), our marketing solutions qualified as separate units of accounting and arrangement consideration was allocated to each respective deliverable based on the relative fair value method using VSOE, which was determined using the same methodology described above. Had ASU 2009-13 been effective and applied to multiple-deliverable arrangements in prior reporting periods, there would not have been any impact on revenue recognized in those periods.
Deferred Directory Costs
Costs directly related to the selling and production of our directories are initially deferred when incurred and recognized ratably over the life of a directory, which is typically
12 months
. These costs are specifically identifiable to a particular directory and include sales commissions and print, paper and initial distribution costs. Such costs that are paid prior to directory publication are classified as prepaid expenses and other current assets until publication, when they are then reclassified as deferred directory costs.
Cash and Cash Equivalents
Cash equivalents include liquid investments with a maturity of less than three months at their time of purchase. At times, such investments may be in excess of federally insured limits.
Accounts Receivable
Accounts receivable consist of balances owed to us by our advertising customers. Billed receivables represent the amount that has been billed to our advertising customers. Billed receivables are recorded net of an allowance for doubtful accounts and sales claims, estimated based on historical experience. We update this estimate as information or circumstances indicate that the estimate no longer appropriately represents the amount of bad debts and sales claims that are probable to be incurred. Unbilled receivables represent contractually owed amounts, net of an allowance for doubtful accounts and sales claims, for published directories that have yet to be billed to our customers.
Some local customers are subject to a credit review or partial advance payment before a signed contract is executed. The credit review and partial advance payment requirement is dependent on spend thresholds and type of business. A credit review includes evaluation of credit or payment history with us, third party credit scoring and credit checks with other vendors. Most local customers are billed a pro rata amount of their contract value on a monthly basis. However, where appropriate, advance payments, in whole or in part, and/or personal guarantees from local customers may be required prior to the extension of credit to select advertisers.
On behalf of our national customers, Certified Marketing Representatives (“CMRs”) pay to the Company the total contract value of their advertising, net of their commission, within
60 days
after the publication month. All new CMRs are subject to a credit review before a signed contract is executed and CMRs who are designated high risk are subject to prepayment requirements up to
twelve
months.
The Company’s write-off policy for accounts receivables associated with our local customers is designed to secure the collection of past-due funds as part of the sales renewal cycle, while the write-off policy for our national customers is determined based on the delinquency stage combined with CMR responsiveness to collection requests. Generally, local customer accounts receivable balances are considered eligible for write-off following completion of the annual sales renewal cycle if customers are greater than
90 days
past-due on their oldest advertising charges, are non-responsive to payment demands, do not renew contracts for future advertising services and if no future billing charges exist. Management has deemed collectability of these past-due accounts receivables to be impaired. Accounts receivable balances associated with CMR's are generally written-off at
240 days
past-due. The Company’s standard write-off policy also includes provisions to allow write-off acceleration for customers who are out of business as demonstrated via disconnected phone lines or declaring bankruptcy. The Company does not have a threshold dollar amount to trigger an accounts receivable balance write-off. Collection processes are performed in accordance with the Fair Debt Collections Practices Act where appropriate and contacts with customers are made at defined time intervals to solicit payment and/or determine if any Company actions may assist in obtaining payment. When appropriate in the collection process, customers are transferred to Company designated resources to resolve outstanding issues or file claims for adjustments of accounts receivable balances. The Company’s bad debt policy includes guidelines for write-off of accounts as well as authorization and approval requirements. The process for estimating the ultimate collection of accounts receivables involves significant assumptions and judgments regarding the write-off of accounts receivables and estimates on recovery expectations relative to bad debt write-offs. The Company believes that its credit, collection, bad debt recovery and reserve processes, combined with monitoring of its billing process, help to reduce the risk associated with material revisions to reserve estimates resulting from adverse changes in reimbursement experience.
The Company initiated a program in 2011 to extend partial or full open credit terms to customers with bad debt write-offs associated with prior year contracts. Terms of this program require customers to either complete a credit application for review and/or satisfy defined advance payment requirements. Under the terms of this program, the accounts receivable balances previously designated as bad debt write-offs continue to be pursued for full recovery by designated outside collection agencies.
Identifiable Intangible Assets and Goodwill
Identifiable Intangible 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:
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•
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Historical financial information, including revenue, profit margins, customer attrition data and price premiums enjoyed relative to competing independent publishers;
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•
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Long-term financial projections, including, but not limited to, revenue trends and profit margin trends;
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•
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Intangible asset and other long-lived asset carrying values and any changes in current and future use;
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•
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Trading values of our debt and equity securities; and
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•
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Other Company-specific information.
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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.
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 the eleven months ended December 31, 2010, respectively. Amortization expense related to the Predecessor Company’s intangible assets was
$15.6 million
for the one month ended January 31, 2010. Amortization expense for all intangible assets for the five succeeding years is estimated to be approximately
$301.6 million
,
$257.5 million
,
$217.1 million
,
$210.4 million
and
$206.2 million
, respectively. Amortization of intangible assets for tax purposes is approximately
$315.9 million
in 2012.
Our identifiable intangible assets and their respective book values at
December 31, 2012
are shown in the following table:
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Directory Services Agreements
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Local Customer Relationships
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National Customer Relationships
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Trade Names and Trademarks
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Technology, Advertising Commitments & Other
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Total
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Gross intangible assets carrying value
|
$
|
1,330,000
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|
$
|
560,000
|
|
$
|
175,000
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$
|
380,000
|
|
$
|
85,500
|
|
$
|
2,530,500
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Accumulated amortization
|
(362,865
|
)
|
(170,746
|
)
|
(46,087
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)
|
(84,508
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)
|
(33,641
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)
|
(697,847
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)
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Net intangible assets
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$
|
967,135
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$
|
389,254
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$
|
128,913
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$
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295,492
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$
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51,859
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$
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1,832,653
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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:
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Intangible Asset
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Remaining Weighted Average Useful Lives
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Amortization Methodology
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Directory services agreements
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9 years
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Income forecast method
(1)
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Local customer relationships
|
8 years
|
Income forecast method
(1)
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National customer relationships
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8 years
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Income forecast method
(1)
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Trade names and trademarks
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8 years
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Straight-line method
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Technology, advertising commitments and other
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5 years
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Income forecast method
(1)
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(1)
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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.
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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. 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 shown in the following table:
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Intangible Asset
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Previous Weighted Average
Useful Lives
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Revised Weighted Average
Useful Lives
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Directory services agreements
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25 years
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10 years
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Local customer relationships
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13 years
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9 years
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National customer relationships
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24 years
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9 years
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Tradenames and trademarks
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13 years
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9 years
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As a result of reducing the estimated useful lives of the intangible assets noted above, the Company experienced an increase in amortization expense of
$161.6 million
during 2012.
Our identifiable intangible assets and their respective book values at December 31, 2011 are shown in the following table:
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Directory Services Agreements
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Local Customer Relationships
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National Customer Relationships
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Trade Names and Trademarks
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Technology, Advertising Commitments & Other
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Total
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Gross intangible assets carrying value
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$
|
1,330,000
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$
|
560,000
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$
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175,000
|
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$
|
380,000
|
|
$
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85,500
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|
$
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2,530,500
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Accumulated amortization
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(166,665
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)
|
(98,312
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)
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(21,500
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)
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(43,352
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)
|
(18,579
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)
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(348,408
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)
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Net intangible assets
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$
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1,163,335
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$
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461,688
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$
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153,500
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$
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336,648
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$
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66,921
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$
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2,182,092
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Goodwill
Goodwill of
$2.1 billion
was recorded in connection with the Company’s adoption of fresh start accounting as discussed in 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 31
st
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 Financial Accounting Standards Board ("FASB") ASC 350,
Intangibles – Goodwill and Other
(“FASB ASC 350”)
.
As of December 31, 2012, the Company’s reporting units are RHDI, Dex Media East, Inc. (“DME Inc.”) and Dex Media West, Inc. (“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
$158.4 million
related to the finalization of cancellation of indebtedness income and tax attribute reduction calculations required to be performed at December 31, 2010 associated with fresh start accounting.
The change in the carrying amount of goodwill since it was established in fresh start accounting on February 1, 2010 (the “Fresh Start Reporting Date”) is as follows:
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Balance at February 1, 2010
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$
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2,097,124
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Goodwill impairment charges during 2010
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(1,137,623
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)
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Reduction in goodwill during 2010
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(158,427
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)
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Total adjustment to goodwill during 2010
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(1,296,050
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)
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Goodwill impairment charge during the second quarter of 2011
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(801,074
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)
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Balance at December 31, 2011
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$
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—
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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.
Additional Information
In connection with our acquisition of Dex Media on January 31, 2006, (the “Dex Media Merger”), we acquired directory services agreements (collectively, the “Dex Directory Services Agreements”) which Dex Media had entered into with Qwest including, (1) a publishing agreement with a term of
50 years
commencing November 8, 2002 (subject to automatic renewal for additional
one
-year terms), which grants us the right to be the exclusive official directory publisher of listings and classified advertisements of Qwest’s telephone customers in the geographic areas in the states Dex Media East and Dex Media West operate our directory business in which Qwest (and its successors) provided local telephone services as of November 8, 2002, as well as having the exclusive right to use certain Qwest branding on directories in those markets and (2) a non-competition agreement with a term of
40 years
commencing November 8, 2002, pursuant to which Qwest (on behalf of itself and its affiliates and successors) has agreed not to sell directory products consisting principally of listings and classified advertisements for subscribers in the geographic areas in the states Dex Media East and Dex Media West operate our directory business in which Qwest provided local telephone service as of November 8, 2002 that are directed primarily at consumers in those geographic areas.
As a result of the Dex Media Merger, we also acquired (1) an advertising commitment agreement whereby Qwest has agreed to purchase an aggregate of
$20 million
of advertising per year through 2017 from us at pricing on terms at least as favorable as those offered to similar large customers and (2) an intellectual property contribution agreement pursuant to which Qwest assigned and or licensed to us the Qwest intellectual property previously used in the Qwest directory services business along with (3) a trademark license agreement pursuant to which Qwest granted to us the right until November 2007 to use the Qwest Dex and Qwest Dex Advantage marks in connection with directory products and related marketing material in the states Dex Media East and Dex Media West operate our directory business and the right to use these marks in connection with DexKnows.com (the intangible assets in (2) and (3) collectively, “Trade Names”).
Directory services agreements between AT&T and the Company include a directory services license agreement, a non-competition agreement, an Internet Yellow Pages reseller agreement and a directory publishing listing agreement (collectively, “AT&T Directory Services Agreements”) with certain affiliates of AT&T. The directory services license agreement designates us as the official and exclusive provider of yellow pages directory services for AT&T (and its successors) in Illinois and Northwest Indiana (the “Territory”), grants us the exclusive license (and obligation as specified in the agreement) to produce, publish and distribute white pages directories in the Territory as AT&T’s agent and grants us the exclusive license (and obligation as specified in the agreement) to use the AT&T brand and logo on print directories in the Territory. The non-competition agreement prohibits AT&T (and its affiliates and successors), with certain limited exceptions, from (1) producing, publishing and distributing yellow and white pages print directories in the Territory, (2) soliciting or selling local or national yellow or white pages advertising for inclusion in such directories, and (3) soliciting or selling local Internet yellow pages advertising for certain Internet yellow pages directories in the Territory or licensing AT&T marks to any third party for that purpose. The Internet Yellow Pages reseller agreement grants us the (a) exclusive right to sell to local advertisers within the Territory Internet yellow pages advertising focused upon products and services to be offered within that territory, and (b) non-exclusive right to sell to local (excluding National advertisers) advertisers within the Territory Internet yellow pages advertising focused upon products and services to be offered outside of the Territory, in each case, onto the YP.com platform. The directory publishing listing agreement gives us the right to purchase and use basic AT&T subscriber listing information and updates for the purpose of publishing directories.
The AT&T Directory Services Agreements (other than the Internet Yellow Pages reseller agreement) have initial terms of
50 years
, commencing in September 2004, subject to automatic renewal and early termination under specified circumstances. The Internet Yellow Pages reseller agreement had a term of
5 years
that commenced in September 2004.
Directory services agreements between CenturyLink and the Company, which were executed in May 2006 in conjunction with Sprint’s spin-off of its local telephone business, include a directory services license agreement, a trademark license agreement and a non-competition agreement with certain affiliates of CenturyLink, as well as a non-competition agreement with Sprint entered into in January 2003 (collectively “CenturyLink Directory Services Agreements”). The CenturyLink Directory Services Agreements replaced the previously existing analogous agreements with Sprint, except that Sprint remained bound by its non-competition agreement. The directory services license agreement grants us the exclusive license (and obligation as specified in the agreement) to produce, publish and distribute yellow and white pages directories for CenturyLink (and its successors) in
18
states where CenturyLink provided local telephone service at the time of the agreement. The trademark license agreement grants us the exclusive license (and obligation as specified in the agreement) to use certain specified CenturyLink trademarks in those markets, and the non-competition agreements prohibit CenturyLink and Sprint (and their respective affiliates and successors) in those markets from selling local directory advertising, with certain limited exceptions, or producing, publishing and distributing print directories. The CenturyLink Directory Services Agreements have initial terms of
50 years
, commencing in January 2003, subject to automatic renewal and early termination under specified circumstances.
Fixed Assets and Computer Software
Fixed assets and computer software are recorded at cost. Depreciation and amortization are provided over the estimated useful lives of the assets using the straight-line method. Estimated useful lives are
thirty years
for buildings,
five years
for machinery and equipment,
ten years
for furniture and fixtures and
three years
to
five years
for computer equipment and computer software. Leasehold improvements are amortized on a straight-line basis over the shorter of the term of the lease or the estimated useful life of the improvement.
Fixed assets and computer software of the Company at December 31, 2012 and 2011 consisted of the following:
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December 31,
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2012
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2011
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Computer software
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$
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200,587
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$
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181,488
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Computer equipment
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2,156
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|
2,161
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Machinery and equipment
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32,645
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31,646
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Furniture and fixtures
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11,607
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13,930
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|
Leasehold improvements
|
18,995
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19,896
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Land and buildings
|
1,775
|
|
1,775
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Construction in Process – Computer software and equipment
|
7,114
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|
9,541
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Total cost
|
274,879
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|
260,437
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Less accumulated depreciation and amortization
|
(169,800
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)
|
(108,892
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)
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Net fixed assets and computer software
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$
|
105,079
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$
|
151,545
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Depreciation and amortization expense on fixed assets and computer software of the Company for the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010 and the Predecessor Company for the one month ended January 31, 2010 was as follows:
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Successor Company
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Predecessor Company
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Years Ended December 31,
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Eleven Months Ended December 31, 2010
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One Month Ended January 31, 2010
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2012
|
2011
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Depreciation of fixed assets
|
$
|
16,188
|
|
$
|
17,073
|
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$
|
15,486
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$
|
1,416
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Amortization of computer software
|
53,026
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|
47,627
|
|
35,191
|
|
3,188
|
|
Total depreciation and amortization on fixed assets and computer software
|
$
|
69,214
|
|
$
|
64,700
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|
$
|
50,677
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|
$
|
4,604
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During the year ended December 31, 2012, the Company identified certain fixed assets no longer in service, which resulted in an acceleration of depreciation expense of
$0.8 million
.
Interest Expense and Deferred Financing Costs
Successor Company
Gross interest expense for the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010 was
$196.0 million
,
$226.9 million
and
$249.7 million
, respectively. 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.
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
,
$27.8 million
and
$29.3 million
for the years ended
December 31, 2012
and 2011 and the eleven months ended December 31, 2010, respectively. See Note 5, “Long-Term Debt” for additional information.
