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DEXO > SEC Filings for DEXO > Form 10-Q on 30-Oct-2012All Recent SEC Filings

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Form 10-Q for DEX ONE CORP


30-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information
Certain statements contained in this Quarterly Report on Form 10-Q regarding Dex One Corporation and its direct and indirect wholly-owned subsidiaries ("Dex One," the "Company," "we," "us" and "our") future operating results, performance, business plans or prospects and any other statements not constituting historical fact are "forward-looking statements" subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Where possible, words such as "believe," "expect," "anticipate," "should," "will," "would," "planned," "estimated," "potential," "goal," "outlook," "may," "predicts," "could," or the negative of those words and other comparable expressions, are used to identify such forward-looking statements. All forward-looking statements reflect our current beliefs and assumptions with respect to our future results, business plans and prospects, based on information currently available to us and are subject to significant risks and uncertainties. Accordingly, these statements are subject to significant risks and uncertainties and our actual results, business plans and prospects could differ significantly from those expressed in, or implied by, these statements. We caution readers not to place undue reliance on, and we undertake no obligation to update, other than as imposed by law, any forward-looking statements. Such risks, uncertainties and contingencies include, but are not limited to, statements about Dex One's future financial and operating results, our plans, objectives, expectations and intentions and other statements that are not historical facts. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: (1) the continuing decline in the use of print directories; (2) increased competition, particularly from existing and emerging digital technologies; (3) ongoing weak economic conditions and continued decline in print advertising sales; (4) our ability to collect trade receivables from customers to whom we extend credit; (5) our ability to generate sufficient cash to service our debt;
(6) our ability to comply with the financial covenants contained in our debt agreements and the potential impact to operations and liquidity as a result of restrictive covenants in such debt agreements; (7) our ability to refinance or restructure our debt on reasonable terms and conditions as might be necessary from time to time; (8) increasing interest rates; (9) changes in the Company's and the Company's subsidiaries credit ratings; (10) changes in accounting standards; (11) regulatory changes and judicial rulings impacting our business;
(12) adverse results from litigation, governmental investigations or tax related proceedings or audits; (13) the effect of labor strikes, lock-outs and negotiations; (14) successful realization of the expected benefits of acquisitions, divestitures and joint ventures; (15) our ability to maintain agreements with CenturyLink and AT&T and other major Internet search and local media companies; (16) our reliance on third-party vendors for various services; and (17) other events beyond our control that may result in unexpected adverse operating results. Additional risks and uncertainties are described in detail in Part I - Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2011.

With respect to the proposed merger between Dex One and SuperMedia Inc. ("SuperMedia") noted below, important factors could cause actual results to differ materially from those indicated by forward-looking statements included herein, including, but not limited to, (1) the ability of Dex One and SuperMedia to consummate the transaction on the terms set forth in the Merger Agreement, which is defined below; (2) the risk that anticipated cost savings, growth opportunities and other financial and operating benefits as a result of the transaction may not be realized or may take longer to realize than expected; (3) the risk that benefits from the transaction may be significantly offset by costs incurred in integrating the companies; (4) potential adverse impacts or delay in completing the transaction as a result of obtaining consents from lenders to Dex One or SuperMedia; (5) failure to receive the approval of the stockholders of either Dex One or SuperMedia for the transaction; and (6) difficulties in connection with the process of integrating Dex One and SuperMedia, including (i) coordinating geographically separate organizations; (ii) integrating business cultures, which could prove to be incompatible; (iii) difficulties and costs of integrating information technology systems; and (iv) the potential difficulty in retaining key officers and personnel. Additional risks and uncertainties associated with the proposed merger are described in detail in Part II - Item 1A. "Risk Factors," in this Quarterly Report on Form 10-Q.


Recent Trends and Developments Related to Our Business

Agreement and Plan of Merger

On August 20, 2012, Dex One entered into an Agreement and Plan of Merger (the "Merger Agreement") with SuperMedia, Newdex, Inc., a direct wholly owned subsidiary of the Company ("Newdex"), and Spruce Acquisition Sub, Inc., a direct wholly owned subsidiary of Newdex ("Merger Sub"). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, (i) Dex One will merge with and into Newdex, with Newdex as the surviving entity (the "Dex Merger") and (ii) immediately following consummation of the Dex Merger, Merger Sub will merge with and into SuperMedia, with SuperMedia as the surviving entity and becoming a direct wholly owned subsidiary of Newdex (the "SuperMedia Merger" and together with the Dex Merger, the "Mergers"). As a result of the Mergers, Newdex, as successor to Dex One, will be renamed Dex Media, Inc. ("Dex Media") and become a newly listed company.

See Item 1, "Financial Statements (Unaudited)" - Note 1, "Business and Basis of Presentation - Agreement and Plan of Merger" for summarized information on the Merger Agreement. In addition, please refer to the Merger Agreement filed with a Current Report on Form 8-K/A with the Securities and Exchange Commission on August 23, 2012 for detailed information on the terms and conditions of the Merger Agreement.

