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Steven M. Blondy |
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Executive Vice President and |
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Chief Financial Officer |
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Dex One Corporation |
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1001 Winstead Drive |
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Cary, North Carolina 27513 |
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Tel:
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919-297-1116 |
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Fax:
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919-297-1601 |
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steve.blondy@dexone.com |
December 17, 2010
Division of Corporation Finance
Securities and Exchange Commission
100 F Street N.E.
Washington, DC 20549
Attention: Mr. Larry Spirgel
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Re: |
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Dex One Corporation
Form 10-K for the Fiscal Year Ended December 31, 2009
Form 10-Q for the Quarterly Period Ended June 30, 2010
File No. 001-07155 |
This letter is submitted with respect to Dex One Corporations (Dex One, the Company, we,
us and our) response to the comment letter by the staff (the Staff) of the Securities and
Exchange Commission (the Commission), dated December 3, 2010 (the Comment Letter), addressed to
the Company with respect to (i) the Companys Annual Report on Form 10-K for the year ended
December 31, 2009 filed by the Company on March 12, 2010 (the Form 10-K) and (ii) the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2010 filed by the Company on August 11, 2010
(the Form 10-Q).
The Companys responses to the comments raised by the Staff in the Comment Letter are set forth
below. For the convenience of the Staff, we have repeated each of the Staffs comments before the
corresponding response. Unless otherwise indicated, page references included in the body of the
Companys responses are to the Form 10-K or Form 10-Q, as applicable. Terms used and not defined
are used in the same manner they are used in the Form 10-K and Form 10-Q, as applicable.
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Form 10-K for the Year Ended December 31, 2009
Risk Factors, Page 15
1. Overall, your risk factor subheadings are overly broad and generic. Please revise your
subheadings to clearly and concisely identify each risk that applies to your company.
Response
The Company plans to file its December 31, 2010 Form 10-K on or prior to March 1, 2011, as
required. All risk factors to be included in the December 31, 2010 Form 10-K will be revised based
upon the current state of our business and external environment and all risk factor subheadings
will be revised to clearly and concisely identify each risk that applies to the Company.
Risk Factors, Page 15
2. Please limit each risk subheading to one risk. Instead of discussing multiple risks under one
subheading, break your disclosure into separate, appropriately captioned, risk factors.
Response
The Company will endeavor to ensure that, wherever practicable, each risk factor subheading, as
well as the content of such risk factor, will be limited to addressing one risk or group of closely
related risks in our December 31, 2010 Form 10-K and in subsequent filings thereafter.
Our ability to meet substantial debt service obligations, Page 15.
3. We note your statement that on the effective date all outstanding term loans, revolving loans
and termination payments outstanding under swap agreements under the R.H. Donnelley credit
facility, the Dex Media East credit facility and the Dex Media West credit facility were converted
into a new tranche of term loans pursuant to amended and restated credit facilities with R.H.
Donnelley, Dex Media East and Dex Media West. These amended and restated credit facilities also
provided for an initial prepayment of such loans. Please disclose the amount of this initial
prepayment and when it was made.
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Response
Principal prepayments of $511.3 million, comprised of $188.6 million under the Dex Media West
credit facility, $109.9 million under the Dex Media East credit facility and $212.8 million under
the RHDI credit facility, were made in January 2010 in accordance with the Plan in connection with
our emergence from Chapter 11. As such, the Company first disclosed such principal prepayments in
our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, specifically on Page 5 of
our Condensed Consolidated Statement of Cash Flows for the one month ended January 31, 2010, Page
23 of Note 3, Fresh Start Accounting and Page 68 of Item 2. Managements Discussion and Analysis
of Financial Condition and Results of Operations Liquidity and Capital Resources. Such
disclosure was also repeated in our Quarterly Reports on Form 10-Q for the quarters ended June 30,
2010 and September 30, 2010 and will be disclosed in our December 31, 2010 Form 10-K.
Our ability to meet substantial debt service obligations, Page 15.
4. Pursuant to the terms of the amended and restated credit facilities filed as exhibits to your
Current Report on Form 8-K filed on February 4, 2010, you were required to make these prepayments
pursuant to the terms of a letter agreement, dated May 29, 2009, by and among you, your
subsidiaries and lenders. Please provide us with a description of the terms of this letter
agreement and an analysis of why you did not file it as a material agreement pursuant to Item 601
of Regulation S-K
Response
The letter agreements referenced above are three separate support agreements (one for each of the
R.H. Donnelley Inc. credit facility, the Dex Media West credit facility and the Dex Media East
credit facility) each dated as of May 21, 2009 entered into among the Company and certain of its
subsidiaries and the lender parties thereto in connection with the Companys and its subsidiaries
prearranged bankruptcy filings on May 28, 2009 (collectively, the Lender Support Agreements). The
terms of the Lender Support Agreements are substantially similar in all respects. Under the Lender
Support Agreements, the signing lenders agreed, among other things, (i) to support a plan of
reorganization consistent with the term sheets agreed to by the Company, the three lender groups
and the group of consenting noteholders of the Company and certain of its subsidiaries and (ii) not
to sell or transfer any claim under the applicable credit agreement documents.