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, and expense of
$8.2 million
for the eleven months ended December 31, 2010 resulting from the change in fair value of these interest rate swaps and interest rate caps.
Predecessor Company
Contractual interest expense that would have appeared on the Predecessor Company’s consolidated statement of comprehensive income if not for the filing of the Chapter 11 petitions was
$65.9 million
for the one month ended January 31, 2010.
Gross interest expense for the one month ended January 31, 2010 was
$19.7 million
. Certain costs associated with the issuance of debt instruments were capitalized and included in other non-current assets on the consolidated balance sheets. These costs were 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
$1.8 million
for the one month ended January 31, 2010.
The Predecessor Company’s interest expense for the one month ended January 31, 2010 includes expense of
$0.8 million
associated with the change in fair value of the Dex Media East LLC interest rate swaps no longer deemed financial instruments as a result of filing the Chapter 11 petitions. The Predecessor Company’s interest expense for the one month ended January 31, 2010 also includes expense of
$1.1 million
resulting from amounts previously charged to accumulated other comprehensive loss related to these interest rate swaps. The amounts previously charged to accumulated other comprehensive loss related to the Dex Media East LLC interest rate swaps were to be amortized to interest expense over the remaining life of the interest rate swaps based on future interest payments, as it was not probable that those forecasted transactions would not occur. In accordance with fresh start accounting and reporting, unamortized amounts previously charged to accumulated other comprehensive loss related to these interest rate swaps of
$15.3 million
were eliminated as of the Fresh Start Reporting Date.
As a result of the amendment of the RHDI credit facility and the refinancing of the former Dex Media West LLC credit facility on June 6, 2008, the Predecessor Company’s interest rate swaps associated with these
two
debt arrangements were no longer highly effective in offsetting changes in cash flows. Accordingly, cash flow hedge accounting treatment was no longer permitted. In addition, as a result of filing the Chapter 11 petitions, these interest rate swaps were required to be settled or terminated during 2009. As a result of the change in fair value of these interest rate swaps prior to the Effective Date, the Predecessor Company’s interest expense included expense of
$0.4 million
for the one month ended January 31, 2010.
Advertising Expense
The Company and the Predecessor Company recognize advertising expenses as incurred. These expenses include media, public relations, promotional, branding and sponsorship costs and on-line advertising. Total advertising expense for the Company was
$8.5 million
,
$17.7 million
and
$27.9 million
for the years ended
December 31, 2012
and 2011 and the eleven months ended December 31, 2010, respectively. Total advertising expense for the Predecessor Company was
$1.0 million
for the one month ended January 31, 2010.
Concentration of Credit Risk
Trade Receivables
Approximately
85%
of our advertising revenue is derived from the sale of our marketing solutions to local businesses. These customers typically enter into
12
-month advertising sales contracts and make monthly payments over the term of the contract. Commencing in late 2011, the Company began to offer customers the ability to purchase digital marketing solutions for shorter time frames than our standard one year contract. Some customers prepay the full amount or a portion of the contract value. Most new customers and customers desiring to expand their advertising programs are subject to a credit review. If the customers qualify, we may extend credit to them in the form of a trade receivable for their advertising purchase. Local businesses tend to have fewer financial resources and higher failure rates than large businesses. In addition, full collection of delinquent accounts can take an extended period of time and involve significant costs. We do not require collateral from our customers, although we do charge late fees to customers that do not pay by specified due dates.
The remaining approximately
15%
of our advertising revenue is derived from the sale of our marketing solutions to national or large regional chains. The majority of the revenue derived through national accounts is serviced through CMRs from which we accept orders. CMRs are independent third parties that act as agents for national customers. 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.
Derivative Financial Instruments
At
December 31, 2012
, we had interest rate swap and interest rate cap agreements with major financial institutions with notional amounts of
$300.0 million
and
$200.0 million
, respectively. We are exposed to credit risk in the event that one or more of the counterparties to the agreements does not, or cannot, meet their obligation. The notional amount for interest rate swaps is used to measure interest to be paid or received and does not represent the amount of exposure to credit loss. Any loss would be limited to the amount that would have been received over the remaining life of the interest rate swap agreement. Under the terms of the interest rate cap agreements, the Company will receive payments based on the spread in rates if the three-month LIBOR rate increases above the negotiated cap rates. Any loss would be limited to the amount that would have been received based on the spread in rates over the remaining life of the interest rate cap agreement. The counterparties to the interest rate swap and interest rate cap agreements are major financial institutions with credit ratings of A- or higher, or the equivalent dependent upon the credit rating agency.
Derivative Financial Instruments and Hedging Activities
We use derivative financial instruments for economic hedging purposes only and not for trading or speculative purposes. Our derivative financial instruments are limited to interest rate swap and interest rate cap agreements. The Company utilizes a combination of fixed rate debt and variable rate debt to finance its operations. The variable rate debt exposes the Company to variability in interest payments due to changes in interest rates. Management believes that it is prudent to mitigate the interest rate risk on a portion of its variable rate borrowings. To satisfy our objectives and requirements, the Company has entered into interest rate swap and interest rate cap agreements, which have not been designated as cash flow hedges, to manage our exposure to interest rate fluctuations on our variable rate debt.
All derivative financial instruments are recognized as either assets or liabilities on the consolidated balance sheets with measurement at fair value. On a quarterly basis, the fair values of our interest rate swaps and interest rate caps are determined based on observable inputs. These derivative instruments have not been designated as cash flow hedges and as such, the initial fair value and any subsequent gains or losses on the change in the fair value of the interest rate swaps and interest rate caps are reported in earnings as a component of interest expense. Any gains or losses related to the quarterly fair value adjustments are presented as a non-cash operating activity on the consolidated statements of cash flows.
By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the possible failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, it is not subject to credit risk. The Company minimizes the credit risk in derivative financial instruments by entering into transactions with major financial institutions with credit ratings of A- or higher, or the equivalent dependent upon the credit rating agency.
Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
See Note 6, “Derivative Financial Instruments” for additional information regarding our interest rate swaps and interest rate caps.
Pension and Postretirement Benefits
Pension and other postretirement benefits represent estimated amounts to be paid to employees in the future. The accounting for benefits reflects the recognition of these benefit costs over the employee’s approximate service period based on the terms of the plan and the investment and funding decisions made. The determination of the benefit obligation and the net periodic pension and other postretirement benefit costs requires management to make assumptions regarding the discount rate, return on retirement plan assets and healthcare cost trends. Changes in these assumptions can have a significant impact on the projected benefit obligation, funding requirement and net periodic benefit cost. The assumed discount rate is the rate at which the pension benefits could be settled. For 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. The expected long-term rate of return on plan assets is based on the mix of assets held by the plan and the expected long-term rates of return within each asset class. The anticipated trend of future healthcare costs is based on historical experience and external factors.
See Note 9, “Benefit Plans,” for further information regarding our benefit plans.
Income Taxes
We account for income taxes under the asset and liability method in accordance with 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 Note 7, “Income Taxes,” for additional information regarding our (provision) benefit for income taxes.
Earnings (Loss) Per Share
The calculation of basic and diluted earnings (loss) per share (“EPS”) is presented below.
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|
|
|
|
|
|
|
|
|
|
Successor Company
|
Predecessor Company
|
|
Years Ended December 31,
|
Eleven Months Ended December 31, 2010
|
One Month Ended January 31, 2010
|
|
2012
|
2011
|
Basic EPS
|
|
|
|
|
Net income (loss)
|
$
|
62,401
|
|
$
|
(518,964
|
)
|
$
|
(923,592
|
)
|
$
|
6,920,009
|
|
Weighted average common shares outstanding
|
50,643
|
|
50,144
|
|
50,020
|
|
69,013
|
|
Basic EPS
|
$
|
1.23
|
|
$
|
(10.35
|
)
|
$
|
(18.46
|
)
|
$
|
100.27
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
Net income (loss)
|
$
|
62,401
|
|
$
|
(518,964
|
)
|
$
|
(923,592
|
)
|
$
|
6,920,009
|
|
Weighted average common shares outstanding
|
50,643
|
|
50,144
|
|
50,020
|
|
69,013
|
|
Dilutive effect of stock awards
|
10
|
|
—
|
|
—
|
|
39
|
|
Weighted average diluted shares outstanding
|
50,653
|
|
50,144
|
|
50,020
|
|
69,052
|
|
Diluted EPS
|
$
|
1.23
|
|
$
|
(10.35
|
)
|
$
|
(18.46
|
)
|
$
|
100.21
|
|
Diluted EPS is calculated by dividing net income by the weighted average common shares outstanding plus dilutive potential common stock. Potential common stock includes stock options and restricted stock, the dilutive effect of which is calculated using the treasury stock method.
Due to the Company's reported net loss for the year ended December 31, 2011 and eleven months ended December 31, 2010, the effect of all stock-based awards was anti-dilutive and therefore not included in the calculation of EPS. For the years ended
December 31, 2012
and 2011 and the eleven months ended December 31, 2010,
2.7 million
,
2.7 million
and
1.3 million
shares of the Company’s stock-based awards had exercise prices that exceeded the average market price of the Company’s common stock for the respective period. For the one month ended January 31, 2010,
4.6 million
shares of the Predecessor Company’s stock-based awards had exercise prices that exceeded the average market price of the Predecessor Company’s common stock for the period.
Stock-Based Awards
The Company maintains the Dex One Equity Incentive Plan (“EIP”), whereby certain employees and non-employee directors of the Company are eligible to receive stock options, 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 originally 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.
Non-employee directors of the Company are eligible to receive stock-based awards on an annual basis with a grant date value equal to
$75,000
.
Upon emergence from Chapter 11 and pursuant to the Plan, all outstanding equity securities of the Predecessor Company including all stock options, SARs and restricted stock, were cancelled. For periods prior to the Effective Date, the Predecessor Company maintained a shareholder approved stock incentive plan, the 2005 Stock Award and Incentive Plan (“2005 Plan”), whereby certain employees and non-employee directors were eligible to receive stock options, SARs, limited stock appreciation rights in tandem with stock options and restricted stock. Prior to adoption of the 2005 Plan, the Predecessor Company maintained a shareholder approved stock incentive plan, the 2001 Stock Award and Incentive Plan (“2001 Plan”). Under the 2005 Plan and 2001 Plan,
5 million
and
4 million
shares, respectively, were originally authorized for grant. Stock awards were typically granted at the market value of the Predecessor Company’s common stock at the date of the grant, became exercisable in ratable installments or otherwise, over a period of
one
to
five
years from the date of grant, and were able to be exercised up to a maximum of
ten
years from the date of grant. The Predecessor Company’s Compensation & Benefits Committee determined termination, vesting and other relevant provisions at the date of the grant. The Predecessor Company implemented a policy of issuing treasury shares to satisfy stock issuances associated with stock-based award exercises.
The Company and the Predecessor Company record stock-based compensation expense in the consolidated statements of comprehensive income (loss) for all employee stock-based awards based on their grant date fair values. The Company and the Predecessor Company estimate forfeitures over the requisite service period when recognizing compensation expense. Estimated forfeitures are adjusted to the extent actual forfeitures differ, or are expected to materially differ, from such estimates. The Company used an estimated weighted average forfeiture rate in determining stock-based compensation expense of
6.4%
,
6.3%
and
8.9%
during 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 the one month ended January 31, 2010.
See Note 8, “Stock Incentive Plans” for additional information regarding the Company’s and the Predecessor Company’s stock incentive plans.
2009 Long-Term Incentive Plan for Executive Officers
The Company had a cash-based long-term incentive plan for executive officers, the 2009 Long-Term Incentive Plan (“2009 LTIP”), designed to provide long-term incentive compensation to participants based on the achievement of performance goals. The 2009 LTIP was originally approved by the Predecessor Company’s Compensation & Benefits Committee in 2009. During the bankruptcy proceedings, the Bankruptcy Court approved for the 2009 LTIP to be carried forward by the Company upon emergence from Chapter 11. The Company’s Compensation & Benefits Committee administered the 2009 LTIP in its sole discretion and had the option, subject to certain exceptions, to delegate some or all of its power and authority under the 2009 LTIP to the Chief Executive Officer or other executive officer of the Company. Participants in the 2009 LTIP consisted of (i) executive officers of the Company and the Predecessor Company and its affiliates and (ii) other employees of the Company and the Predecessor Company and its subsidiaries and affiliates as designated by the Chief Executive Officer. The amount of each award under the 2009 LTIP was paid in cash and was dependent upon the attainment of certain performance measures related to the amount of the Company’s and Predecessor Company’s cumulative free cash flow for the 2010 and 2011 fiscal years (the “Performance Period”). Participants who are/were executive officers of the Company and Predecessor Company, and certain other participants designated by the Chief Executive Officer, also received a payment upon the achievement of the restructuring, reorganization and/or recapitalization of the Predecessor Company’s outstanding indebtedness and liabilities (the “Specified Actions”) during the Performance Period. Payments were made following the end of the Performance Period or the date of a Specified Action, as the case may be. Upon emergence from Chapter 11 and the achievement of the Specified Actions, the Company made cash payments associated with the 2009 LTIP of
$8.0 million
during the eleven months ended December 31, 2010. Remaining cash payments associated with the 2009 LTIP of
$10.9 million
were made during the year ended December 31, 2012 related to the attainment of certain performance measures during the Performance Period.
These cash-based awards were granted to participants in April 2009. The Company recognized compensation expense related to the 2009 LTIP of
$0.3 million
,
$1.2 million
and
$4.8 million
during the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010, respectively. The Predecessor Company recognized compensation expense related to the 2009 LTIP of
$0.5 million
during the one month ended January 31, 2010.
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.
|
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|
•
|
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.
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|
|
|
|
|
|
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 of the fair value hierarchy during the years ended
December 31, 2012
or 2011. The Company has established a policy of recognizing transfers between levels of 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 our Credit Facilities in 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.
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 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 values of the Company’s benefit plan assets and the disclosures required by FASB ASC 715-20,
Compensation – Retirement Benefits
are presented in Note 9, “Benefit Plans.”
Estimates
The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and certain expenses and the disclosure of contingent assets and liabilities. Actual results could differ materially from those estimates and assumptions. Estimates and assumptions are used in the determination of recoverability of long-lived assets, sales allowances, allowances for doubtful accounts, depreciation and amortization, employee benefit plans expense, restructuring expense and accruals, deferred income taxes, certain assumptions pertaining to our stock-based awards, and certain estimates and assumptions used in our impairment evaluation and useful lives assessment of definite-lived intangible assets and other long-lived assets, among others.
New Accounting Pronouncements
In June 2011, the FASB issued 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. 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 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.
|
|
3.
|
Fresh Start Accounting and Reorganization Items, Net
|
The Company adopted fresh start accounting and reporting effective February 1, 2010, 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. The Company was required to adopt fresh start accounting and reporting as of January 29, 2010, the Effective Date. However, in light of the proximity of that date to our accounting period close immediately after the Effective Date, which was January 31, 2010, as well as the results of a materiality assessment, we elected to adopt fresh start accounting and reporting on February 1, 2010.
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 prior periods presented by RHD. The consolidated financial statements for periods ended prior to the Fresh Start Reporting Date do not purport to reflect or provide for the consequences of the Chapter 11 proceedings and 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.
FASB ASC 852 requires that the financial statements distinguish transactions and events that are directly associated with the process of reorganizing the business under Chapter 11 from the ongoing operations of the business. Reorganization items include certain expenses such as professional fees, realized gains and losses and provisions for losses that were realized from the reorganization and restructuring process. The Predecessor Company has classified these items as reorganization items, net on the consolidated statement of comprehensive income (loss).
