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 operations.

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 $300.0 million aggregate principal amount of 12%/14% Senior Subordinated Notes due 2017 (“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 amended and restated credit facilities. See Note 2, “Summary of Significant Accounting Policies – Interest Expense and Deferred Financing Costs” and Note 5, “Long-Term Debt, Credit Facilities and Notes” 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.

During the year ended December 31, 2009, the Predecessor Company recorded $94.8 million as reorganization items, net on the consolidated statement of operations. The following table displays the details of reorganization items for the year ended December 31, 2009:



	Predecessor Company
	Year Ended December 31, 2009
Professional fees ⁽¹⁾	$	77,375
Write-off of unamortized deferred financing costs ⁽²⁾	64,475
Write-off of unamortized net premiums / discounts on long-term debt ⁽²⁾	34,886
Write-off of debt related unamortized fair value adjustments ⁽²⁾	(78,511		)
Lease rejections, abandoned property and other ⁽³⁾	(3,457		)
Total reorganization items, net	$	94,768


⁽¹⁾	The Predecessor Company incurred professional fees associated with filing the Chapter 11 petitions of $77.4 million during the year ended December 31, 2009, of which $67.6 million were paid in cash.


⁽²⁾	The write-off of unamortized deferred financing costs of $64.5 million, unamortized net premiums / discounts of $34.9 million and unamortized fair value adjustments required by GAAP as a result of the Dex Media Merger of $78.5 million at May 28, 2009, relate to long-term debt classified as liabilities subject to compromise at December 31, 2009.


⁽³⁾	The Predecessor Company recognized $3.5 million during the year ended December 31, 2009 associated with rejected leases, abandoned property and other, which were approved by the Bankruptcy Court through December 31, 2009 as part of the Chapter 11 proceedings.

In 2009, the Predecessor Company did not receive any operating cash receipts resulting from the filing of the Chapter 11 petitions.

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 purchase method of accounting for business combinations included in FASB ASC 805, Business Combinations. 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.