As disclosed in our June 30, 2009 Form 10-Q, specifically on page 7 in Note 1 to Condensed
Consolidated Financial Statements (Unaudited) under Proposed Plan of Reorganization and page 30
of Item 2. Managements Discussion and Analysis Chapter 11 Bankruptcy Proceedings and Plan of
Reorganization, the joint plan of reorganization filed with the Bankruptcy Court is consistent
with the terms and
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conditions of the foregoing lender and noteholder support agreements, which formed the basis for
the joint plan of reorganization.
Given that (i) the pre-bankruptcy filing and pre-emergence payments provided for in the terms
sheets which formed a part of the Lender Support Agreements were fully disclosed in the Form 10-Q
(as well as in Exhibit 99.1 to the Current Report on Form 8-K filed on May 29, 2009) and (ii) the
salient terms of the Lender Support Agreements were ultimately embodied in the final joint plan of
reorganization, as confirmed by the bankruptcy court on January 12, 2010, which was filed as
Exhibit 2.1 to the Companys Current Report on Form 8-K filed on January 15, 2010 and incorporated
by reference as Exhibit 2.1 to the Form 10-K, the Company, on advice of counsel, concluded that it
was not required to file the Lender Support Agreements as material agreements pursuant to Item 601
of Regulation S-K.
Our ability to meet substantial debt service obligations, Page 15.
5. In the last paragraph of this risk factor you state that you expect to be able to generate cash
flows from operations in amounts sufficient to fund your operations and satisfy your debt payments
but that you can make no assurances that your business will generate sufficient cash flows from
operations to enable you to fund your operations and satisfy your debt repayments. Please
reconcile.
Response
The Companys intent of the first statement noted on page 17, Based on current financial
projections, we expect to be able to generate cash flows from operations in amounts sufficient to
fund our operations, satisfy our interest and principal payment obligations on our secured
indebtedness and pay administrative expenses was to provide the reader of our Form 10-K assurance
that the Company had performed a going concern analysis, which resulted in the stated conclusion,
and to address any concern about the Companys ability to continue as a going concern for a
reasonable period of time. The intent of the second statement noted on page 17, We can make no
assurances that our business will generate sufficient cash flows from operations to enable us to
fund our operations, satisfy our interest and principal payment obligations on our secured
indebtedness or for other purposes was to emphasize the longer-term risk that current information
used in our going concern analysis could change as a result of the risks noted in the risk factor.
As noted above, all risk factors to be included in the December 31, 2010 Form 10-K will be revised
based upon the current state of our business and external environment and will clarify the previous
disclosure. The Company will revise this disclosure in our December 31, 2010 Form 10-K and with
subsequent filings thereafter as applicable.
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The inability to enforce any of our key agreements, Page 25
6. We note your disclosure that your arrangements with Qwest, CenturyLink and AT&T may be
terminated by your counterparties prior to their stated terms under certain specified
circumstances, some of which may be beyond your reasonable control and/or which may require
extraordinary efforts or the incurrence of material excess costs on our part in order to avoid
breach of the applicable agreement. To the extent you believe that certain of these specified
circumstances that give rise to a termination right by your counterparties are reasonably likely to
occur or not occur, as the case may be, please disclose those circumstances.
Response
The Companys intent of the statement noted on page 25 regarding counterparty termination risk of
the commercial agreements with Qwest, CenturyLink and AT&T under certain circumstances was to alert
the readers of our Form 10-K of the possible termination risk and attendant cost with respect to
these agreements. At the time we filed the Form 10-K (and subsequent quarterly reports on Form
10-Q) we had no information as to whether any circumstances that might give rise to a termination
right by such counterparties was reasonably likely to occur or not occur, as the case may be.
Accordingly, we had no such circumstances to disclose. This risk factor, along with all the other
risk factors to be included in the December 31, 2010 Form 10-K will be reviewed and revised, as
applicable, based on the current state of our business and external environment at the time of
filing.