The Predecessor Company recorded
$7.8 billion
of reorganization items during the one month ended January 31, 2010 comprised of (i) a pre-emergence gain of
$4.5 billion
resulting from the discharge of liabilities under the Plan, partially offset by the issuance of new Dex One common stock, establishment of additional paid-in capital and the issuance of the Dex One Senior Subordinated Notes; (ii) pre-emergence charges to earnings recorded as reorganization items resulting from certain costs and expenses relating to the Plan becoming effective; and (iii) a pre-emergence increase in earnings of
$3.3 billion
resulting from the aggregate changes to the net carrying value of our pre-emergence assets and liabilities to reflect their fair values under fresh start accounting, as well as the recognition of goodwill. The following table displays the details of reorganization items for the one month ended January 31, 2010:
|
|
|
|
|
|
Predecessor Company
|
|
One Month Ended January 31, 2010
|
Liabilities subject to compromise
(1)
|
$
|
6,352,813
|
|
Issuance of new Dex One common stock (par value)
(2)
|
(50
|
)
|
Dex One additional paid-in capital established in fresh start accounting
(2)
|
(1,450,734
|
)
|
Issuance of Dex One Senior Subordinated Notes
(3)
|
(300,000
|
)
|
Reclassified into other balance sheet liability accounts
(4)
|
(39,471
|
)
|
Professional fees and other
(5)
|
(38,403
|
)
|
Gain on reorganization / settlement of liabilities subject to compromise
|
4,524,155
|
|
|
|
Fresh start accounting adjustments:
|
|
Goodwill
(6)
|
2,097,124
|
|
Write off of deferred revenue and deferred directory costs
(7)
|
655,555
|
|
Fair value adjustment to intangible assets
(8)
|
415,132
|
|
Fair value adjustment to the amended and restated credit facilities
(9)
|
120,245
|
|
Fair value adjustment to fixed assets and computer software
(8)
|
49,814
|
|
Write-off of deferred financing costs
(10)
|
(48,443
|
)
|
Other fresh start accounting adjustments
(11)
|
(20,450
|
)
|
Total fresh start accounting adjustments
|
3,268,977
|
|
Total reorganization items, net
|
$
|
7,793,132
|
|
|
|
(1)
|
Liabilities subject to compromise generally refer to pre-petition obligations, secured or unsecured, that may be impaired by a plan of reorganization. FASB ASC 852 requires such liabilities, including those that became known after filing the Chapter 11 petitions, be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. The table below identifies the principal categories of liabilities subject to compromise at January 31, 2010, which subsequently were discharged under the Plan:
|
|
|
|
|
|
Predecessor Company senior notes, senior discount notes and senior subordinated notes (“Notes in Default”)
|
$
|
6,071,756
|
|
Accrued interest
|
241,585
|
|
Tax related liabilities
|
28,845
|
|
Accounts payable and accrued liabilities
|
10,627
|
|
Total liabilities subject to compromise
|
$
|
6,352,813
|
|
|
|
(2)
|
On the Effective Date, the Company issued an aggregate amount of
50.0 million
shares of new common stock, par value
$.001
per share, and established additional paid-in capital of
$1.5 billion
based on the fair value of equity less the par value of Dex One common stock.
|
|
|
(3)
|
On the Effective Date and in accordance with the Plan, we issued the Dex One Senior Subordinated Notes to the holders of the Dex Media West
8.5%
Senior Notes due 2010 and
5.875%
Senior Notes due 2011 on a pro rata basis in addition to their share of the reorganized Dex One equity.
|
|
|
(4)
|
Represents liabilities originally classified as liabilities subject to compromise that were assumed under the Plan and reclassified to liabilities not subject to compromise.
|
|
|
(5)
|
The Predecessor Company incurred professional fees associated with filing the Chapter 11 petitions of
$30.6 million
during the one month ended January 31, 2010, of which
$22.7 million
were paid in cash during the one month ended January 31, 2010. Professional fees included financial, legal and valuation services directly associated with the reorganization process. During the one month ended January 31, 2010, the Predecessor Company did not receive any operating cash receipts resulting from the filing of the Chapter 11 petitions.
|
|
|
(6)
|
The excess reorganization value over the fair value of identified tangible and intangible assets of
$2.1 billion
was recorded as goodwill. See “Enterprise Value / Reorganization Value Determination” below for additional information.
|
|
|
(7)
|
The adoption of fresh start accounting had a significant impact on the results of operations of the Company commencing on the Fresh Start Reporting Date. As a result of the deferral and amortization method of revenue recognition, recognized advertising revenues reflect the amortization of advertising sales consummated in prior periods as well as in the current period. Fresh start accounting precluded us from recognizing substantially all of our deferred advertising revenue of
$791.0 million
and all of the related deferred directory costs of
$135.5 million
based on the minimal obligations we had subsequent to the Fresh Start Reporting Date associated with advertising sales fulfilled prior to the Fresh Start Reporting Date.
|
|
|
(8)
|
The determination of the fair value of our intangible assets resulted in a
$415.1 million
net increase in intangible assets on the reorganized condensed consolidated balance sheet at January 31, 2010. The determination of the fair value of our fixed assets and computer software resulted in a
$49.8 million
net increase in fixed assets and computer software on the reorganized condensed consolidated balance sheet at January 31, 2010.
|
|
|
(9)
|
In conjunction with our adoption of fresh start accounting, an adjustment was established to record our outstanding debt at fair value on the Fresh Start Reporting Date. A total discount of
$120.2 million
was recorded upon adoption of fresh start accounting associated with our Credit Facilities. See Note 2, “Summary of Significant Accounting Policies – Interest Expense and Deferred Financing Costs” and Note 5, “Long-Term Debt” for additional information.
|
|
|
(10)
|
As a result of fresh start accounting, deferred financing costs of
$48.4 million
associated with the Predecessor Company’s existing credit facilities were eliminated.
|
|
|
(11)
|
Represents various other fresh start accounting adjustments including adjustments to deferred rent and prepaid expenses and other current assets.
|
Enterprise Value / Reorganization Value Determination
Enterprise value represents the fair value of an entity’s interest-bearing debt and shareholders’ equity.
In the disclosure statement associated with the Plan, which was confirmed by the Bankruptcy Court, we estimated a range of enterprise values between
$4.2 billion
and
$5.3 billion
, with a midpoint of
$4.8 billion
. Based on the then current and anticipated economic conditions and the direct impact these conditions had on our business, we deemed it appropriate to use the midpoint between the low end of the range and the overall midpoint of the range to determine the final enterprise value of
$4.5 billion
, comprised of debt valued at
$3.3 billion
and equity valued at
$1.3 billion
less cash required to be on hand as a result of the Plan of
$125.0 million
.
FASB ASC 852 provides for, among other things, a determination of the value to be assigned to the assets of the reorganized Company as of a date selected for financial reporting purposes. The Company adjusted its enterprise value of
$4.5 billion
for certain items such as post-petition liabilities, deferred income taxes and cash on hand post emergence to determine a reorganization value of
$5.9 billion
. Under fresh start accounting, the reorganization value was allocated to Dex One’s assets based on their respective fair values in conformity with the acquisition method of accounting for business combinations included in FASB ASC 805. The excess reorganization value over the fair value of identified tangible and intangible assets of
$2.1 billion
was recorded as goodwill.
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.
4.
Restructuring Charges
Successor Company Actions
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”). Employees impacted by the Restructuring Actions were notified of their termination during the fourth quarter of 2010 and throughout 2011. In addition, the Company vacated certain of its leased facilities during 2011. The Company did not recognize a restructuring charge to earnings related to the Restructuring Actions during the
year ended
December 31, 2012
. Cash payments of
$7.3 million
were made in conjunction with the Restructuring Actions during the
year ended
December 31, 2012
. The Company recognized a restructuring charge to earnings of
$25.0 million
and
$18.6 million
and made cash payments of
$31.9 million
and
$0.7 million
during the year ended December 31, 2011 and eleven months ended December 31, 2010, respectively, related to the Restructuring Actions. The following table shows the activity in our restructuring reserve associated with the Restructuring Actions since inception:
|
|
|
|
|
|
Restructuring Actions
|
Balance at February 1, 2010
|
$
|
—
|
|
Additions to reserve charged to earnings
|
18,586
|
|
Payments
|
(728
|
)
|
Balance at December 31, 2010
|
17,858
|
|
Additions to reserve charged to earnings
|
25,019
|
|
Payments
|
(31,905
|
)
|
Non-cash reduction in restructuring reserve
|
(3,005
|
)
|
Balance at December 31, 2011
|
7,967
|
|
Payments
|
(7,317
|
)
|
Balance at December 31, 2012
|
$
|
650
|
|
Predecessor Company Actions
During 2009, the Predecessor Company initiated a restructuring plan that included vacating leased facilities and headcount reductions (“2009 Actions”). During the eleven months ended December 31, 2010, the Company relieved the remaining restructuring reserve associated with the 2009 Actions of
$0.2 million
to earnings. The Company made payments associated with the 2009 Actions of
$0.3 million
during the eleven months ended December 31, 2010. During the one month ended January 31, 2010, the Predecessor Company relieved a portion of the restructuring reserve associated with the 2009 Actions by
$0.6 million
with a corresponding credit to earnings. The Predecessor Company did not make any payments associated with the 2009 Actions during the one month ended January 31, 2010.
Restructuring charges that are charged (credited) to earnings are included in production and distribution expenses, selling and support expenses or general and administrative expenses on the consolidated statements of comprehensive income (loss), as applicable.
5. Long-Term Debt
The following table presents the fair market value of our long-term debt at
December 31, 2012
and 2011 based on quoted market prices on that date, as well as the carrying value of our long-term debt at
December 31, 2012
and 2011, which includes (1) unamortized fair value adjustments in connection with the Company’s adoption of fresh start accounting on the Fresh Start Reporting Date of
$36.7 million
and
$63.2 million
at December 31, 2012 and 2011, respectively, (2) during the year ended December 31, 2012, the issuance of an additional
$7.4 million
and
$10.5 million
of Dex One Senior Subordinated Notes as a result of the Company's election to make paid-in-kind ("PIK") interest payments for the semi-annual interest periods ending September 30, 2012 and March 31, 2012, respectively, and (3) the impact of the Debt Repurchases during the year ended December 31, 2012. See Note 1, “Business and Basis of Presentation - Significant Financing Developments” for additional information on the Debt Repurchases.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
December 31, 2011
|
|
Fair Market Value
|
Carrying Value
|
Fair Market Value
|
Carrying Value
|
RHDI Amended and Restated Credit Facility
|
$
|
528,461
|
|
$
|
776,007
|
|
$
|
333,892
|
|
$
|
947,211
|
|
Dex Media East Amended and Restated Credit Facility
|
360,005
|
|
515,767
|
|
294,026
|
|
651,582
|
|
Dex Media West Amended and Restated Credit Facility
|
368,885
|
|
498,156
|
|
339,418
|
|
611,564
|
|
Dex One Senior Subordinated Notes
|
73,053
|
|
219,708
|
|
66,750
|
|
300,000
|
|
Total Dex One consolidated
|
1,330,404
|
|
2,009,638
|
|
1,034,086
|
|
2,510,357
|
|
Less current portion
|
1,330,404
|
|
2,009,638
|
|
143,132
|
|
326,300
|
|
Long-term debt
|
$
|
—
|
|
$
|
—
|
|
$
|
890,954
|
|
$
|
2,184,057
|
|
The Company's voluntary filing for Chapter 11 on March 18, 2013 triggered an event of default that rendered the remaining financial obligations under our Dex One Senior Subordinated Notes and Credit Facilities automatically and immediately due and payable. Although we believe that any efforts to enforce the acceleration of these financial obligations are stayed as a result of the filing of the Chapter 11 Cases in the Bankruptcy Court, we have classified our Dex One Senior Subordinated Notes and Credit Facilities as current obligations on our consolidated balance sheet as of December 31, 2012. See Note 1, "Business and Basis of Presentation - Going Concern" for additional information. Outstanding debt at December 31, 2012 if held to contractual maturity, (1) excluding fair value adjustments as a result of fresh start accounting and (2) assuming the issuance of additional Dex One Senior Subordinated Notes as a result of the Company's election to make PIK interest payments until maturity totals
$2,122.7 million
.
Credit Facilities
RHDI Amended and Restated Credit Facility
In conjunction with the Credit Facility Repurchases, RHDI repurchased
$92.0 million
of loans under the RHDI Amended and Restated Credit Facility at a rate of
43.5%
of par. As of
December 31, 2012
, the outstanding carrying value under the RHDI Amended and Restated Credit Facility totaled
$776.0 million
. The RHDI Amended and Restated Credit Facility requires quarterly principal and interest payments at our option at either:
|
|
◦
|
The highest (subject to a floor of
4.00%
) of (i) the Prime Rate (as defined in the RHDI Amended and Restated Credit Facility), (ii) the Federal Funds Effective Rate (as defined in the RHDI Amended and Restated Credit Facility) plus
0.50%
, and (iii) one month LIBOR plus
1.00%
in each case, plus an interest rate margin for base rate loans. The interest rate margin for base rate loans is initially
5.25%
per annum, and such interest rate margin adjusts pursuant to a pricing grid that provides for a margin equal to
5.25%
per annum if RHDI’s consolidated leverage ratio is greater than or equal to
4.25
to 1.00, and equal to
5.00%
per annum if RHDI’s consolidated leverage ratio is less than
4.25
to 1.00; or
|
|
|
◦
|
The higher of (i) LIBOR rate and (ii)
3.00%
, in each case, plus an interest rate margin for Eurodollar loans. The interest rate margin for Eurodollar loans is initially
6.25%
per annum, and such interest rate margin adjusts pursuant to a pricing grid that provides for a margin equal to
6.25%
per annum if RHDI’s consolidated leverage ratio is greater than or equal to
4.25
to 1.00, and equal to
6.00%
per annum if RHDI’s consolidated leverage ratio is less than
4.25
to 1.00. RHDI may elect interest periods of
one
,
two
,
three
or
six
months for LIBOR borrowings.
|
The RHDI Amended and Restated Credit Facility matures on
October 24, 2014
. The weighted average interest rate of outstanding debt under the RHDI Amended and Restated Credit Facility was
9.0%
at
December 31, 2012
.
Dex Media East Amended and Restated Credit Facility
In conjunction with the Credit Facility Repurchases, DME Inc. repurchased
$23.6 million
of loans under the Dex Media East Amended and Restated Credit Facility at a rate of
53.0%
of par. As of
December 31, 2012
, the outstanding carrying value under the Dex Media East Amended and Restated Credit Facility totaled
$515.8 million
. The Dex Media East Amended and Restated Credit Facility requires quarterly principal and interest payments at our option at either:
|
|
◦
|
The highest of (i) the Prime Rate (as defined in the Dex Media East Amended and Restated Credit Facility), (ii) the Federal Funds Effective Rate (as defined in the Dex Media East Amended and Restated Credit Facility) plus
0.50%
, and (iii) one month LIBOR plus
1.00%
in each case, plus an interest rate margin for base rate loans. The interest rate margin for base rate loans is initially
1.50%
per annum, and such interest rate margin adjusts pursuant to a pricing grid that provides for a margin equal to
1.50%
per annum if DME Inc.’s consolidated leverage ratio is greater than or equal to
2.75
to 1.00, equal to
1.25%
per annum if DME Inc.’s consolidated leverage ratio is greater than or equal to
2.50
to 1.00 but less than
2.75
to 1.00 and equal to
1.00%
per annum if DME Inc.’s consolidated leverage ratio is less than
2.50
to 1.00; or
|
|
|
◦
|
The LIBOR rate plus an interest rate margin for Eurodollar loans. The interest rate margin for Eurodollar loans is initially
2.50%
per annum, and such interest rate margin adjusts pursuant to a pricing grid that provides for a margin equal to
2.50%
per annum if DME Inc.’s consolidated leverage ratio is greater than or equal to
2.75
to 1.00, equal to
2.25%
per annum if DME Inc.’s consolidated leverage ratio is greater than or equal to
2.50
to 1.00 but less than
2.75
to 1.00 and equal to
2.00%
per annum if DME Inc.’s consolidated leverage ratio is less than
2.50
to 1.00. DME Inc. may elect interest periods of
one
,
two
,
three
or
six
months for LIBOR borrowings.
|
The Dex Media East Amended and Restated Credit Facility matures on
October 24, 2014
. The weighted average interest rate of outstanding debt under the Dex Media East Amended and Restated Credit Facility was
2.8%
at
December 31, 2012
.
