Stock-Based Compensation

Stock-Based Compensation Expense

The Dex Media, Inc. Equity Incentive Plan and the Dex Media, Inc. Amended and Restated Long-Term Incentive Plan ("Plans") provide for several forms of incentive awards to be granted to designated eligible employees, non-management directors, consultants and independent contractors providing services to the Company. As of April 30, 2013, the maximum number of shares of Dex Media common stock authorized for issuance under the Plans is 1,264,911. During 2013, the Company granted equity awards under the Plans.

Impact of Merger on Equity Compensation Plans

The Merger Agreement specified how equity compensation awards issued by Dex One prior to completion of the merger with SuperMedia would be treated. If the closing price of Dex One common stock on the day before the closing date of the merger was less than or equal to the strike price for an option, such option was considered "underwater" and was canceled for no value. If the Dex One closing price exceeded the strike price, such options were considered "in the money" and converted into a fully-vested option, subject to the modifications to both the number of shares that could be acquired upon exercise of the option and the per share exercise price resulting from the 1-for-5 reverse split. All stock appreciation rights were underwater at the time of the merger and were therefore canceled. Each share of restricted stock was converted into 0.2 shares of Dex Media common stock. Each restricted stock unit denominated in shares of Dex One stock that was unsettled, became vested and converted into the right to receive a number of shares of Dex Media common stock equal to the number of stock units multiplied by the 0.2 conversion rate. As a result of these merger related stock transactions, the Company accelerated $2 million of expense related to these awards during the three months ended June 30, 2013.

Restricted Stock

The Plans provide for grants of restricted stock. These awards are classified as equity awards based on the criteria established by the applicable accounting rules for stock-based compensation. The fair value of the restricted stock awards was determined based on the price of Dex Media common stock on the date of grant.

On September 5, 2013, certain employees were granted restricted stock awards of 342,724 that cliff vest on December 31, 2015. Grant award recipients would receive all regular cash dividends if the Company were to declare dividends.

All unvested shares of restricted stock will immediately terminate upon the employee's termination of employment with the Company on or before December 31, 2015 except that the Compensation and Benefits Committee of the Board of Directors, at its sole option and election, may permit the accelerated vesting of the award. In the event of the employee's termination of service by the Company without cause or by the employee for good reason within six months prior to or two years following a change in control (as defined in the applicable award agreement), any unvested restricted stock will become fully vested on the date of such termination (or the date of the change in control, if such termination occurs within six months prior to such change in control).

A portion of the cost related to these awards is included in the Company's compensation expense for the three and nine months ended September 30, 2013.

Stock Options

The Plans provide for grants of stock options. These awards are classified as equity awards based on the criteria established by the applicable accounting rules for stock-based compensation.

On September 5, 2013, certain employees were granted stock option awards of 430,600 that vest over four years in equal installments on the first, second, third, and fourth anniversaries of the grant date and have a 10 year term from the date of grant.

A stock option holder may pay the option exercise price in cash by delivering unrestricted shares to the Company having a value at the time of exercise equal to the exercise price, by a cashless broker-assisted exercise, by a combination of these methods or by any other method approved by the Compensation and Benefits Committee of the Company's Board of Directors. Options may not be re-priced without the approval of the Company's stockholders.

If the employee's employment with the Company terminates by reason of the Company's termination of the employee's employment other than for cause, or the employee's resignation from employment, then in any such case, stock options shall be vested only to the extent they are vested on the effective date of such termination of employment or resignation.

If the employee's employment with the Company terminates by reason of the Company's termination of the employee's employment for cause, then stock options, whether or not vested, shall terminate immediately upon such termination of employment.

In the event of the employee's termination of service with the Company by the Company without cause or by the employee for good reason within six months prior to or two years following a change in control (as defined in the applicable award agreement), any unvested portion of the options shall become fully vested on the date of such termination (or the date of the change in control, if such termination occurs within six months prior to such change in control).

The fair value of each option award is estimated on the grant date using the Black-Scholes option pricing model. The model incorporates assumptions regarding inputs as follows:

Ÿ Expected volatility is a blend of the implied volatility of Dex Media common stock as of the grant date, the historical volatility of Dex Media common stock over its history, and the historical volatility of ten of Dex Media's peers;

Ÿ Expected life is calculated based on the average life of the remaining vesting term and the remaining contractual life of each award; and

Ÿ The risk-free interest rate is determined using the U.S. Treasury zero-coupon issue with a remaining term equal to the expected life of the option.

A portion of the cost related to these stock option awards is included in the Company's compensation expense for the three and nine months ended September 30, 2013.

Stock-Based Compensation Expense

The following table sets forth stock-based compensation expense recognized for the three and nine months ended September 30, 2013 and 2012. Of the 2013 amount, $2 million was included as part of merger transaction costs. These costs were recorded as part of general and administrative expense on the Company's consolidated statements of comprehensive income (loss).



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in millions)
Stock-based compensation expense	$	1	$	1	$	4	$	4

As of September 30, 2013, unrecognized compensation expense related to the unvested portion of the Company's restricted stock and stock option awards was approximately $5 million, and is expected to be recognized over a weighted-average period of approximately 3.3 years.