Reliance on, and extension of credit to, local businesses, Page 27
7. Please provide tabular disclosure quantifying the amount of aggregate credit currently extended
to your clients, including aging.
Response
Our reference to the extension of credit to local businesses in the context of our Trade
Receivables is associated with advertising contracts that typically require payment over twelve
months. In the ordinary course of business, we generate Trade Receivables through the selling of
advertising products and services on credit to local businesses. We define Trade Receivables as
amounts due from customers under specified credit or payment terms for goods or services provided
in the normal course of business operations.
We will revise our future filings to more clearly reflect that credit is being extended to local
businesses in the context of Trade Receivables generated by the sale of advertising products and
services.
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Managements Discussion and Analysis of Financial Condition and Results of Operations, Page
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8. In your future filings, please strive to eliminate repetitive or redundant disclosure. For
example, the description of your business in Item 1 is largely repeated throughout your
Managements Discussion and Analysis of Financial Condition and Results of Operations.
Response
Commencing with the Companys December 31, 2010 Form 10-K and with subsequent filings thereafter,
we will strive to eliminate repetitive or redundant disclosures throughout the respective
documents.
Corporate Overview, Page 38
9. In future filings, please revise the introductory section to provide a more robust
executive-level discussion that identifies the most important themes or other significant matters
with which management is primarily concerned when evaluating the companys financial condition and
operating results. A good introduction or overview would provide insight into material
opportunities, challenges and risks, such as those presented by known material trends and
uncertainties, on which the companys executives are most focused for both the short and long term,
as well as the actions they are taking to address these opportunities, challenges and risks. For
example, the disclosure in the section entitled Context and Perspective on page 96 includes the
type of discussion and trends, opportunities and challenges that could be helpful to an investors
understanding of your business. For more information, refer to Part III.A. of the Commission
Guidance Regarding Managements Discussion and Analysis of Financial Condition and Results of
Operations (Release Nos. 33-8350, dated December 29, 2003).
Response
The Company will provide more robust executive-level discussion that identifies the most important
themes or other significant matters with which management is primarily concerned when evaluating
the companys financial condition and operating results, as well as the actions we are taking to
address opportunities, challenges and risks that affect the Company, in our December 31, 2010 Form
10-K and in subsequent filings thereafter.
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Production and Distribution Expenses, Page 57
10. We note that your other expenses, net decreased by $7.3 million in 2009. Please discuss the
factors that contributed to this decrease.
Response
The Company has a practice of combining variances less than $5.0 million into an All other, net
category in our Managements Discussion and Analysis of Financial Condition and Results of
Operations section of our Form 10-K. For the year ended December 31, 2009, the largest component of
the $7.3 million All other, net variance was a decrease in barter expense of $4.4 million driven
by the continued decline in barter activity. The next largest component of the $7.3 million All
other, net variance was a decline in incentive compensation expense of $1.4 million. On occasion,
the Company may separately disclose variances less than $5.0 million if deemed qualitatively
material to our operations.
Controls and Procedures
11. We note your disclosure that your Chief Executive Officer and Chief Financial Officer
concluded that your disclosure controls and procedures are effective and sufficient to ensure that
information required to be disclosed by the Company in reports that it files or submits under the
Securities Act of 1934 is recorded, processed, summarized and reported within the time periods
specific [sic] in the Securities and Exchange Commissions rules and forms. In your future
filings, please also specify your officers conclusion regarding the effectiveness of your
disclosure controls and procedures to ensure that information required to be disclosed in the
reports that you file or submit under the Exchange Act is accumulated and communicated to your
management, including your chief executive officer and chief financial officer, to allow timely
decisions regarding required disclosure. See Exchange Act Rule 13a-15(e).
Response
The Company will provide the requested disclosure as required by Exchange Act Rule 13a-15(e) in our
December 31, 2010 Form 10-K and with subsequent filings thereafter.
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Controls and Procedures
12. We also note that you provide disclosure regarding changes in your internal control over
financial reporting on Page 90. Please provide disclosure regarding this material weakness in your
Managements Annual Report on Internal Control Over Financial Reporting pursuant to Item 308 of
Regulation S-K.
Response
The Company disclosed the following on Page 90 in Item 9A of the Form 10-K:
(b) Managements Annual Report on Internal Control Over Financial Reporting Managements Report
on Internal Control over Financial Reporting and the independent registered public accounting
firms attestation report on the Companys internal control over financial reporting required under
Item 308 of Regulation S-K have been included in Item 8 immediately preceding the Companys
consolidated financial statements.