Dex Media West Amended and Restated Credit Facility
In conjunction with the Credit Facility Repurchases, DMW Inc. repurchased
$26.6 million
of loans under the Dex Media West Amended and Restated Credit Facility at a rate of
64.0%
of par. As of
December 31, 2012
, the outstanding carrying value under the Dex Media West Amended and Restated Credit Facility totaled
$498.2 million
. The Dex Media West Amended and Restated Credit Facility requires quarterly principal and interest payments at our option at either:
|
|
◦
|
The highest (subject to a floor of
4.00%
) of (i) the Prime Rate (as defined in the Dex Media West Amended and Restated Credit Facility), (ii) the Federal Funds Effective Rate (as defined in the Dex Media West Amended and Restated Credit Facility) plus
0.50%
, and (iii) one month LIBOR plus
1.00%
in each case, plus an interest rate margin for base rate loans. The interest rate margin for base rate loans is initially
3.50%
per annum, and such interest rate margin adjusts pursuant to a pricing grid that provides for a margin equal to
3.50%
per annum if DMW Inc.’s consolidated leverage ratio is greater than or equal to
2.75
to 1.00, equal to
3.25%
per annum if DMW Inc.’s consolidated leverage ratio is greater than or equal to
2.50
to 1.00 but less than
2.75
to 1.00 and equal to
3.00%
per annum if DMW Inc.’s consolidated leverage ratio is less than
2.50
to 1.00; or
|
|
|
◦
|
The higher of (i) LIBOR rate and (ii)
3.00%
, in each case, plus an interest rate margin for Eurodollar loans. The interest rate margin for Eurodollar loans is initially
4.50%
per annum, and such interest rate margin adjusts pursuant to a pricing grid that provides for a margin equal to
4.50%
per annum if DMW Inc.’s consolidated leverage ratio is greater than or equal to
2.75
to 1.00, equal to
4.25%
per annum if DMW Inc.’s consolidated leverage ratio is greater than or equal to
2.50
to 1.00 but less than
2.75
to 1.00 and equal to
4.00%
per annum if DMW Inc.’s consolidated leverage ratio is less than
2.50
to 1.00. DMW Inc. may elect interest periods of
one
,
two
,
three
or
six
months for LIBOR borrowings.
|
The Dex Media West Amended and Restated Credit Facility matures on
October 24, 2014
. The weighted average interest rate of outstanding debt under the Dex Media West Amended and Restated Credit Facility was
7.0%
at
December 31, 2012
.
Each of our Credit Facilities require significant balloon payments upon maturity on October 24, 2014. If the Company is unable to extend the maturity or significantly reduce our outstanding indebtedness prior to maturity by either (1) completing the Mergers and associated refinancing of our Credit Facilities through the Chapter 11 Cases, (2) open market repurchases as permitted by the Amendments to our Credit Facilities, (3) obtaining additional financing and/or (4) refinancing our existing indebtedness separate from the Mergers and Chapter 11 Cases, we will not be able to generate cash flows from operations in amounts sufficient to fund operations and capital expenditures and/or satisfy debt service requirements at that time. In addition, if the Company was to become non-compliant with restrictive covenants under our debt agreements prior to October 24, 2014, default provisions would be triggered under our Credit Facilities and outstanding balances could become due immediately. The Company continues to monitor and assess all available options and opportunities that would allow us to accomplish these financing initiatives; however, no assurances can be made that these financing initiatives will be attained.
Each of the Credit Facilities described above includes an uncommitted revolving credit facility available for borrowings up to
$40.0 million
. The availability of such uncommitted revolving credit facility is subject to certain conditions including the prepayment of the term loans under each of the Credit Facilities in an amount equal to such revolving credit facility.
The Credit Facilities contain provisions for prepayment from net proceeds of asset dispositions, equity issuances and debt issuances subject to certain exceptions, from a ratable portion of the net proceeds received by the Company from asset dispositions by the Company, subject to certain exceptions, and from a portion of excess cash flow.
Each of the Credit Facilities described above contain certain covenants that, subject to exceptions, limit or restrict each borrower and its subsidiaries’ incurrence of liens, investments (including acquisitions), sales of assets, indebtedness, payment of dividends, distributions and payments of certain indebtedness, sale and leaseback transactions, swap transactions, affiliate transactions, capital expenditures and mergers, liquidations and consolidations. Each Credit Facility also contains certain covenants that, subject to exceptions, limit or restrict each borrower’s incurrence of liens, indebtedness, ownership of assets, sales of assets, payment of dividends or distributions or modifications of the Dex One Senior Subordinated Notes. Each borrower is required to maintain compliance with a consolidated leverage ratio covenant. RHDI and DMW Inc. are also required to maintain compliance with a consolidated interest coverage ratio covenant. DMW Inc. is also required to maintain compliance with a consolidated senior secured leverage ratio covenant. The Dex Media West Amended and Restated Credit Agreement includes an option for additional covenant relief under the senior secured leverage covenant through the fourth quarter of 2011, subject to increased amortization of the loans through the first quarter of 2012, an increase in the excess cash flow sweep for 2011 and payment of a
25
basis point fee ratably to the lenders under the Dex Media West Amended and Restated Credit Agreement. On March 31, 2010, the Company exercised the Senior Secured Leverage Ratio Election, as defined in the Dex Media West Amended and Restated Credit Agreement. The Company incurred a fee of
$2.1 million
to exercise this option.
The obligations under each of the Credit Facilities are guaranteed by our subsidiaries and are secured by a lien on substantially all of our and our subsidiaries’ tangible and intangible assets, including a pledge of the stock of their respective subsidiaries, as well as a mortgage on certain real property, if any.
Pursuant to a shared guaranty and collateral agreement and subject to an intercreditor agreement among the administrative agents under each of the Credit Facilities, the Company and, subject to certain exceptions, certain subsidiaries of the Company, guaranty the obligations under each of the Credit Facilities and the obligations are secured by a lien on substantially all of such guarantors’ tangible and intangible assets (other than the assets of the Company’s subsidiary, Dex One Digital), including a pledge of the stock of their respective subsidiaries, as well as a mortgage on certain real property, if any.
Notes
Dex One Senior Subordinated Notes
In conjunction with the Note Repurchases, the Company repurchased
$98.2 million
aggregate principal amount of Dex One Senior Notes at a rate of
27.0%
of par. As of December 31, 2012, the outstanding carrying value of the Dex One Senior Subordinated Notes totaled
$219.7 million
. Interest on the Dex One Senior Subordinated Notes is payable semi-annually on
March 31st
and
September 30th
of each year, commencing on
March 31, 2010
through
January 29, 2017
. The Dex One Senior Subordinated Notes accrue interest at an annual rate of
12%
for cash interest payments and
14%
if the Company elects PIK interest payments. The Company may elect, no later than
two
business days prior to the beginning of any such semi-annual interest period, whether to make each interest payment on the Dex One Senior Subordinated Notes (i) entirely in cash or (ii)
50%
in cash and
50%
in PIK interest, which is capitalized as additional senior subordinated notes. In the absence of such an election for any subsequent semi-annual interest period, interest on the Dex One Senior Subordinated Notes will be payable in the form of the interest payment for the semi-annual interest period immediately preceding such subsequent semi-annual interest period. For the semi-annual interest periods ending September 30, 2012 and March 31, 2012, the Company made interest payments
50%
in cash and
50%
in PIK interest, as permitted by the indenture governing the Dex One Senior Subordinated Notes, resulting in the issuance of an additional
$7.4 million
and
$10.5 million
, respectively, of Dex One Senior Subordinated Notes. The Company will continue to make interest payments on the Dex One Senior Subordinated Notes
50%
in cash and
50%
in PIK interest for the semi-annual interest period ending March 31, 2013. The interest rate on the Dex One Senior Subordinated Notes may be subject to adjustment in the event the Company incurs certain specified debt with a higher effective yield to maturity than the yield to maturity of the Dex One Senior Subordinated Notes.
The Dex One Senior Subordinated Notes are unsecured obligations of the Company, effectively subordinated in right of payment to all of the Company’s existing and future secured debt, including Dex One’s guarantee of borrowings under each of the Credit Facilities and are structurally subordinated to any existing or future liabilities (including trade payables) of our direct and indirect subsidiaries.
The indenture governing the Dex One Senior Subordinated Notes contains certain covenants that, subject to certain exceptions, among other things, limit or restrict the Company’s (and, in certain cases, the Company’s restricted subsidiaries’) incurrence of indebtedness, making of certain restricted payments, incurrence of liens, entry into transactions with affiliates, conduct of its business and the merger, consolidation or sale of all or substantially all of its property. The indenture governing the Dex One Senior Subordinated Notes also requires the Company to offer to repurchase the Dex One Senior Subordinated Notes at par after certain changes of control involving the Company or the sale of substantially all of the assets of the Company. Holders of the Dex One Senior Subordinated Notes also may cause the Company to repurchase the Dex One Senior Subordinated Notes at a price of
101%
of the principal amount upon the incurrence by the Company of certain acquisition indebtedness.
The Dex One Senior Subordinated Notes are redeemable at our option at the following prices (as a percentage of face value):
|
|
|
|
Redemption Year
|
Price
|
|
2013
|
101.000
|
%
|
2014 and thereafter
|
100.000
|
%
|
Impact of Fresh Start Accounting
In conjunction with our adoption of fresh start accounting, an adjustment was established to record our outstanding debt at fair value on the Fresh Start Reporting Date. The Company was required to record our Credit Facilities at a discount as a result of their fair value on the Fresh Start Reporting Date. Therefore, the carrying amount of these debt obligations is lower than the principal amount due at maturity. A total discount of
$120.2 million
was recorded upon adoption of fresh start accounting associated with our Credit Facilities, of which
$36.7 million
remains unamortized at
December 31, 2012
, as shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value at December 31, 2012
|
Unamortized Fair Value Adjustments at December 31, 2012
|
Outstanding Debt at December 31, 2012 Excluding the Impact of Unamortized Fair Value Adjustments
|
RHDI Amended and Restated Credit Facility
|
$
|
776,007
|
|
$
|
6,493
|
|
$
|
782,500
|
|
Dex Media East Amended and Restated Credit Facility
|
515,767
|
|
25,108
|
|
540,875
|
|
Dex Media West Amended and Restated Credit Facility
|
498,156
|
|
5,076
|
|
503,232
|
|
Dex One Senior Subordinated Notes
|
219,708
|
|
—
|
|
219,708
|
|
Total
|
$
|
2,009,638
|
|
$
|
36,677
|
|
$
|
2,046,315
|
|
In conjunction with the Credit Facility Repurchases, we accelerated amortization of fair value adjustments to our Credit Facilities of
$2.0 million
, which partially offset the net gain on Credit Facility Repurchases recognized during the
year ended
December 31, 2012
. See Note 1, “Business and Basis of Presentation - Significant Financing Developments” for additional information.
6. Derivative Financial Instruments
Successor Company
The Company has entered into the following interest rate swaps that effectively convert
$300.0 million
, or approximately
17%
, of the Company’s variable rate debt to fixed rate debt as of
December 31, 2012
. Since the RHDI Amended and Restated Credit Facility and the Dex Media West Amended and Restated Credit Facility are subject to a LIBOR floor of
3.00%
and the LIBOR rate is below that floor at
December 31, 2012
, both credit facilities are effectively fixed rate debt until such time LIBOR exceeds the stated floor. At
December 31, 2012
, approximately
89%
of our total debt outstanding consisted of variable rate debt, excluding the effect of our interest rate swaps. Including the effect of our interest rate swaps, total fixed rate debt comprised approximately
26%
of our total debt portfolio as of
December 31, 2012
.
Interest Rate Swaps – Dex Media East
|
|
|
|
|
|
|
|
Effective Dates
|
Notional Amount
|
|
Pay Rates
|
Maturity Dates
|
(amounts in millions)
|
|
|
|
|
February 26, 2010
|
$
|
100
|
|
(1)
|
1.796%
|
February 28, 2013
|
March 5, 2010
|
100
|
|
(1)
|
1.688%
|
January 31, 2013
|
March 10, 2010
|
100
|
|
(1)
|
1.75%
|
January 31, 2013
|
Total
|
$
|
300
|
|
|
|
|
(1)
Consists of one swap
Under the terms of the interest rate swap agreements, we receive variable interest based on the three-month LIBOR and pay a weighted average fixed rate of
1.7%
. The weighted average rate received on our interest rate swaps was
0.3%
for the
year ended
December 31, 2012
. These periodic payments and receipts are recorded as interest expense.
Under the terms of the interest rate cap agreements, the Company will receive payments based on the spread in rates if the three-month LIBOR rate increases above the cap rates noted in the table below. The Company paid
$2.1 million
for the interest rate cap agreements entered into during the first quarter of 2010. We are not required to make any future payments related to these interest rate cap agreements.
Interest Rate Caps – RHDI
|
|
|
|
|
|
|
|
Effective Dates
|
Notional Amount
|
|
Cap Rates
|
Maturity Dates
|
(amounts in millions)
|
|
|
|
|
February 26, 2010
|
$
|
100
|
|
(2)
|
3.5%
|
February 28, 2013
|
March 8, 2010
|
100
|
|
(2)
|
3.5%
|
January 31, 2013
|
Total
|
$
|
200
|
|
|
|
|
(2)
Consists of one cap
The following tables present the fair value of our interest rate swaps and interest rate caps at
December 31, 2012
and 2011. The fair value of our interest rate swaps is presented in accounts payable and accrued liabilities and other non-current liabilities and the fair value of our interest rate caps is presented in prepaid expenses and other current assets and other non-current assets on the consolidated balance sheets at
December 31, 2012
and 2011. The following tables also present the (gain) loss recognized in interest expense from the change in fair value of our interest rate swaps and interest rate caps for the years ended
December 31, 2012
and 2011 and the eleven months ended December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) Loss Recognized in Interest Expense From the Change in Fair Value of Interest Rate Swaps
|
|
Fair Value Measurements at December 31,
|
|
Years Ended December 31,
|
Eleven Months Ended December 31, 2010
|
Interest Rate Swaps
|
2012
|
2011
|
|
2012
|
2011
|
Accounts payable and accrued liabilities
|
$
|
(413
|
)
|
$
|
(2,269
|
)
|
|
$
|
(1,856
|
)
|
$
|
(2,106
|
)
|
$
|
4,376
|
|
Other non-current liabilities
|
—
|
|
(425
|
)
|
|
(425
|
)
|
(1,565
|
)
|
1,989
|
|
Total
|
$
|
(413
|
)
|
$
|
(2,694
|
)
|
|
$
|
(2,281
|
)
|
$
|
(3,671
|
)
|
$
|
6,365
|
|
|
|
|
|
|
|
|
|
|
|
Loss Recognized in Interest Expense From the Change in Fair Value of Interest Rate Caps
|
|
Fair Value Measurements at December 31,
|
|
Years Ended December 31,
|
Eleven Months Ended December 31, 2010
|
Interest Rate Caps
|
2012
|
2011
|
|
2012
|
2011
|
Prepaid expenses and other current assets
|
$
|
—
|
|
$
|
1
|
|
|
$
|
1
|
|
$
|
4
|
|
$
|
64
|
|
Other non-current assets
|
—
|
|
4
|
|
|
4
|
|
299
|
|
1,766
|
|
Total
|
$
|
—
|
|
$
|
5
|
|
|
$
|
5
|
|
$
|
303
|
|
$
|
1,830
|
|
The Company recognized expense related to our interest rate swaps and interest rate caps, including accrued interest, of
$1.9 million
,
$2.8 million
and
$13.2 million
during the years ended
December 31, 2012
and 2011 and eleven months ended December 31, 2010, respectively.
