Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2012

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 three and nine months ended September 30, 2012 to determine if the carrying amounts of our definite-lived intangible assets and other long-lived assets were recoverable:


•	Historical financial information, including revenue, profit margins, customer attrition data and price premiums enjoyed relative to competing independent publishers;


•	Long-term financial projections, including, but not limited to, revenue trends and profit margin trends;


•	Intangible asset and other long-lived asset carrying values and any changes in current and future use;


•	Trading values of our debt and equity securities; and


•	Other Company-specific information.

Based on our evaluation during the three and nine months ended September 30, 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 $87.4 million and $50.5 million for the three months ended September 30, 2012 and 2011, respectively, and $262.1 million and $134.2 million for the nine months ended September 30, 2012 and 2011, respectively. Our intangible assets and their respective book values at September 30, 2012 are shown in the following table:



	Directory Services Agreements			Local Customer Relationships			National Customer Relationships			Trade Names and Trademarks			Technology, Advertising Commitments & Other			Total
Gross intangible assets carrying value	$	1,330,000		$	560,000		$	175,000		$	380,000		$	85,500		$	2,530,500
Accumulated amortization	(313,815		)	(152,638		)	(39,940		)	(74,219		)	(29,875		)	(610,487		)
Net intangible assets	$	1,016,185		$	407,362		$	135,060		$	305,781		$	55,625		$	1,920,013

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 during the first quarter 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 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 are 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:



Intangible Asset	Previous Weighted Average Useful Lives	Revised Weighted Average Useful Lives	Amortization Methodology
Directory services agreements	25 years	10 years	Income forecast method ⁽¹⁾
Local customer relationships	13 years	9 years	Income forecast method ⁽¹⁾
National customer relationships	24 years	9 years	Income forecast method ⁽¹⁾
Tradenames and trademarks	13 years	9 years	Straight-line method


⁽¹⁾	These intangible assets are being amortized under the income forecast method, which assumes the value derived from these intangible assets is greater in the earlier years and steadily declines over time.

The weighted average useful lives of technology, advertising commitments and other remained at seven years. The Company performed the same evaluation of the remaining useful lives of its definite-lived intangible assets and other long-lived assets during the three months ended September 30, 2012 and determined that the weighted average useful lives presented above continue to be deemed appropriate. The combined weighted average useful life of our intangible assets at September 30, 2012 is nine years. As a result of reducing the estimated useful lives of the intangible assets noted above, the Company expects an increase in amortization expense of $161.6 million and total amortization expense of $349.4 million for 2012. 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.

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 nine months ended September 30, 2011. Please refer to our Quarterly Report on From 10-Q for the period ended June 30, 2011 for additional information including estimates and assumptions used in our impairment testing.

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.

Interest Expense

In conjunction with our adoption of fresh start accounting and reporting on February 1, 2010 ("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 $5.8 million and $6.9 million for the three months ended September 30, 2012 and 2011, respectively, and $19.6 million and $21.7 million for the nine months ended September 30, 2012 and 2011, respectively.

During the first quarter of 2010, we entered into interest rate swap and interest rate cap agreements that are not designated as cash flow hedges. The Company’s interest expense includes income of $0.6 million and $1.6 million for the three months ended September 30, 2012 and 2011, respectively, and $1.5 million and $1.8 million for the nine months ended September 30, 2012 and 2011, respectively, resulting from the change in fair value of these interest rate swaps and interest rate caps.

Advertising Expense

We 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 $1.5 million and $3.9 million for the three months ended September 30, 2012 and 2011, respectively, and $6.7 million and $13.7 million for the nine months ended September 30, 2012 and 2011, respectively.

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 certified marketing representatives ("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 September 30, 2012, we had interest rate swap and interest rate cap agreements with major financial institutions with a notional amount 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.

Earnings (Loss) Per Share

The calculation of basic and diluted earnings (loss) per share (“EPS”) is presented below.



	Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011		2012		2011
Basic EPS
Net income (loss)	$	(12,665	)	$	22,184	$	97,847	$	(524,512	)
Weighted average common shares outstanding	50,825			50,177		50,562		50,114
Basic EPS	$	(0.25	)	$	0.44	$	1.94	$	(10.47	)

Diluted EPS
Net income (loss)	$	(12,665	)	$	22,184	$	97,847	$	(524,512	)
Weighted average common shares outstanding	50,825			50,177		50,562		50,114
Dilutive effect of stock awards	—			1		11		—
Weighted average diluted shares outstanding	50,825			50,178		50,573		50,114
Diluted EPS	$	(0.25	)	$	0.44	$	1.93	$	(10.47	)

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 three months ended September 30, 2012 and nine months ended September 30, 2011, the effect of all stock-based awards was anti-dilutive and therefore not included in the calculation of EPS. For both the three and nine months ended September 30, 2012, 2.7 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 three and nine months ended September 30, 2011, 3.0 million shares and 2.9 million shares, respectively, of the Company’s stock-based awards had exercise prices that exceeded the average market price of the Company’s common stock for the period.

Fair Value of Financial Instruments

At September 30, 2012 and December 31, 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. 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.

As required by Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements and Disclosures, 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 September 30, 2012 and December 31, 2011, respectively, and interest rate caps with a notional amount of $200.0 million and $400.0 million at September 30, 2012 and December 31, 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 September 30, 2012 and December 31, 2011, respectively, and the level within the fair value hierarchy in which the fair value measurements were included.



	Fair Value Measurements Using Significant Other Observable Inputs (Level 2)
Derivatives:	September 30, 2012			December 31, 2011
Interest Rate Swap – Liabilities	$	(1,235	)	$	(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 three and nine months ended September 30, 2012 or year ended December 31, 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 4, “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 September 30, 2012. 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 5, “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 September 30, 2012, the impact of applying counterparty credit risk in determining the fair value of our derivative instruments was not material. At September 30, 2012, the impact of applying the Company’s credit risk in determining the fair value of our derivative instruments was a decrease to our derivative instruments liability of $0.3 million.

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.

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 Accounting Standards Update ("ASU") No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders' equity. ASU 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 ("ASU 2011-12"). ASU 2011-12 defers the effective date of provisions included in ASU 2011-05 that require entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement where net income is presented and the statement where other comprehensive income is presented for both interim and annual financial statements. ASU 2011-12 further states that entities must continue to report reclassification adjustments out of accumulated comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. In August 2012, the FASB issued a proposed ASU, Comprehensive Income (Topic 220): Presentation of Items Reclassified Out of Accumulated Other Comprehensive Income. This proposed ASU would require an entity to present separately by component in a footnote, reclassifications out of accumulated other comprehensive income as well as a tabular disclosure of the effect of items reclassified out of accumulated other comprehensive income on the respective line items of net income but only if the item reclassified is required to be reclassified to net income in its entirety. For other reclassification items that are not required to be reclassified directly to net income in their entirety, the new tabular disclosure only would require a cross-reference to other disclosures currently required for those items. The Company continues to monitor the FASB's deliberations on this proposed ASU. 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 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 IFRSs (“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 September 30, 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.

Derivative Financial Instruments

We do not use derivative financial instruments for trading or speculative purposes and 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 condensed 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 condensed 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 2, “Summary of Significant Accounting Policies – Fair Value of Financial Instruments” for additional information regarding our interest rate swaps and interest rate caps.

Income Tax Rate

Our quarterly income tax (provision) benefit for income taxes is measured using an estimated annual effective tax rate for the period, adjusted for discrete items that occurred within the periods presented.

Segment Reporting

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