It is the Companys belief that since we elected to present Managements Report on Internal Control
over Financial Reporting in Item 8 of the Form 10-K rather than Item 9A, cross-referencing
Managements Report on Internal Control over Financial Reporting in Item 9A to Item 8 satisfied the
disclosure requirements of Item 308 of Regulation S-K. Commencing with the Companys December 31,
2010 Form 10-K, we will relocate Managements Report on Internal Control over Financial Reporting
to Item 9A in order to satisfy the disclosure requirements of Item 308 of Regulation S-K. As the
material weakness assessment was made as of December 31, 2008 and the remediation of such material
weakness was made as of December 31, 2009, no reference will be made to either the material
weakness or the remediation in the December 31, 2010 Form 10-K.
Compensation Discussion and Analysis, Page 95
Long-Term Incentives for 2009, Page 101
13. In your discussion of the 2009 LTIP beginning on page 101, you state that the awards to
participants in your 2009 LTIP, including certain named executive officers, are dependent upon the
attainment of certain performance measures related to the amount of the Companys cumulative free
cash flow for the 2009, 2010 and 2011 fiscal years. In future filings, please disclose within this
section the quantitative/objective performance targets and threshold levels that must be reached
for payment to each named executive officer. See Item 402(b)(2)(v) of Regulation S-K. To the extent
you believe that disclosure of these objectives or targets is not required because it would result
in competitive harm such that you may omit this information under Instruction 4 to Item 402(b) of
Regulation S-K, please provide in your response letter a detailed explanation of such conclusion.
Further, disclose in future filings how difficult it would be for the executive or how likely it
would be for you to achieve the undisclosed objective or target. General statements regarding the
level of difficulty or ease associated with achieving the
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targets are not sufficient. In discussing how difficult it will be for an executive or how likely
it will be for you to achieve the objectives, targets or other factors, provide as much detail as
necessary without providing information that would result in competitive harm. For more
information, please see also Question 118.04 of Regulation S-Ks Compliance and Disclosure
Interpretations.
Response
On May 8, 2009, the Company filed the Dex One Corporation 2009 Long-Term Incentive Program for
Executive Officers (as adopted and effective as of March 9, 2009) as Exhibit 10.3 to the Quarterly
Report on Form 10-Q for the quarter ended March 31, 2009 (Commission File No. 001-07155). For your
immediate reference, all performance measures are specifically disclosed and provided for in that
filing. The Company will provide the requested disclosures noted above in its 2010 Proxy Statement
to be filed with the Securities and Exchange Commission in the first quarter of 2011.
Compensation Discussion and Analysis, Page 95
Grants of Plan-Based Awards during 2009, Page 108
14. In footnote 2 to this table, you disclose that certain executive officers (including NEOs)
received cash payment equal to one-half of the participants Maximum Long-Term Incentive Award
payable under the 2009 LTIP. Please disclose the trigger for these payments and whether any of
these payments can be clawed back if the company does not meet its free cash flow targets during
the remainder of the performance period.
Response
As noted in the Form 10-K on Page F-30, the trigger for the 2009 LTIP payments was the achievement
of a restructuring, reorganization and/or recapitalization relating to the Companys outstanding
indebtedness and liabilities (the Specified Actions) during the Performance Period. Payments will
be made following the end of the Performance Period or the date of a Specified Action, as the case
may be. There is no clawback feature under the 2009 LTIP, as all cash payments made are
considered earned by the recipient once the performance condition has been achieved. The Company
will disclose the trigger for the payments referenced above and that no clawback feature exists
under the 2009 LTIP in its 2010 Proxy Statement to be filed with the Securities and Exchange
Commission in the first quarter of 2011.
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Compensation Discussion and Analysis, Page 95
Summary Compensation Table, Page 106
15. In footnote (d) to this table, you disclose that other compensation includes 401(k)
equalization plan payments equal to the amount that you would have contributed as a matching
contribution to the 401(k) plan in 2008 but for the contribution limitations under the tax laws.
First, why are you making matching contributions for 2008 in 2009? Second, what is the difference
between the equalization payments and payments under the Restoration Plan?
Response
The equalization plan payments for 2008 were made under the R.H. Donnelley, Inc. 401(k) Restoration
Plan (the Equalization Plan), which was established to make participants whole with regard to
company matching contributions for which they would otherwise be eligible under the R.H. Donnelley
401(k) Savings Plan (now known as the Dex One 401(k) Savings Plan) if not for the limitations under
the Internal Revenue Code. The plan provided that equalization payments for a particular year be
calculated and paid to participants in cash in the following fiscal year (i.e. payments related to
2008 compensation were calculated and paid in fiscal year 2009). This is why Equalization Plan
payments for 2008 were included as 2009 compensation.