Predecessor Company
As a result of filing the Chapter 11 petitions, the Predecessor Company did not have any interest rate swaps designated as cash flow hedges. During the one month ended January 31, 2010, the Predecessor Company recognized interest expense of
$2.3 million
associated with the change in fair value of its interest rate swaps. During the one month ended January 31, 2010, the Predecessor Company recognized expense of
$3.0 million
related to interest rate swaps into earnings, including accrued interest. In accordance with fresh start accounting, unamortized amounts previously charged to accumulated other comprehensive loss of
$15.3 million
related to the Predecessor Company’s interest rate swaps were eliminated as of the Fresh Start Reporting Date.
7. Income Taxes
Current income tax (provision) benefit represents estimated taxes payable or refundable for the current year based on enacted tax laws and rates. Deferred income tax assets and liabilities are determined based on the estimated future tax effects of temporary differences between the financial statement carrying amount and tax basis of assets and liabilities, as measured by tax rates at which temporary differences are expected to reverse. Deferred income tax (provision) benefit is the result of changes in deferred income tax assets and liabilities. A valuation allowance is recognized to reduce gross deferred tax assets to the amount that will more likely than not be realized.
Components of (Provision) Benefit for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
Predecessor Company
|
|
Years Ended December 31,
|
Eleven Months Ended December 31, 2010
|
One Month Ended January 31, 2010
|
|
2012
|
2011
|
Current (provision) benefit
|
|
|
|
|
Federal
|
$
|
4,689
|
|
$
|
18,955
|
|
$
|
(1,263
|
)
|
$
|
(600
|
)
|
State and local
|
(4,535
|
)
|
(2,905
|
)
|
3,772
|
|
(20
|
)
|
Total current (provision) benefit
|
154
|
|
16,050
|
|
2,509
|
|
(620
|
)
|
Deferred (provision) benefit
|
|
|
|
|
Federal
|
(3,328
|
)
|
73,981
|
|
568,938
|
|
(792,162
|
)
|
State and local
|
(3,750
|
)
|
34,727
|
|
48,668
|
|
(124,759
|
)
|
Total deferred (provision) benefit
|
(7,078
|
)
|
108,708
|
|
617,606
|
|
(916,921
|
)
|
(Provision) benefit for income taxes
|
$
|
(6,924
|
)
|
$
|
124,758
|
|
$
|
620,115
|
|
$
|
(917,541
|
)
|
Reconciliation of Statutory Federal Tax Rate to Effective Tax Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
Predecessor Company
|
|
Years Ended December 31,
|
Eleven Months Ended December 31, 2010
|
One Month Ended January 31, 2010
|
|
2012
|
2011
|
Income (loss) before income taxes
|
$
|
69,325
|
|
$
|
(643,722
|
)
|
$
|
(1,543,707
|
)
|
$
|
7,837,550
|
|
Statutory federal tax rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
State and local taxes, net of federal tax benefit
|
4.7
|
|
3.6
|
|
3.6
|
|
2.6
|
|
Non-taxable fresh start adjustments
|
—
|
|
—
|
|
—
|
|
(28.0
|
)
|
Non-deductible interest expenses
|
8.1
|
|
—
|
|
—
|
|
—
|
|
Non-deductible impairment expenses
|
—
|
|
(27.5
|
)
|
(19.5
|
)
|
—
|
|
Section 382 limitation
|
—
|
|
—
|
|
22.9
|
|
1.1
|
|
Section 108 tax attribution reduction
|
(2.6
|
)
|
—
|
|
—
|
|
21.4
|
|
Section 1245 recapture
|
14.5
|
|
12.6
|
|
—
|
|
—
|
|
Change in valuation allowance
|
(56.2
|
)
|
(8.0
|
)
|
(2.3
|
)
|
(19.5
|
)
|
Change in gross unrecognized tax benefits
|
—
|
|
2.9
|
|
—
|
|
—
|
|
Change in state tax laws
|
4.0
|
|
—
|
|
—
|
|
—
|
|
Other, net
|
2.5
|
|
0.8
|
|
0.5
|
|
(0.9
|
)
|
Effective tax rate
|
10.0
|
%
|
19.4
|
%
|
40.2
|
%
|
11.7
|
%
|
Components of Deferred Tax Assets and Liabilities
|
|
|
|
|
|
|
|
|
December 31,
|
|
2012
|
2011
|
Deferred tax assets:
|
|
|
Allowance for doubtful accounts
|
$
|
14,081
|
|
$
|
23,259
|
|
Deferred and other compensation
|
9,090
|
|
6,413
|
|
Capital investments
|
6,240
|
|
6,255
|
|
Debt and other interest
|
898
|
|
1,008
|
|
Pension and other retirement benefits
|
29,465
|
|
29,001
|
|
Restructuring reserves
|
253
|
|
2,475
|
|
Net operating loss and credit carryforwards
|
434,106
|
|
500,481
|
|
Other, net
|
6,096
|
|
9,102
|
|
Total deferred tax assets
|
500,229
|
|
577,994
|
|
Valuation allowance
|
(123,786
|
)
|
(157,171
|
)
|
Net deferred tax assets
|
$
|
376,443
|
|
$
|
420,823
|
|
Deferred tax liabilities:
|
|
|
Fixed assets and capitalized software
|
$
|
32,830
|
|
$
|
44,875
|
|
Goodwill and intangible assets
|
337,346
|
|
375,017
|
|
Deferred directory revenue and costs
|
1,936
|
|
—
|
|
Investment in subsidiaries
|
18,767
|
|
8,484
|
|
Other, net
|
340
|
|
146
|
|
Total deferred tax liabilities
|
$
|
391,219
|
|
$
|
428,522
|
|
Net deferred tax liability
|
$
|
(14,776
|
)
|
$
|
(7,699
|
)
|
Reconciliation of Gross Unrecognized Tax Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
Predecessor Company
|
|
Years Ended December 31,
|
Eleven Months Ended December 31, 2010
|
One Month Ended January 31, 2010
|
|
2012
|
2011
|
Balance at beginning of period
|
$
|
5,942
|
|
$
|
20,954
|
|
$
|
390,872
|
|
$
|
298,001
|
|
Gross additions for tax positions related to the current year
|
—
|
|
7,029
|
|
693
|
|
95,555
|
|
Gross reductions for tax positions related to the current year
|
—
|
|
—
|
|
(370,611
|
)
|
(2,684
|
)
|
Gross reductions for tax positions related to prior years
|
(16
|
)
|
—
|
|
—
|
|
—
|
|
Gross reductions for tax positions related to the lapse of applicable statute of limitations
|
—
|
|
(20,261
|
)
|
—
|
|
—
|
|
Settlements
|
—
|
|
(1,780
|
)
|
—
|
|
—
|
|
Balance at end of period
|
$
|
5,926
|
|
$
|
5,942
|
|
$
|
20,954
|
|
$
|
390,872
|
|
Successor Company
Components of (Provision) Benefit for Income Taxes
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 as discussed in Note 2, "Summary of Significant Accounting Policies - Identifiable Intangible Assets and Goodwill," 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%
.
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.
The discharge of our debt in conjunction with our emergence from Chapter 11 resulted in a tax gain of
$5,016.6 million
. In conjunction with the filing of our consolidated federal tax return for the year ended December 31, 2010, the Company made an election under IRC Section 108(b)(5) to first apply this reduction to certain amortizable and depreciable property for certain subsidiaries. As a result of this election and other adjustments related to the filing of our federal consolidated tax return, the Company recognized an increase in deferred tax assets related to net operating losses of approximately
$328.7 million
. These increases were primarily offset by decreases in the basis of amortizable and depreciable property.
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
$568.9 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
$48.7 million
, primarily related to the recognition of an unrecognized tax position during the eleven months ended December 31, 2010.
Reconciliation of Statutory Federal Tax Rate to Effective Tax Rate
Our effective tax rate (provision) of
(10.0)%
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.
Our effective tax rate benefit of
19.4%
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.
Our effective tax rate benefit of
40.2%
for the eleven months ended December 31, 2010 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.
Components of Deferred Tax Assets and Liabilities
Total deferred tax assets before valuation allowance are
$500.2 million
and total deferred tax liabilities are
$391.2 million
at December 31, 2012. Deferred tax assets of
$434.1 million
represent net operating loss and credit carryforwards. After assessing the amount of deferred tax assets that are more likely than not to be realized, we established a valuation allowance of
$123.8 million
, representing the extent to which deferred tax assets are not supported by future reversals of existing taxable temporary differences.
Total deferred tax assets before valuation allowance are
$578.0 million
and total deferred tax liabilities are
$428.5 million
at December 31, 2011. Deferred tax assets of
$500.5 million
represent net operating loss and credit carryforwards. After assessing the amount of deferred tax assets that are more likely than not to be realized, we established a valuation allowance of
$157.2 million
, representing the extent to which deferred tax assets are not supported by future reversals of existing taxable temporary differences.
Reconciliation of Gross Unrecognized Tax Benefits
Changes to our liability for unrecognized tax benefits were not material for the year ended December 31, 2012.
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 resulted in an increase to our effective tax rate of
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.
Tax years 2009 through 2011 are subject to examination by the Internal Revenue Service (“IRS”). Certain state tax returns are under examination by various regulatory authorities. Our state tax return years are open to examination for an average of three years. However, certain jurisdictions remain open to examination longer than three years due to the existence of net operating loss carryforwards and statutory waivers.
We continually review issues raised in connection with ongoing examinations and open tax years to evaluate the adequacy of our reserves. We believe that our accrued tax liabilities under FASB ASC 740 are adequate to cover uncertain tax positions related to federal and state income taxes.
Included in the balance of unrecognized tax benefits at December 31, 2012 and 2011 are
$5.7 million
and
$5.7 million
, respectively, of tax benefits that, if recognized, would favorably affect the effective tax rate. The Company believes that approximately
$0.7 million
of its unrecognized tax benefits as of December 31, 2012 may reverse during the third quarter of 2013.
During the year ended December 31, 2012, the Company recognized a de minimis amount related to interest and penalties due to unrecognized tax benefits. During the year ended December 31, 2011 and eleven months ended December 31, 2010, the Company recognized
$(4.8) million
and
$0.5 million
, respectively, in interest and penalties due to unrecognized tax benefits. As of December 31, 2012, we accrued a de minimis amount related to interest. As of December 31, 2011, we did not accrue any amount related to interest. No amounts were accrued for tax penalties as of December 31, 2012 and 2011.
During the eleven months ended December 31, 2010, we decreased our liability for unrecognized tax benefits by
$370.6 million
primarily related to IRC Section 382 (“Section 382”) limitations. See “Other” below for additional information on the impact this decrease in our liability for unrecognized tax benefits had on our effective tax rate for the eleven months ended December 31, 2010.
Other
At December 31, 2012, the Company had federal and state net operating loss carryforwards of approximately
$985.3 million
and
$1,975.4 million
, respectively, which will begin to expire in 2029 and 2013, respectively.
During 2009, the Predecessor Company accrued an unrecognized tax benefit for the uncertainty surrounding a potential ownership change under 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
, respectively.
Our certificate of incorporation contains provisions generally prohibiting (i) the acquisition of
4.9%
or more of our common stock by any one person or group of persons whose shares would be aggregated pursuant to Section 382 and (ii) the acquisition of additional common stock by persons already owning
4.9%
or more of our common stock, in each case until February 2, 2011, or such shorter period as may be determined by our board of directors. Without these restrictions, it is possible that certain changes in the ownership of our common stock could result in the imposition of limitations on the ability of the Company and its subsidiaries to fully utilize the net operating losses and other tax attributes currently available to them for U.S. federal and state income tax purposes.
Upon our emergence from bankruptcy, the Company adjusted certain deferred tax assets and liabilities to reflect estimated future reductions in certain tax attributes primarily net operating loss carryforwards, intangible asset basis, and subsidiary stock basis. In accordance with FASB ASC 852, the Company trued-up its previous attribute reduction estimates at January 31, 2010 to reflect actual attribute reduction at December 31, 2010, resulting in a
$158.4 million
decrease in deferred tax liabilities and goodwill.
Predecessor Company
Components of Provision for Income Taxes
The income tax (provision) of
$(917.5) million
for the one month ended January 31, 2010 is comprised of a federal tax (provision) of
$(792.8) million
and a state tax (provision) of
$(124.8) million
. The federal current tax (provision) is primarily related to an increase in the federal tax accrual related to unrecognized tax benefits and the federal deferred tax (provision) is primarily related to the reduction of the Predecessor Company’s tax attributes in accordance with IRC Section 108. The state tax (provision) is primarily related to the reduction of the Predecessor Company’s tax attributes in accordance with IRC Section 108.
Reconciliation of Statutory Federal Tax Rate to Effective Tax Rate
Our effective tax rate (provision) of (
11.7%
) was lower than the statutory federal tax rate of
35.0%
primarily due to decreases in income tax expense for non-taxable fresh start adjustments and the release of our valuation allowance offset, in part, by increases in income tax expense for the estimated loss of tax attributes due to cancellation of debt income at emergence, and the impact of state taxes.
Reconciliation of Gross Unrecognized Tax Benefits
Included in the balance of unrecognized tax benefits at January 31, 2010 are
$377.0 million
of tax benefits that, if recognized, would favorably affect the effective tax rate.
During the one month ended January 31, 2010, the Predecessor Company recognized
$0.4 million
in interest and penalties due to unrecognized tax benefits. As of January 31, 2010, the Predecessor Company accrued
$8.3 million
related to interest. No amounts were accrued for tax penalties as of January 31, 2010.
For the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010, the Company recognized
$4.6 million
,
$4.8 million
and
$4.5 million
, respectively, of stock-based compensation expense related to stock-based awards. Prior to the cancellation of its equity awards, the Predecessor Company recognized stock-based compensation expense related to stock-based awards of
$0.6 million
during the one month ended January 31, 2010.
The fair value of the Company’s and the Predecessor Company’s stock options and 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 the Company’s 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 fair value, net of estimated forfeitures, is then amortized over the vesting period of the respective stock-based award.
Compensation expense related to restricted stock granted to employees, including executive officers, and non-employee directors is measured at fair value on the date of grant based on the number of shares granted and the quoted market price of the Company’s or Predecessor Company’s common stock at such time. The fair value, net of estimated forfeitures, is then amortized over the vesting period of the respective stock-based award.
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 weighted average fair value per share of stock options and SARs granted by the Company during the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010 was
$0.96
,
$1.84
and
$8.13
, respectively.
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, we 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.