In 2009, the Company replaced the Equalization Plan with the Dex One Corporation Restoration Plan
(formerly known as the R.H. Donnelley Corporation Restoration Plan) (the Restoration Plan). Under
the Restoration Plan, Company contributions are credited to participant accounts under a
non-qualified deferred compensation arrangement on the last day of the fiscal year (i.e.
non-qualified deferred compensation credits for 2009 were calculated and allocated to participant
accounts on December 31, 2009). This is why Restoration Plan payments were also included as 2009
compensation.
Because the Equalization Plan and the Restoration Plan provided for different crediting and/or
payment schedules, two years of supplemental 401(k) compensation were reportable for the 2009
fiscal year and included in the summary compensation table in the Form 10-K.
Form 10-Q for the Quarterly Period Ended June 30, 2010
Note 3 Fresh Start Accounting, Page 21
16. In light of the fact that you have taken a $752 million dollar impairment charge, please
provide an analysis for changes in the cash flow projections and reasons for the changes that led
to impairment four months after the performance of the initial valuation. Please also provide an
explanation as to why the changes could not have been foreseen four months prior.
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Response
Key Inputs
The Companys business plan was the foundation for developing long-term financial projections used
in both the Plan of Reorganization (POR) and fresh start accounting. Specific operating and
financial metrics that drive or inform the long term forecast include, but are not limited to,
customer numbers, customer behaviors (i.e., defect, decrease, maintain, increase), average spend
per customer, consumer product usage, and sales representative productivity.
Summary of Development of Cash Flow Projections
The cash flow projections and business plan used in the POR were developed and approved by
management and our Board of Directors using a robust process as noted in our Form 10-Q. The
Companys enterprise value was determined by a combination of values derived from discounted cash
flows and cash flow multiples. Both of these methods used Dex Ones business plan as their
foundation. The business plan was initially developed by management in late 2008 and was
continually updated leading up to our filing for Chapter 11 bankruptcy and throughout the
bankruptcy process based on information obtained throughout the bankruptcy process. Management
finalized its post-emergence business plan in the fourth quarter of 2009.
The business planning and financial forecasting process also included a review of industry and
macroeconomic factors. Detailed research and forecast materials from leading industry and economic
analysts were used to form Dex Ones assumptions and to provide context for the business plan and
forecast. The planning and forecasting process was further informed by sensitivity analyses related
to key industry and macroeconomic variables. Dex Ones final business plan and financial forecast
was reviewed and approved by critical internal and external constituents during the fourth quarter
of 2009. In addition to managements responsibility for developing the forecast, Dex Ones
Executive Committee and Board of Directors were actively involved and were ultimately responsible
for reviewing and approving the Business plan and forecast and establishing our 2010 budget and
bonus targets. Representatives and advisors to the secured and unsecured creditors committees also
conducted due diligence on the business plan and financial forecast prior to Dex Ones submission
of the long term forecast to the bankruptcy court.
In addition, in determining the equity component of our fresh start enterprise value, management
also considered the trading value of the Companys equity securities post emergence from Chapter 11
through the filing date of our March 31, 2010 Form 10-Q, which was May 13, 2010. Based on the
volatility and low trading volume of our equity securities, management considered the trading value
of the Companys equity securities a factor, but not the primary indicator, in determining its
equity value. ASC 852, Reorganizations, details a process that entities should consider in
developing its
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enterprise/ reorganization value. This guidance informed the process in which the Company went
through in developing a range of enterprise values for the reconstituted company with emphasis on
the fact that the range of enterprise values is determined only after extensive negotiations
between interested parties. We believe that the Company went through a very robust process that
included extensive negotiations with our creditors. The estimates of the range of enterprise values
predominately relied upon the discounted cash flow analysis methodology given the limitations
associated with the applicability of both publicly traded company analysis and precedent
transactions analysis. For a more detailed discussion of the process we utilized to arrive at the
range of enterprise values, please see our disclosures contained on page 23 of our Form 10-Q in
Note 3, Fresh Start Accounting. The bankruptcy disclosure statement estimated a range of
enterprise values between $4.2 billion and $5.3 billion with a midpoint of $4.8 billion. Factoring
in current conditions in the local search industry and general economic conditions, we used the
midpoint between the low end of the range and the overall midpoint of the range of valuations as
provided in the disclosure statement to determine the enterprise value of $4.5 billion. We believe
that the half way point between the low end and midpoint of the range of enterprise values was
appropriate after factoring in the current conditions in the local search industry, general
economic conditions and our perspective on our long-term forecast and near-term revenue outlook.
Changes in Inputs & Assumptions
The Companys cash flow projections used for our goodwill impairment testing during the second
quarter of 2010 were approximately 11% less over a five year projection period than the cash flow
projections used in conjunction with the valuation performed for our POR and used in fresh start
accounting. As noted in more detail below, some of the main drivers for the decline in our cash
flow projections were changes to the anticipated timing of improvement in local business conditions
and advertising sales, changes in the anticipated rate of decline in print advertising and the fact
that new products originally scheduled to be introduced in 2010 have not been deployed. As
indicated on page 48 of our Form 10-Q, Recent Trends Related to Our Business, although our
long-term financial forecast included in our POR and forming the basis for fresh start accounting
anticipated a gradual improvement in local business conditions and advertising sales during 2010,
during the second quarter, we concluded that such improvement was progressing slower than
originally anticipated, particularly related to our print sales. During the second quarter of 2010,
we determined that the current trending of our key performance indictors reflected significantly
larger declines than anticipated in our POR. This is partly due to small business recovery lagging
the broader economic recovery as well as our urban geographies lagging the broader economic
recovery. Also, we determined that the secular decline in print advertising was greater than we
anticipated in the POR. In addition, our new product offerings contemplated in the POR had not been
introduced due to competitive and market factors and as such, cash flows associated with these
initiatives were excluded from the projections used for our goodwill impairment testing during the
second quarter of 2010. In addition, our industry is in a period of unprecedented change with many
new competitors as it moves from a print only model to a digital model or a combination thereof.
The pace of adoption of
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this model has a high degree of uncertainty. Based upon these market and economic related factors,
we do not believe that the reduction in our long-term cash flow projections during the second
quarter of 2010 was in our reasonable control and, therefore, was not foreseeable at the time we
emerged from bankruptcy and applied fresh start accounting as of February 1, 2010. The Company also
notes that trends associated with the timing of improvement in local business conditions and
advertising sales and rate of decline in print advertising continued to show incremental declines
during the third quarter of 2010.
Assumption Risk Factors
Many inputs, estimates and assumptions used in our long-term financial forecast models are
sensitive and subject to volatility, especially market based inputs, estimates and assumptions that
the Company believes are beyond our reasonable control. The Company had disclosed in Item 1A and
Item 7 of its Form 10-K and Item 1 of its Form 10-Q, the risk factors and critical accounting
estimates that could have a significant impact on our results of operations, financial position and
cash flows for the current period as well as in future periods. For the Staffs convenience, we
have included excerpts of the disclosures below noting that various uncertainties were disclosed
regarding estimates and assumptions used in developing our long-term projections and enterprise
value in fresh start accounting:
Item 1A Risk Factors Form 10-K
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Ongoing global credit and liquidity crisis and general economic factors Page 19 |
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As a result of the ongoing credit and liquidity crisis in the United States and
throughout the global financial system, substantial volatility in world capital markets and
the banking industry has occurred. This volatility and other events have had a significant
negative impact on financial markets, as well as the overall economy. From an operational
perspective, we have continued to experience lower advertising sales primarily as a result
of declines in new and recurring business, including both renewal and incremental sales to
existing clients, mainly driven by (1) declines in overall advertising spending by
businesses, (2) the significant impact of the weaker economy on smaller businesses in the
markets in which we do business and (3) an increase in competition and more fragmentation
in the local business search market. A continuation or deepening of the national or
regional economic recession could continue to have a material adverse effect on our
business, operating results or financial condition. |
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Recognition of impairment charges related to our intangible assets and goodwill Page
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If industry and economic conditions in our markets continue to deteriorate, resulting in
further declines in advertising sales and operating results, and if the trading value of
our debt and equity securities decline further, we will be required to again assess the
recoverability and useful lives of our long-lived assets and other intangible assets. This
could result in additional impairment charges, a reduction of remaining useful lives and
acceleration of amortization expense. |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Estimates Form 10-K
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Fresh Start Accounting Page 54 |
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The Company will adopt fresh start accounting and reporting on the Fresh Start Reporting
Date, February 1, 2010, in accordance with FASB ASC 852, as the holders of existing voting shares immediately before confirmation of the Plan received less than 50% of the emerging
entity and the reorganization value of the Companys assets was less than its post-petition
liabilities and allowed claims. Under FASB ASC 852, the reorganization value represents the
fair value of the entity before considering liabilities and approximates the amount a