The following table presents a summary of the Company’s stock options and SARs activity and related information for the year ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Exercise/Grant Price Per Share
|
|
Aggregate Intrinsic
Value
|
Awards outstanding, January 1, 2012
|
2,683,015
|
|
|
$
|
13.83
|
|
|
$
|
173
|
|
Granted
|
428,804
|
|
|
1.62
|
|
|
30
|
|
Exercises
|
—
|
|
|
—
|
|
|
—
|
|
Forfeitures
|
(236,311
|
)
|
|
24.15
|
|
|
—
|
|
Awards outstanding, December 31, 2012
|
2,875,508
|
|
|
$
|
11.17
|
|
|
$
|
203
|
|
There are
1.4 million
shares available for future grant under the EIP at December 31, 2012. Total intrinsic value of the Company’s stock options and SARs vested and expected to vest as of December 31, 2012 and 2011 was
$0.2 million
and
$0.2 million
, respectively. There were no stock options or SARs exercised during the years ended December 31, 2012 and 2011, eleven months ended December 31, 2010 or one month ended January 31, 2010. The total fair value of the Company’s stock options and SARs vested during the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010 was
$1.8 million
,
$3.0 million
and
$2.0 million
, respectively. The total fair value of the Predecessor Company’s stock options and SARs vested during the one month ended January 31, 2010 was
$3.7 million
.
The following table summarizes information about the Company’s stock-based awards outstanding and exercisable at December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards Outstanding
|
|
|
Stock Awards Exercisable
|
Range of Exercise/Grant Prices
|
Shares
|
|
Weighted Average Remaining Contractual Life
(In Years)
|
|
Weighted Average Exercise/Grant Price Per Share
|
|
|
Shares
|
|
Weighted Average Remaining Contractual Life
(In Years)
|
|
Weighted Average Exercise/Grant Price Per Share
|
$0.73 - $0.80
|
77,500
|
|
|
8.74
|
|
$
|
0.80
|
|
|
|
6,250
|
|
|
8.73
|
|
$
|
0.80
|
|
$1.20 - $1.74
|
712,129
|
|
|
8.97
|
|
1.45
|
|
|
|
25,000
|
|
|
8.70
|
|
1.20
|
|
$2.04 - $2.04
|
15,000
|
|
|
8.45
|
|
2.04
|
|
|
|
3,750
|
|
|
8.45
|
|
2.04
|
|
$4.61 - $4.61
|
623,060
|
|
|
8.16
|
|
4.61
|
|
|
|
37,472
|
|
|
8.16
|
|
4.61
|
|
$4.96 - $6.97
|
275,000
|
|
|
8.22
|
|
5.33
|
|
|
|
31,250
|
|
|
8.17
|
|
5.76
|
|
$9.75 - $9.75
|
200,000
|
|
|
7.68
|
|
9.75
|
|
|
|
100,000
|
|
|
7.68
|
|
9.75
|
|
$15.00 - $15.00
|
200,000
|
|
|
7.68
|
|
15.00
|
|
|
|
200,000
|
|
|
7.68
|
|
15.00
|
|
$23.00 - $23.00
|
200,000
|
|
|
7.68
|
|
23.00
|
|
|
|
200,000
|
|
|
7.68
|
|
23.00
|
|
$28.68 - $28.68
|
372,819
|
|
|
7.16
|
|
28.68
|
|
|
|
251,450
|
|
|
7.16
|
|
28.68
|
|
$32.00 - $32.00
|
200,000
|
|
|
7.68
|
|
32.00
|
|
|
|
200,000
|
|
|
7.68
|
|
32.00
|
|
|
2,875,508
|
|
|
8.13
|
|
$
|
11.17
|
|
|
|
1,055,172
|
|
|
7.63
|
|
$
|
21.40
|
|
The aggregate intrinsic value of the Company’s exercisable stock-based awards as of December 31, 2012 was not material.
The following table summarizes the status of the Company’s non-vested stock awards as of December 31, 2012 and changes during the year ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested Stock Options and SARs
|
|
Weighted Average Grant Date Exercise Price Per Award
|
|
Non-Vested Restricted Stock
|
|
Weighted Average Grant Date Fair Value Per Award
|
Non-vested at January 1, 2012
|
1,773,272
|
|
|
$
|
8.71
|
|
|
563,796
|
|
|
$
|
5.21
|
|
Granted
|
428,804
|
|
|
1.62
|
|
|
712,136
|
|
|
1.01
|
|
Vested
|
(283,743
|
)
|
|
16.25
|
|
|
(711,273
|
)
|
|
2.46
|
|
Forfeitures
|
(97,997
|
)
|
|
20.44
|
|
|
(25,015
|
)
|
|
2.71
|
|
Non-vested at December 31, 2012
|
1,820,336
|
|
|
$
|
5.23
|
|
|
539,644
|
|
|
$
|
3.41
|
|
As of December 31, 2012, there was
$3.7 million
of total unrecognized compensation cost related to non-vested stock-based awards, which is expected to be recognized over a weighted average period of approximately
2.0
years.
Components of Successor Company Stock-Based Compensation Expense
The following table summarizes stock-based awards granted during the year ended December 31, 2012 and stock-based compensation expense recognized during the year ended December 31, 2012 related to these grants. Grant prices of stock-based awards are based on the closing market value of the Company’s common stock on the date of grant. All stock based awards are settled in our common stock.
|
|
|
|
|
|
|
|
Grant Date
|
Type of Award
|
Recipient
|
Number of Shares
|
Vesting Terms
|
Grant / Exercise Price
|
Expense Recognized During the Year Ended December 31, 2012
|
May 8, 2012
|
Restricted stock
|
Board of Directors
|
0.5 million
|
Vested immediately upon issuance
|
$0.90
|
$0.4 million
|
March 29, 2012
|
Restricted stock
|
Certain employees
|
0.1 million
|
Vest ratably over three years
|
$1.26
|
Less than $0.1 million
|
March 29, 2012
|
Stock Options
|
Certain employees
|
0.1 million
|
Vest ratably over four years
|
$1.26
|
Less than $0.1 million
|
March 29, 2012
|
Restricted stock units
|
Executive officers
|
0.1 million
|
Vests at the end of three years if both time and performance conditions are satisfied. Time condition shall be satisfied as of the date the Company's financial results for the calendar year 2014 are ratified by the Board of Directors. Performance condition shall be satisfied based upon the Company achieving targeted ad sales levels specified for each year
|
$1.26
|
Less than $0.1 million
|
February 28, 2012
|
Stock Options
|
Executive officers
|
0.3 million
|
Vest ratably over four years
|
$1.74
|
Less than $0.1 million
|
The following table summarizes stock-based awards granted during the years ended December 31, 2011 and stock-based compensation expense recognized during the years ended December 31, 2012 and 2011 related to these grants. Grant prices of stock-based awards are based on the closing market value of the Company’s common stock on the date of grant. All stock based awards are settled in our common stock.
|
|
|
|
|
|
|
|
|
Grant Date
|
Type of Award
|
Recipient
|
Number of Shares
|
Vesting Terms
|
Grant / Exercise Price
|
Expense Recognized During the Years Ended December 31,
|
2012
|
2011
|
September 22, 2011
|
Stock options
|
Certain employees
|
0.1 million
|
Less than 0.1 million shares will become exercisable, if at all, in two 50% increments if the average daily closing price of our common stock during any 30 consecutive trading day period commencing on or after March 22, 2012 exceeds $2 with respect to the first increment and $3 with respect to the second increment. The remaining shares will vest ratably over four years.
|
$0.80
|
Less than $0.1 million
|
Less than $0.1 million
|
September 22, 2011
|
Restricted stock
|
Certain employees
|
Less than 0.1 million
|
Vest ratably over three years
|
$0.80
|
Less than $0.1 million
|
Less than $0.1 million
|
September 12, 2011
|
Stock options
|
Executive officers
|
0.3 million
|
0.2 million shares will become exercisable, if at all, in two 50% increments if the average daily closing price of our common stock during any 30 consecutive trading day period commencing on or after March 12, 2012 exceeds $3 with respect to the first increment and $4 with respect to the second increment. The remaining shares will vest ratably over four years.
|
$1.20
|
Less than $0.1 million
|
Less than $0.1 million
|
September 12, 2011
|
Restricted stock
|
Executive officers
|
0.1 million
|
Vest ratably over three years
|
$1.20
|
Less than $0.1 million
|
Less than $0.1 million
|
June 13, 2011
|
Stock options
|
Certain employees
|
Less than 0.1 million
|
Vest ratably over four years
|
$2.04
|
Less than $0.1 million
|
Less than $0.1 million
|
June 13, 2011
|
Restricted stock
|
Certain employees
|
Less than 0.1 million
|
Vest ratably over three years
|
$2.04
|
Less than $0.1 million
|
Less than $0.1 million
|
May 3, 2011
|
Common stock
|
Board of Directors
|
0.1 million
|
Vested immediately upon issuance
|
$3.75
|
__
|
$0.4 million
|
April 4, 2011
|
Stock options
|
Executive officers
|
0.2 million
|
0.1 million shares will become exercisable, if at all, in two 50% increments if the average daily closing price of our common stock during any 30 consecutive trading day period commencing on or after October 4, 2011 exceeds $10 with respect to the first increment and $15 with respect to the second increment. The remaining shares will vest ratably over four years.
|
$4.96
|
$0.2 million
|
$0.1 million
|
April 4, 2011
|
Restricted stock
|
Executive officers
|
0.1 million
|
Vest ratably over three years
|
$4.96
|
$0.1 million
|
Less than $0.1 million
|
March 2, 2011
|
Stock options
|
Executive officers
|
1.1 million
|
0.9 million shares will become exercisable, if at all, in two 50% increments if the average daily closing price of our common stock during any 30 consecutive trading day period commencing on or after September 2, 2011 exceeds $10 with respect to the first increment and $15 with respect to the second increment. The remaining shares will vest ratably over four years.
|
$4.61
|
$0.4 million
|
$0.4 million
|
March 2, 2011
|
Restricted stock
|
Executive officers
|
0.2 million
|
Vest ratably over three years
|
$4.61
|
$0.2 million
|
$0.2 million
|
March 2, 2011
|
Common stock
|
Board of Directors
|
Less than 0.1 million
|
Vested immediately upon issuance
|
$4.61
|
__
|
$0.1 million
|
January 18, 2011
|
Stock options
|
Executive officers
|
Less than 0.1 million
|
Vest ratably over four years
|
$6.97
|
Less than $0.1 million
|
Less than $0.1 million
|
January 18, 2011
|
Restricted stock
|
Executive officers
|
Less than 0.1 million
|
Vest ratably over three years
|
$6.97
|
$0.1 million
|
$0.1 million
|
The following table summarizes stock-based awards granted during the eleven months ended December 31, 2010 and stock-based compensation expense recognized during the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010 related to these grants. Grant prices of stock-based awards are based on the closing market value of the Company’s common stock on the date of grant, except where otherwise indicated. All stock based awards are settled in our common stock. 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.
|
|
|
|
|
|
|
|
|
|
Grant Date
|
Type of Award
|
Recipient
|
Number of Shares
|
Vesting Terms
|
Grant / Exercise Price
|
Expense Recognized During the Years Ended December 31,
|
Expense Recognized During the Eleven Months Ended December 31, 2010
|
2012
|
2011
|
September 13, 2010
|
Restricted Stock
|
CEO
|
0.2 million
|
Vest ratably over three years
|
$9.62
|
$0.6 million
|
$0.7 million
|
$0.2 million
|
September 13, 2010
|
Stock options
|
CEO
|
0.2 million
|
Vest ratably over four years
|
$9.75: based on the closing market price of the Company’s common stock on September 3, 2010.
|
$0.2 million
|
$0.2 million
|
Less than $0.1 million
|
September 13, 2010
|
Premium priced stock options
|
CEO
|
0.6 million
|
Vested immediately upon issuance
|
0.2 million shares at $15 per share
0.2 million shares at $23 per share
0.2 million shares at $32 per share
|
$0.6 million
|
$0.7 million
|
$0.2 million
|
September 13, 2010
|
Common Stock
|
Executive Oversight Committee
|
Less than 0.1 million
|
Vested immediately upon issuance
|
$9.62
|
—
|
—
|
$0.2 million
|
March 1, 2010
|
SARs
|
Executive officers and certain employees
|
1.3 million
|
Vest ratably over three years
|
$28.68: based on the volume weighted average market value of the Company’s common stock during the first thirty calendar days upon emergence from Chapter 11.
|
$1.4 million
|
$1.8 million
|
$3.5 million
|
March 1, 2010
|
Common Stock
|
Board of Directors
|
Less than 0.1 million
|
Vested immediately upon issuance
|
$29.60
|
—
|
—
|
$0.5 million
|
Components of Predecessor Company Stock-Based Compensation Expense
Upon emergence from Chapter 11 and pursuant to the Plan, all outstanding equity securities of the Predecessor Company including all stock options, SARs and restricted stock, were cancelled. As a result, the Predecessor Company recognized
$1.9 million
of remaining unrecognized compensation expense related to these stock-based awards as reorganization items, net for the one month ended January 31, 2010.
On March 4, 2008, the Predecessor Company granted
2.2 million
SARs to certain employees, including executive officers, in conjunction with its annual grant of stock incentive awards. These SARs were granted at a grant price of
$7.11
per share, which was equal to the market value of the Predecessor Company’s common stock on the grant date, and vested ratably over
three
years. The Predecessor Company recognized compensation expense related to these SARs of
$0.1 million
for the one month ended January 31, 2010.
On February 27, 2007, the Predecessor Company granted
1.1 million
SARs to certain employees, including executive officers, in conjunction with its annual grant of stock incentive awards. These SARs were granted at a grant price of
$74.31
per share, which was equal to the market value of the Predecessor Company’s common stock on the grant date, and vested ratably over
three
years. The Predecessor Company recognized compensation expense related to these SARs of
$0.4 million
for the one month ended January 31, 2010.
In conjunction with RHD’s acquisition of Business.com,
4.2 million
outstanding Business.com equity awards were converted into
0.2 million
RHD equity awards on August 23, 2007. For the one month ended January 31, 2010, the Predecessor Company recognized compensation expense related to these converted equity awards of
$0.1 million
.
9. Benefit Plans
At December 31, 2012, the Company has
two
defined benefit pension plans (the Dex One Retirement Plan and the Dex Media, Inc. Pension Plan, defined below), which participate in the Dex One Corporation Retirement Account Master Trust (“Master Trust”), and
two
defined contribution plans (the Dex One 401(k) Savings Plan and the Dex Media, Inc. Employee Savings Plan). A summary of each of these plans is provided below. The Business.com, Inc. 401(k) Plan was merged with and into the Dex One 401(k) Savings Plan effective February 1, 2011. During 2011, former employees of the Company were able to participate in
two
postretirement plans (the Dex One Group Benefit Plan and the Dex Media Group Benefit Plan). Effective January 1, 2011, participants who elected to continue coverage under the Dex One Group Benefit Plan became responsible for making their individual premium payments associated with this plan. Although the Dex One Group Benefit Plan remains active for these participants, the Company does not have any future benefit obligation associated with this plan. The Company terminated the Dex Media Group Benefit Plan effective January 1, 2012 and therefore we do not have any future benefit obligation associated with this plan.
Dex One Retirement Plan.