willing buyer would pay for the assets of the Company immediately after restructuring. The
reorganization value is allocated to the respective fair value of assets. The excess
reorganization value over the fair value of identified tangible and intangible assets is
recorded as goodwill. Liabilities, other than deferred taxes, are stated at present values
of amounts expected to be paid. Fair values of assets and liabilities represent our best
estimates based on independent appraisals and valuations. Where the foregoing are not
available, industry data and trends or references to relevant market rates and transactions
are used. These estimates and assumptions are subject to significant uncertainties beyond
our reasonable control. In addition, the market value of our common stock may differ
materially from the fresh start equity valuation. |
Item 1. Financial Statement and Supplemental Data Form 10-Q
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The preparation of financial statements in conformity with 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 |
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determination of recoverability of long-lived assets, sales allowances, allowances for
doubtful accounts, depreciation and amortization, employee benefit plans expense,
restructuring reserves, deferred income taxes, certain estimates pertaining to liabilities
under FASB ASC 740, certain assumptions pertaining to our stock-based awards, certain
estimates associated with liabilities classified as liabilities subject to compromise, and
certain estimates and assumptions used in our impairment evaluation of goodwill,
definite-lived intangible assets and other long-lived assets, among others. |
Summary Conclusion
In conclusion, due to the volatility we have experienced related to key inputs, estimates and
assumptions used in our cash flow projections, which we believe was caused by market and economic
factors beyond our reasonable control, it was necessary to update our business plan and projections
during the second quarter of 2010 in order to reflect current trending and outlook over our five
year projection period. Based on this update, coupled with a significant decline in our debt and
equity fair value subsequent to our emergence from Chapter 11, we could not support the previous
concluded enterprise value and goodwill recorded in fresh start accounting. Therefore, we were
required to recognize a goodwill impairment charge of $752.3 million during the three months ended
June 30, 2010.
Note 7 Derivative Financial Instruments, Page 37
17. You have noted that during the three and five months ended June 30, 2010, you had
reclassified $7.1 million and $8.7 million, respectively, of hedging losses related to the interest
rate swaps and interest rate caps into earnings. Since you had not designated these instruments in
a cash flow hedging relationship, what were the reclassifications related to?
Response
As noted on page 33 of our Form 10-Q, none of the Companys interest rate swaps and interest rate
caps have been designated as cash flow hedges. Therefore, the Company does not benefit from cash
flow hedge accounting treatment under Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) 815, Derivatives and Hedging (ASC 815). The term that should be
used for the disclosure is recorded rather than reclassified and we will revise such disclosure
in future filings. In addition, in order to eliminate ambiguity, the Company will remove the term
hedging from the disclosure included in future filings.
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Note 13 Dex One Corporation (Parent Company) Financial Statements, Page 43
18. Please expand your disclosure to explain in more detail the nature of the restrictions on you
and your operating subsidiaries, specifically the use of proceeds generated to satisfy any
obligations at the parent level. In addition, please quantify the amount of the restricted net
assets, as required by Rule 4-08(e)(3)(ii) of Regulation S-X.
Response
Based upon an analysis of Regulation S-X 210.5-04, the Company concluded that condensed parent
company financial information was required to be disclosed in our Form 10-Q. The agreements
governing our operating subsidiaries credit facilities contain usual and customary representations
and warranties as well as affirmative and negative covenants. The Company had previously disclosed
certain covenant limitations and restrictions in Risk Factor 2 on pages 17-18 of our Form 10-K,
which have not changed and have not required an update during 2010. In addition, on page 43 of our
Form 10-Q, the Company disclosed In general, substantially all of the net assets of the Company
and its subsidiaries are restricted from being paid as dividends to any third party, and our
subsidiaries are restricted from paying dividends, loans or advances to us with very limited
exceptions, under the terms of our amended and restated credit facilities. The very limited
exceptions noted in the statement above are presented below in Proposed Language for 2010 Form
10-K. Since the Company believes that the very limited exceptions noted below are immaterial in
determining restricted net assets, our position is that restricted net assets as of June 30, 2010
were materially quantifiable based upon information presented in the Condensed Parent Company
Balance Sheet at June 30, 2010.
Regarding the nature of the restrictions on the Company and its operating subsidiaries,
specifically the use of proceeds generated to satisfy any obligations at the parent level, as
certain important and relevant information to your request has been disclosed in our Form 10-K and
Form 10-Q, we respectfully request the Staffs permission to commence the expanded disclosure noted
below in our December 31, 2010 Form 10-K.
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Proposed Language for 2010 Form 10-K
At the request of the Staff and to provide additional detail on the nature and restrictions of the
use of proceeds to satisfy any obligations at the parent level, we will provide the following
disclosure in the Parent Company footnote of our December 31, 2010 Form 10-K.