The Dex One cash balance defined benefit pension plan (the “Dex One Retirement Plan” formerly the "RHD Retirement Plan") covers substantially all legacy Dex One employees with at least
one
year of service. The benefits to be paid to employees are based on age, years of service and a percentage of total annual compensation. The percentage of compensation allocated to a retirement account ranges from
3.0%
to
12.5%
depending on age and years of service (“cash balance benefit”). Benefits for certain employees who were participants in the predecessor The Dun & Bradstreet Corporation (“D&B”) defined benefit pension plan are also determined based on the participant’s average compensation and years of service (“final average pay benefit”) and benefits to be paid will equal the greater of the final average pay benefit or the cash balance benefit. Annual pension costs are determined using the projected unit credit actuarial cost method. Our funding policy is to contribute an amount at least equal to the minimum legal funding requirement. The Company was required to make contributions of
$5.2 million
,
$3.1 million
and
$1.0 million
to the Dex One Retirement Plan during the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010, respectively. The Predecessor Company was not required to make contributions to the Dex One Retirement Plan during the one month ended January 31, 2010. The underlying pension plan assets are invested in diversified portfolios consisting primarily of equity and debt securities. A measurement date of December 31 is used for all of our plan assets.
We also have an unfunded non-qualified defined benefit pension plan, the Pension Benefit Equalization Plan (“PBEP”), which covers senior executives and certain key employees. Benefits are based on years of service and compensation (including compensation not permitted to be taken into account under the previously mentioned defined benefit pension plan). The Company made contributions of
$1.1 million
,
$0.6 million
and
$1.9 million
to the PBEP during the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010, respectively. The Predecessor Company did not make any contributions to the PBEP during the one month ended January 31, 2010.
Dex Media Pension Plan.
We have a noncontributory defined benefit pension plan covering substantially all non-union and union employees within Dex Media (the “Dex Media Pension Plan”). Annual pension costs are determined using the projected unit credit actuarial cost method. Our funding policy is to contribute an amount at least equal to the minimum legal funding requirement. The Company was required to make contributions of
$9.0 million
,
$13.6 million
and
$8.8 million
to the Dex Media Pension Plan during the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010, respectively. The Predecessor Company was not required to make contributions to the Dex Media Pension Plan during the one month ended January 31, 2010. The underlying pension plan assets are invested in diversified portfolios consisting primarily of equity and debt securities. A measurement date of December 31 is used for all of our plan assets.
The Company has frozen the Dex Media Pension Plan covering CWA and IBEW represented employees and the Dex One Retirement Plan and Dex Media Pension Plan covering all non-union employees. In connection with the freeze, all pension plan benefit accruals for CWA and IBEW plan participants ceased as of December 31, 2009 and all pension plan benefit accruals for non-union plan participants ceased as of December 31, 2008, however, all plan balances remained intact and interest credits on participant account balances under an account balance formula, as well as service credits for vesting and retirement eligibility, continue in accordance with the terms of the plans. In addition, supplemental transition credits have been provided to certain plan participants nearing retirement who would otherwise lose a portion of their anticipated pension benefit at age
65
as a result of freezing the current plans. Similar supplemental transition credits will be provided to certain plan participants who were grandfathered under a final average pay formula when the defined benefit plans were previously converted from traditional pension plans to cash balance plans.
Savings Plans.
Under each of our savings plans, we contribute
100%
for each dollar contributed by participating employees, up to a maximum of
6%
of each participating employee’s salary, including bonus and commissions, and contributions made by the Company are fully vested for participants who have completed
one
year of service with the Company. The Company made contributions to the Dex One 401(k) Savings Plan of
$7.6 million
,
$9.0 million
and
$8.7 million
during the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010, respectively, the Dex Media, Inc. Employee Savings Plan of
$2.1 million
,
$2.4 million
and
$4.7 million
during the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010, respectively, and the Business.com, Inc. 401(k) Plan of
$0.3 million
during the eleven months ended December 31, 2010.
No
contributions were made to the Business.com, Inc. 401(k) Plan during the year ended December 31, 2011. Contributions made by the Predecessor Company to the Dex One 401(k) Savings Plan and Dex Media, Inc. Employee Savings Plan were
$0.5 million
and
$0.4 million
, respectively, for the one month ended January 31, 2010. Contributions made by the Predecessor Company to the Business.com, Inc. 401(k) Plan were
$0.1 million
for the one month ended January 31, 2010.
The Company maintains the Dex One 401(k) Restoration Plan for those employees with compensation in excess of the IRS annual limits. Effective January 1, 2011, the Dex One 401(k) Restoration Plan was amended to eliminate matching credits.
Other Benefits Information - Union Employees
|
|
•
|
All access to retiree health care and life insurance benefits has been eliminated for IBEW represented employees retiring after May 8, 2009 and for CWA represented employees retiring after October 2, 2009;
|
|
|
•
|
Retiree life insurance benefits have been eliminated effective January 1, 2010;
|
|
|
•
|
The
two
-year phase out of subsidized retiree health care benefits commenced January 1, 2010; and
|
|
|
•
|
Effective January 1, 2012, retiree health care benefits have been eliminated for all retirees.
|
Other Benefits Information – Non-Union Employees
|
|
•
|
All non-subsidized access to retiree health care and life insurance benefits were eliminated effective January 1, 2009;
|
|
|
•
|
Subsidized retiree health care benefits for any Medicare-eligible retirees were eliminated effective January 1, 2009; and
|
|
|
•
|
The
three
-year phase out of subsidized retiree health care benefits commenced January 1, 2009 (with non-union retiree health care benefits terminating December 31, 2011, except for continued non-subsidized access to retiree benefits for retirees enrolled as of December 31, 2008). With respect to the phase out of subsidized retiree health care benefits, if an eligible retiree becomes Medicare-eligible at any point in time during the phase out process noted above, such retiree will no longer be eligible for retiree health care coverage.
|
Benefit Obligation and Funded Status
A summary of the funded status of the Company’s benefit plans at December 31, 2012 and 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Postretirement Plans
|
|
December 31, 2012
|
December 31, 2011
|
|
December 31, 2012
|
December 31, 2011
|
Change in benefit obligation
|
|
|
|
|
|
Benefit obligation, beginning of year
|
$
|
249,234
|
|
$
|
257,245
|
|
|
$
|
—
|
|
$
|
1,040
|
|
Interest cost
|
10,693
|
|
12,707
|
|
|
—
|
|
26
|
|
Actuarial loss (gain)
|
27,928
|
|
11,269
|
|
|
—
|
|
(727
|
)
|
Benefits paid
|
(13,500
|
)
|
(7,769
|
)
|
|
—
|
|
(339
|
)
|
Plan settlements
|
(18,478
|
)
|
(24,218
|
)
|
|
—
|
|
—
|
|
Benefit obligation, end of year
|
$
|
255,877
|
|
$
|
249,234
|
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
Fair value of plan assets, beginning of year
|
$
|
174,358
|
|
$
|
187,327
|
|
|
$
|
—
|
|
$
|
—
|
|
Return on plan assets
|
20,342
|
|
1,689
|
|
|
—
|
|
—
|
|
Employer contributions
|
15,251
|
|
17,329
|
|
|
—
|
|
339
|
|
Benefits paid
|
(13,500
|
)
|
(7,769
|
)
|
|
—
|
|
(339
|
)
|
Plan settlements
|
(18,478
|
)
|
(24,218
|
)
|
|
—
|
|
—
|
|
Fair value of plan assets, end of year
|
$
|
177,973
|
|
$
|
174,358
|
|
|
$
|
—
|
|
$
|
—
|
|
Funded status at end of year
|
$
|
(77,904
|
)
|
$
|
(74,876
|
)
|
|
$
|
—
|
|
$
|
—
|
|
Net amounts recognized in the Company’s consolidated balance sheet at December 31, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Postretirement Plans
|
|
December 31, 2012
|
December 31, 2011
|
|
December 31, 2012
|
December 31, 2011
|
Current liabilities
|
$
|
(496
|
)
|
$
|
(541
|
)
|
|
$
|
—
|
|
$
|
—
|
|
Non-current liabilities
|
(77,408
|
)
|
(74,335
|
)
|
|
—
|
|
—
|
|
Net amount recognized
|
$
|
(77,904
|
)
|
$
|
(74,876
|
)
|
|
$
|
—
|
|
$
|
—
|
|
The accumulated benefit obligation for all qualified defined benefit pension plans of the Company was
$255.9 million
and
$249.2 million
at December 31, 2012 and 2011, respectively.
Components of Net Periodic Benefit Expense (Income)
The net periodic benefit expense (income) of the Company’s pension plans for the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010 and the Predecessor Company’s pension plans for the one month ended January 31, 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
Predecessor Company
|
|
Years Ended December 31,
|
Eleven Months Ended December 31, 2010
|
One Month Ended January 31, 2010
|
|
2012
|
2011
|
Interest cost
|
$
|
10,693
|
|
$
|
12,707
|
|
$
|
12,432
|
|
$
|
1,124
|
|
Expected return on plan assets
|
(13,419
|
)
|
(14,500
|
)
|
(12,201
|
)
|
(1,385
|
)
|
Settlement loss
|
3,746
|
|
2,748
|
|
17
|
|
—
|
|
Amortization of unrecognized prior service cost
|
—
|
|
—
|
|
—
|
|
81
|
|
Curtailment gain
|
—
|
|
—
|
|
(3,754
|
)
|
—
|
|
Amortization of unrecognized net loss
|
856
|
|
2
|
|
—
|
|
122
|
|
Net periodic benefit expense (income)
|
$
|
1,876
|
|
$
|
957
|
|
$
|
(3,506
|
)
|
$
|
(58
|
)
|
The net periodic benefit income of the Company’s postretirement plans for the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010 and the Predecessor Company’s postretirement plans for the one month ended January 31, 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
Predecessor Company
|
|
Years Ended December 31,
|
Eleven Months Ended December 31, 2010
|
One Month Ended January 31, 2010
|
|
2012
|
2011
|
Interest cost
|
$
|
—
|
|
$
|
26
|
|
$
|
107
|
|
$
|
10
|
|
Amortization of unrecognized net gain
|
—
|
|
(1,111
|
)
|
(291
|
)
|
(21
|
)
|
Net periodic benefit income
|
$
|
—
|
|
$
|
(1,085
|
)
|
$
|
(184
|
)
|
$
|
(11
|
)
|
In accordance with fresh start accounting and reporting, unamortized amounts previously charged to accumulated other comprehensive loss of
$44.7 million
were eliminated on the Fresh Start Reporting Date.
As of December 31, 2012, there is approximately
$2.4 million
of previously unrecognized actuarial losses in accumulated other comprehensive loss expected to be recognized as net periodic benefit expense in 2013.
Amounts recognized in accumulated other comprehensive loss for the Company at December 31, 2012 and 2011 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Postretirement Plans
|
|
December 31, 2012
|
December 31, 2011
|
|
December 31, 2012
|
December 31, 2011
|
|
|
|
|
|
|
Net actuarial loss
|
$
|
16,402
|
|
$
|
21,330
|
|
|
$
|
—
|
|
$
|
1,111
|
|
Assumptions
The following assumptions were used in determining the benefit obligations for the Company's pension plans and postretirement plans for the years ended December 31, 2012 and 2011.
|
|
|
|
|
Years Ended December 31,
|
|
2012
|
2011
|
Weighted average discount rates:
|
|
|
Dex One Retirement Plan
|
3.64%
|
4.51%
|
Dex One Postretirement Plan
|
—%
|
—%
|
Dex Media Pension Plan
|
3.65%
|
4.38%
|
Dex Media Postretirement Plan
|
—%
|
4.95%
|
The discount rate reflects the current rate at which the pension and postretirement obligations could effectively be settled at the end of the year. 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. Since the pension plans have been frozen, no rate of increase in future compensation was utilized to calculate the benefit obligations of the Company at December 31, 2012 and 2011.
On December 31, 2012 and April 30, 2012, settlements of the Dex Media Pension Plan and 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
. Pension expense for the Dex Media Pension Plan and PBEP were recomputed based on assumptions as of December 31, 2012, resulting in a decrease in the discount rate from
4.38%
at April 30, 2012 to
4.22%
for the Dex Media Pension Plan and
4.51%
at April 30, 2012 to
4.25%
for the PBEP. Pension expense for the Dex Media Pension Plan and PBEP were recomputed based on assumptions as of April 30, 2012, resulting in a decrease in the discount rate from
4.95%
at December 31, 2011 to
4.38%
for the Dex Media Pension Plan and
5.30%
at December 31, 2011 to
4.51%
for the PBEP. The expected return on plan assets assumption was also reduced for the Company's benefit plans from
8.0%
at December 31, 2011 to
7.5%
based on a review of historical performance and long-term capital market return forecasts.
On December 31, 2011, settlements of the Dex One Retirement Plan and Dex Media Pension Plan occurred as a result of restructuring actions. On May 31, 2011, settlements of the Dex Media Pension Plan occurred as a result of restructuring actions. These settlements resulted in the recognition of actuarial losses of
$2.7 million
for the year ended December 31, 2011. Pension expense for the Dex One Retirement Plan was recomputed based on assumptions as of December 31, 2011, resulting in a decrease in the discount rate from
5.70%
at December 31, 2010 to
5.30%
. Pension expense for the Dex Media Pension Plan was recomputed based on assumptions as of December 31, 2011, resulting in a decrease in the discount rate from
5.06%
at May 31, 2011 to
4.95%
. Pension expense for the Dex Media Pension Plan was recomputed based on assumptions as of May 31, 2011, resulting in a decrease in the discount rate from
5.70%
at December 31, 2010 to
5.06%
.
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, which is included in general and administrative expenses on the consolidated statement of comprehensive income (loss) for the eleven months ended December 31, 2010.
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:
|
|
|
|
|
|
|
|
|
|
|
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%
|
The following assumptions were used in determining the Company’s net periodic benefit income for the Dex One postretirement plan and Dex Media postretirement plan:
|
|
|
|
|
|
|
|
|
Dex One Postretirement Plan
|
Dex Media Postretirement Plan
|
|
Years Ended December 31,
|
Eleven Months Ended December 31, 2010
|
Years Ended December 31,
|
Eleven Months Ended December 31, 2010
|
|
2012
|
2011
|
2012
|
2011
|
Weighted average discount rate
|
—%
|
—%
|
5.70%
|
—%
|
5.06%
|
5.70%
|
The following assumptions were used in determining the Predecessor Company’s net periodic benefit income for the Dex One postretirement plan and Dex Media postretirement plan:
|
|
|
|
|
Dex One Postretirement Plan
|
Dex Media Postretirement Plan
|
|
One Month Ended January 31, 2010
|
Weighted average discount rate
|
5.70%
|
5.70%
|
Plan Assets
The fair value of the assets held in the 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Company's pension plan weighted-average asset allocation in the Master Trust at December 31, 2012 and 2011 by asset category on a weighted average basis, is as follows:
|
|
|
|
|
|
|
December 31, 2012
|
December 31, 2011
|
|
Plan Assets
|
Asset Allocation
Target
|
Plan Assets
|
Asset Allocation
Target
|
Equity securities
|
63%
|
65%
|
65%
|
65%
|
Debt securities
|
37%
|
35%
|
35%
|
35%
|
Total
|
100%
|
100%
|
100%
|
100%
|
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.
The plans' assets are invested in accordance with investment practices that emphasize long-term investment fundamentals. The plans' investment objective is to achieve a positive rate of return over the long term from capital appreciation and a growing stream of current income that would significantly contribute to meeting the plans' current and future obligations. These objectives can be obtained through a well-diversified portfolio structure in a manner consistent with each plan's investment policy statement.
The plans' assets are invested in marketable equity and fixed income securities managed by professional investment managers. Plan assets are invested using a combination of active and passive (indexed) investment strategies. The plans' assets are to be broadly diversified by asset class, investment style, number of issues, issue type and other factors consistent with the investment objectives outlined in each plan's investment policy statement. The plans' assets are to be invested with prudent levels of risk and with the expectation that long-term returns will maintain and contribute to increasing purchasing power of the plans' assets, net of all disbursements, over the long term.
The plans' assets in separately managed accounts may not be used for the following purposes: short sales, purchases of letter stock, private placements, leveraged transactions, commodities transactions, option strategies, investments in some limited partnerships, investments by the managers in their own securities, their affiliates or subsidiaries, investment in futures, use of margin or investments in any derivative not explicitly permitted in each plan's investment policy statement.
The plans' fixed income manager uses derivative financial instruments in the normal course of its investing activities to hedge against adverse changes in the fixed income market and to achieve overall investment portfolio objectives. These financial instruments include U.S. Treasury futures contracts, equity futures contracts and credit default swaps. The futures held are a combination of
5
,
10
and
20
year futures and are being used to manage the duration exposure of the portfolio. The credit default swaps are held as a hedge against declines in certain bond markets and as a vehicle to take advantage of opportunities in certain segments of the fixed income market. The plans' investment policy statements do not allow the use of derivatives to leverage the portfolio or for speculative purposes. In addition, the plans' investment managers synthetically invest cash, which is primarily held to fund benefit payments, through the use of equity and fixed income index futures contracts. The use of specific futures contracts is guided by the Master Trust's asset allocation targets. Consequently, this strategy enables the Master Trust to achieve its asset allocation targets while maintaining sufficient liquidity to meet benefit payments. The use of derivatives is not believed to materially increase the credit or market risk of the plans' investments.
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 Predecessor Company used a rate of
7.50%
,
8.00%
,
8.00%
and
8.00%
, respectively, as the expected long-term rate of return assumption on the plan assets for the Dex One Retirement Plan and Dex Media Pension Plan. The basis used for determining these rates was the long-term capital market return forecasts for an asset mix similar to the plans' asset allocation target of
65%
equity securities and
35%
debt securities at the beginning of each such year. The basis used for determining these rates also included an opportunity for active management of the assets to add value over the long term. The active management expectation was supported by calculating historical returns for the investment managers who actively managed the plans' assets.
Although we review our expected long-term rate of return assumption on an annual basis or more frequently if deemed necessary, the performance in any one particular year does not, by itself, significantly influence our evaluation. Our assumption is generally not revised unless there is a fundamental change in one of the factors upon which it is based, such as the target asset allocation or long-term capital market return forecasts.
Estimated Future Benefit Payments
The Company’s pension plans' benefits expected to be paid in each of the next five fiscal years and in the aggregate for the five fiscal years thereafter are as follows:
|
|
|
|
|
|
Pension Plans
|
2013
|
$
|
16,847
|
|
2014
|
17,020
|
|
2015
|
16,444
|
|
2016
|
17,100
|
|
2017
|
16,023
|
|
Years 2018-2022
|
78,371
|
|
We expect to make total contributions of approximately
$4.7 million
to our pension plans in 2013.
We lease office facilities and equipment under operating leases with non-cancelable lease terms expiring at various dates through 2018. Rent and lease expense of the Company for the years ended December 31, 2012 and 2011 and eleven months ended December 31, 2010 was
$19.4 million
,
$22.7 million
and
$22.1 million
, respectively. Rent and lease expense of the Predecessor Company for the one month ended January 31, 2010 was
$1.6 million
. The future non-cancelable minimum rental payments applicable to operating leases at December 31, 2012 are as follows:
|
|
|
|
|
2013
|
$
|
16,426
|
|
2014
|
11,960
|
|
2015
|
8,770
|
|
2016
|
4,592
|
|
2017
|
1,076
|
|
Thereafter
|
98
|
|
Total
|
$
|
42,922
|
|
We are obligated to pay an outsource service provider approximately
$30.0 million
over the years 2012 through 2017 for datacenter / server assessment, migration and ongoing management and administration services. As of December 31, 2012, approximately
$25.5 million
remains outstanding under this obligation. We are also obligated to pay an IT outsource service provider approximately
$22.0 million
over the years 2012 through 2015 for software licensing and related services. As of December 31, 2012, approximately
$13.4 million
remains outstanding under this obligation. Under an Internet Yellow Pages Reseller Agreement, we are obligated to pay YellowPages.com
$9.8 million
in 2013.
11. 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.
12. Business Segments
For the periods covered by this annual report, management reviews and analyzes its business of providing marketing solutions as
one
operating segment.
13. Other Information
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.
14. Parent Company Financial Statements
The following condensed Parent Company financial statements should be read in conjunction with the consolidated financial statements of the Company and the Predecessor Company. As provided for in our Credit Facilities, each of the Company’s operating subsidiaries are permitted to fund a share of the Parent Company’s interest obligations on the Dex One Senior Subordinated Notes. Other funds, based on a percentage of each operating subsidiaries’ excess cash flow, as defined in each credit agreement, may be provided to the Parent Company to fund specific activities, such as acquisitions. In addition, each of our operating subsidiaries is permitted to send up to
$5 million
annually to the Parent Company. Lastly, our operating subsidiaries fund on a proportionate basis those expenses paid by the Parent Company to fund the daily operations of our operating subsidiaries. Except for certain limited situations, including those noted above, the Credit Facilities restrict the ability of the Company and its subsidiaries to dividend assets to any third party and of our subsidiaries to pay dividends, loans or advances to us. See Note 5, “Long-Term Debt” for a further description of our debt instruments.
Condensed Parent Company Balance Sheets
|
|
|
|
|
|
|
|
|
December 31,
|
|
2012
|
2011
|
Assets
|
|
|
Cash and cash equivalents
|
$
|
3,420
|
|
$
|
28,361
|
|
Prepaid expenses and other current assets
|
663
|
|
953
|
|
Total current assets
|
4,083
|
|
29,314
|
|
Investment in subsidiaries
|
296,799
|
|
282,926
|
|
Total assets
|
$
|
300,882
|
|
$
|
312,240
|
|
Liabilities and Shareholders’ Equity (Deficit)
|
|
|
Accounts payable, accrued liabilities and other
|
$
|
177
|
|
$
|
1,224
|
|
Accrued interest
|
7,859
|
|
10,672
|
|
Intercompany, net
|
14,409
|
|
2,403
|
|
Short-term deferred income taxes, net
|
123
|
|
32
|
|
Current portion of long-term debt
|
219,708
|
|
—
|
|
Total current liabilities
|
242,276
|
|
14,331
|
|
Long-term debt
|
—
|
|
300,000
|
|
Deferred income taxes, net
|
17,997
|
|
7,776
|
|
Total liabilities
|
260,273
|
|
322,107
|
|
Shareholders’ equity (deficit)
|
40,609
|
|
(9,867
|
)
|
Total Liabilities and Shareholders’ Equity (Deficit)
|
$
|
300,882
|
|
$
|
312,240
|
|
Condensed Parent Company Statements of Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
Predecessor Company
|
|
Years Ended December 31,
|
Eleven Months Ended December 31, 2010
|
One Month Ended January 31, 2010
|
|
2012
|
2011
|
|
|
|
|
|
Expenses
|
$
|
13,171
|
|
$
|
17,229
|
|
$
|
18,019
|
|
$
|
891
|
|
Partnership and equity income (loss)
|
45,368
|
|
(589,046
|
)
|
(1,492,376
|
)
|
643,971
|
|
Operating income (loss)
|
32,197
|
|
(606,275
|
)
|
(1,510,395
|
)
|
643,080
|
|
Gain on debt repurchases, net
|
70,792
|
|
—
|
|
—
|
|
—
|
|
Interest expense, net
|
(33,664
|
)
|
(37,447
|
)
|
(33,312
|
)
|
—
|
|
Income (loss) before reorganization items, net and income taxes
|
69,325
|
|
(643,722
|
)
|
(1,543,707
|
)
|
643,080
|
|
Reorganization items, net
|
—
|
|
—
|
|
—
|
|
7,194,470
|
|
Income (loss) before income taxes
|
69,325
|
|
(643,722
|
)
|
(1,543,707
|
)
|
7,837,550
|
|
(Provision) benefit for income taxes
|
(6,924
|
)
|
124,758
|
|
620,115
|
|
(917,541
|
)
|
Net income (loss)
|
62,401
|
|
(518,964
|
)
|
(923,592
|
)
|
6,920,009
|
|
Other comprehensive income (loss)
|
—
|
|
—
|
|
—
|
|
—
|
|
Comprehensive income (loss)
|
$
|
62,401
|
|
$
|
(518,964
|
)
|
$
|
(923,592
|
)
|
$
|
6,920,009
|
|
Condensed Parent Company Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
Predecessor Company
|
|
Years Ended December 31,
|
Eleven Months Ended December 31, 2010
|
One Month Ended January 31, 2010
|
|
2012
|
2011
|
Cash flow provided by (used in) operating activities
|
$
|
1,579
|
|
$
|
40,454
|
|
$
|
4,778
|
|
$
|
(531
|
)
|
Cash flow from investing activities
|
|
|
|
|
Additions to fixed assets and computer software
|
—
|
|
—
|
|
—
|
|
(643
|
)
|
Contributions to subsidiaries
|
—
|
|
(12,227
|
)
|
—
|
|
—
|
|
Intercompany loan
|
—
|
|
(2,000
|
)
|
(4,900
|
)
|
—
|
|
Net cash used in investing activities
|
—
|
|
(14,227
|
)
|
(4,900
|
)
|
(643
|
)
|
Cash flow from financing activities
|
|
|
|
|
Long-term debt repurchases
|
(26,520
|
)
|
—
|
|
—
|
|
—
|
|
Debt issuance costs and other financing items, net
|
—
|
|
—
|
|
—
|
|
(370
|
)
|
Decrease in checks not yet presented for payment
|
—
|
|
—
|
|
(1,025
|
)
|
(182
|
)
|
Net cash used in financing activities
|
(26,520
|
)
|
—
|
|
(1,025
|
)
|
(552
|
)
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
(24,941
|
)
|
26,227
|
|
(1,147
|
)
|
(1,726
|
)
|
Cash and cash equivalents, beginning of period
|
28,361
|
|
2,134
|
|
3,281
|
|
5,007
|
|
Cash and cash equivalents, end of period
|
$
|
3,420
|
|
$
|
28,361
|
|
$
|
2,134
|
|
$
|
3,281
|
|
|
|
15.
|
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
Net Additions Charged To Revenue and Expense
|
|
Net Changes to Other Balance Sheet Accounts
|
|
Write-offs and Other Deductions
|
|
Balance at End of Period
|
Allowance for Doubtful Accounts
|
|
|
|
|
|
|
|
|
|
Successor Company:
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2012
|
$
|
53,696
|
|
|
32,602
|
|
|
(7,262
|
)
|
|
(47,266
|
)
|
|
$
|
31,770
|
|
For the year ended December 31, 2011
|
$
|
75,891
|
|
|
52,296
|
|
|
16,218
|
|
|
(90,709
|
)
|
|
$
|
53,696
|
|
For the eleven months ended December 31, 2010
|
$
|
—
|
|
|
16,364
|
|
|
119,230
|
|
|
(59,703
|
)
|
|
$
|
75,891
|
|
Predecessor Company:
|
|
|
|
|
|
|
|
|
|
For the one month ended January 31, 2010
|
$
|
54,612
|
|
|
7,822
|
|
|
(54,591
|
)
|
|
(7,843
|
)
|
|
$
|
—
|
|
Deferred Income Tax Asset Valuation Allowance
|
|
|
|
|
|
|
|
|
|
Successor Company:
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2012
|
$
|
157,171
|
|
|
(33,385
|
)
|
|
—
|
|
|
—
|
|
|
$
|
123,786
|
|
For the year ended December 31, 2011
|
$
|
97,642
|
|
|
59,529
|
|
|
—
|
|
|
—
|
|
|
$
|
157,171
|
|
For the eleven months ended December 31, 2010
|
$
|
7,876
|
|
|
89,766
|
|
|
—
|
|
|
—
|
|
|
$
|
97,642
|
|
Predecessor Company:
|
|
|
|
|
|
|
|
|
|
For the one month ended January 31, 2010
|
$
|
1,531,905
|
|
|
—
|
|
|
—
|
|
|
(1,524,029
|
)
|
|
$
|
7,876
|
|
|
|
16.
|
Quarterly Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2012
|
|
Three Months Ended June 30, 2012
|
|
Three Months Ended September 30, 2012
|
|
Three Months Ended December 31, 2012
|
Net revenues
|
$
|
344,428
|
|
|
$
|
334,483
|
|
|
$
|
319,751
|
|
|
$
|
301,347
|
|
Operating income
|
44,726
|
|
|
34,746
|
|
|
27,318
|
|
|
18,939
|
|
Gain on debt repurchases, net
(1)
|
68,763
|
|
|
70,792
|
|
|
—
|
|
|
—
|
|
(Provision) benefit for income taxes
|
1,167
|
|
|
(4,707
|
)
|
|
6,641
|
|
|
(10,025
|
)
|
Net income (loss)
|
$
|
57,572
|
|
|
$
|
52,940
|
|
|
$
|
(12,665
|
)
|
|
$
|
(35,446
|
)
|
Basic earnings (loss) per share
|
$
|
1.15
|
|
|
$
|
1.05
|
|
|
$
|
(0.25
|
)
|
|
$
|
(0.70
|
)
|
Diluted earnings (loss) per share
|
$
|
1.15
|
|
|
$
|
1.05
|
|
|
$
|
(0.25
|
)
|
|
$
|
(0.70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2011
|
|
Three Months Ended June 30, 2011
|
|
Three Months Ended September 30, 2011
|
|
Three Months Ended December 31, 2011
|
Net revenues
|
$
|
391,235
|
|
|
$
|
377,266
|
|
|
$
|
360,095
|
|
|
$
|
352,027
|
|
Impairment charges
(2)
|
—
|
|
|
801,074
|
|
|
—
|
|
|
—
|
|
Operating income (loss)
|
119,938
|
|
|
(707,762
|
)
|
|
78,218
|
|
|
79,239
|
|
Gain on sale of assets, net
(3)
|
13,437
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(Provision) benefit for income taxes
|
(20,245
|
)
|
|
163,714
|
|
|
(719
|
)
|
|
(17,992
|
)
|
Net income (loss)
|
$
|
55,410
|
|
|
$
|
(602,107
|
)
|
|
$
|
22,184
|
|
|
$
|
5,549
|
|
Basic earnings (loss) per share
|
$
|
1.11
|
|
|
$
|
(12.01
|
)
|
|
$
|
0.44
|
|
|
$
|
0.11
|
|
Diluted earnings (loss) per share
|
$
|
1.11
|
|
|
$
|
(12.01
|
)
|
|
$
|
0.44
|
|
|
$
|
0.11
|
|
|
|
(1)
|
During the three months ended March 31, 2012 we recognized a gain on the Credit Facility Repurchases of
$68.8 million
. During the three months ended June 30, 2012, we recognized a gain on the Note Repurchases of
$70.8 million
. See Note 1, “Business and Basis of Presentation - Significant Financing Developments” for further discussion.
|
|
|
(2)
|
We recognized a goodwill impairment charge of
$801.1 million
during the three months ended June 30, 2011. See Note 2, “Summary of Significant Accounting Policies – Identifiable Intangible Assets and Goodwill” for further discussion.
|
|
|
(3)
|
During the three months ended March 31, 2011, we recognized a gain on the sale of substantially all net assets of Business.com of
$13.4 million
. See Note 13, “Other Information” for further discussion.
|