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 amended and restated credit facilities, each of the Companys operating subsidiaries are
permitted to fund a share of the Parent Companys interest obligations on the $300.0 million
aggregate principal amount 12%/14% Senior Subordinated Notes due 2017 (Dex One Senior Subordinated
Notes). In addition, each of the operating subsidiaries is permitted to send up to $5 million
annually to the Parent Company for its use on an unrestricted basis. 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. 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. Excluding the very limited exceptions
noted above, all of the net assets of the Company and its subsidiaries are restricted from being
paid as dividends to any third party, and our subsidiaries are restricted from paying dividends,
loans or advances to us under the terms of our amended and restated credit facilities.
Liquidity and Capital Resources, Page 72
19. Please expand to discuss the restrictions that have triggered Parent Company financials and
the effect it may have on the Companys meeting its obligations, specifically obligations that are
at the parent company level.
Response
As noted in our response to Comment 18 above, the Company has disclosed detail of the restrictive
covenants under our debt agreements under Risk Factor 2 on pages 17-18 of our Form 10-K, which have
not changed and have not required an update during 2010.
In that risk factor, the Company also states that Our ability to maintain compliance with these
financial covenants during 2010 is dependent on various factors, certain of which are outside of
our control. Such factors include our ability to generate sufficient revenues and cash flows from
operations, our ability to achieve reductions in our outstanding indebtedness, changes in interest
rates and the impact on earnings, investments and liabilities. In conjunction with that risk
factor, on page 74 of our Form 10-Q, Item 2 Management Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Cash Flows, the Company states, Based on
current financial projections, but in any event for the next 12-15 months, the Company expects to
be able to continue to generate cash flows from operations in amounts sufficient to fund
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operations and capital expenditures, as well as meet debt service requirements. However, no
assurances can be made that our business will generate sufficient cash flows from operations to
enable us to fund these prospective cash requirements. We believe this disclosure addresses the
Companys liquidity and capital resources for the reporting period and future periods as a whole,
including the parent company level. However, in order to provide additional detail on the nature
and restrictions that have triggered parent company financials and the effect the restrictions may
have on the Companys meeting its obligations, specifically obligations that are at the parent
company level, we respectfully request the Staffs permission to commence the expanded disclosure
noted below in our December 31, 2010 Form 10-K.
Proposed Language for 2010 Form 10-K
As provided for in our amended and restated credit facilities, each of the Companys operating
subsidiaries are permitted to fund a share of the Companys interest obligations on the $300.0
million aggregate principal amount 12%/14% Senior Subordinated Notes due 2017 (Dex One Senior
Subordinated Notes). In addition, each of our operating subsidiaries is permitted to send up to $5
million annually to the Company for its use on an unrestricted basis. Other funds, based on a
percentage of each operating subsidiaries excess cash flow, as defined in each credit agreement,
may be provided to the Company to fund specific activities, such as acquisitions. Lastly, our
operating subsidiaries fund on a proportionate basis those expenses paid by the Company to fund the
daily operations of our operating subsidiaries. Excluding the very limited exceptions noted above,
all of the net assets of the Company and its subsidiaries are restricted from being paid as
dividends to any third party, and our subsidiaries are restricted from paying dividends, loans or
advances to us under the terms of our amended and restated credit facilities.
The Company currently believes that the limitations and restrictions imposed by our amended and
restated credit facilities noted above will not impact our ability to fund operations and capital
expenditures as well as meet debt service requirements, specifically at the parent company level.
However, no assurances can be made that these limitations and restrictions will not have an impact
on our ability to fund operations and capital expenditures as well as meet debt service
requirements specifically at the parent company level in the future.
* * * * * *
The Company acknowledges that:
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the Company is responsible for the adequacy and accuracy of the disclosures in its
filings, |
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Staff comments or changes to disclosure in response to Staff comments do not
foreclose the Commission from taking any action with respect to the filings, and |
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the Company may not assert Staff comments as a defense in any proceeding initiated
by the Commission or any person under the federal securities laws of the United
States. |
We have provided this response letter to you via facsimile, as well as through EDGAR submission, to
facilitate an expeditious resolution to any remaining comments the Staff may have.
Please contact me at (919) 297-1116 should you wish to discuss any of the Companys responses.
Thank you for your continuing attention to this matter.
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Sincerely, |
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/s/ Steven M. Blondy |
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Steven M. Blondy |
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Executive Vice President and Chief Financial Officer
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cc:
Mark Hianik, Esq.
Brandon Hill
Rahim Ismail
Celeste Murphy
Carlos Pacho
Larry Spirgel
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