Significant Financing Developments

On March 20, 2012, the Company announced the commencement of a cash tender offer to purchase the maximum aggregate principal amount of our outstanding $300.0 million Initial Aggregate Principal Amount of 12%/14% Senior Subordinated Notes due 2017 ("Dex One Senior Subordinated Notes") for $26.0 million. See Item 1, "Financial Statements (Unaudited)" - Note 1, "Business and Basis of Presentation
- Significant Financing Developments" for additional information on the cash tender offer to repurchase the Dex One Senior Subordinated Notes. On April 19, 2012, under the terms and conditions of the Offer to Purchase, the Company utilized cash on hand of $26.5 million to repurchase $98.2 million aggregate principal amount of Dex One Senior Subordinated Notes, representing 27% of par value ("Note Repurchases"). The Note Repurchases have been accounted for as an extinguishment of debt resulting in a non-cash, pre-tax gain of $70.8 million during the nine months ended September 30, 2012, consisting of the difference between the par value and purchase price of the Dex One Senior Subordinated Notes, offset by fees associated with the Note Repurchases. The following table provides the calculation of the net gain on Note Repurchases for the nine months ended September 30, 2012:

                                                                Nine Months Ended September
                                                                         30, 2012
Dex One Senior Subordinated Notes (repurchased at 27% of par)   $              98,222
Total purchase price                                                          (26,520 )
Fees associated with the Note Repurchases                                        (910 )
Net gain on Note Repurchases                                    $              70,792

On March 9, 2012, R.H. Donnelley Inc. ("RHDI"), Dex Media East, Inc. ("DME Inc.") and Dex Media West, Inc. ("DMW Inc.") each entered into the First Amendment (the "Amendments") to the amended and restated RHDI credit facility ("RHDI Amended and Restated Credit Facility"), the amended and restated DME Inc. credit facility ("Dex Media East Amended and Restated Credit Facility") and the amended and restated DMW Inc. credit facility ("Dex Media West Amended and Restated Credit Facility") (collectively, the "Credit Facilities"), respectively, with certain financial institutions. The Amendments permit RHDI, DME Inc. and DMW Inc. to make open market repurchases and retire loans under their respective Credit Facilities at a discount to par through December 31, 2013, provided that such discount is acceptable to those lenders who choose to participate. See Item 1, "Financial Statements (Unaudited)" - Note 1, "Business and Basis of Presentation - Significant Financing Developments" for additional information on the Amendments and the offers to repurchase loans under the respective Credit Facilities.

On March 23, 2012, RHDI, DME Inc. and DMW Inc. collectively utilized cash on hand of $69.5 million to repurchase loans under the Credit Facilities of $142.1 million ("Credit Facility Repurchases"). The Credit Facility Repurchases have been accounted for as an extinguishment of debt resulting in a non-cash, pre-tax gain of $68.8 million during the nine months ended September 30, 2012, consisting of the difference between the par value and purchase price of the Credit Facilities, offset by accelerated amortization of fair value adjustments to our Credit Facilities that were recognized in conjunction with our adoption of fresh start accounting and fees associated with the Credit Facility Repurchases. The following table provides detail of the Credit Facility Repurchases and the calculation of the net gain on Credit Facility Repurchases for the nine months ended September 30, 2012:


Nine Months Ended September 30, 2012 RHDI Amended and Restated Credit Facility (repurchased at 43.5%

of par)                                                         $              91,954
Dex Media East Amended and Restated Credit Facility
(repurchased at 53.0% of par)                                                  23,585
Dex Media West Amended and Restated Credit Facility
(repurchased at 64.0% of par)                                                  26,593
Total Credit Facilities repurchased                                           142,132
Total purchase price                                                          (69,519 )
Accelerated amortization of fair value adjustments to Credit
Facilities                                                                     (2,002 )
Fees associated with the Credit Facility Repurchases                           (1,848 )
Net gain on Credit Facility Repurchases                         $              68,763

The Note Repurchases and the Credit Facility Repurchases are hereby collectively referred to as the "Debt Repurchases." The net gains on Debt Repurchases for the nine months ended September 30, 2012 were $139.6 million.

Results of Operations

As discussed in "Results of Operations" below, we continue to experience lower revenues, advertising sales and bookings related to our print products primarily as a result of declines in new and recurring business, including both renewal and incremental sales to existing advertisers, mainly driven by (1) customer attrition, (2) declines in overall advertising spending by our customers, (3) the significant impact of the weak local business conditions on consumer spending in our clients' markets, (4) an increase in competition and more fragmentation in local business search and (5) the migration of customers to digital marketing solutions. However, despite the challenges associated with our print products, we have seen growth in our digital revenues, advertising sales and bookings driven by new partnerships, a focus on providing targeted solution bundled packages to our customers, new digital products and services and the migration of customers to digital marketing solutions. These advancements have helped partially offset the decline in print revenues, advertising sales and bookings.

The Company currently projects that these challenging conditions associated with our print products will continue for the foreseeable future, and, as such, our print revenues, advertising sales and bookings, as well as overall operating results, cash flow and liquidity, will continue to be adversely impacted. Therefore, the Company's historical operating results will not be indicative of future operating performance, although our long-term financial forecast currently anticipates no material improvement in local business conditions in our markets until 2013 at the earliest.

As more fully described below in "Results of Operations - Net Revenues," our method of recognizing print revenue under the deferral and amortization method results in delayed recognition of advertising sales whereby recognized revenues reflect the amortization of advertising sales consummated in prior periods as well as advertising sales consummated in the current period. Accordingly, the Company's projected decline in print advertising sales will result in a decline in print revenues recognized in future periods. In addition, any improvements in local business conditions that are anticipated in our long-term financial forecast noted above will not have a significant immediate impact on our print revenues.

Our Plan

As more fully described in Part I - Item 1, "Business" of our Annual Report on Form 10-K for the year ended December 31, 2011, we are a marketing solutions company that helps local businesses and consumers connect with each other. Our proprietary and affiliate provided marketing solutions combine multiple media platforms, which help drive large volumes of consumer leads to our customers, and assist our customers in managing their presence among those consumers. Our proprietary marketing solutions include our Dex published yellow pages directories, our Internet yellow pages site, DexKnows.com and our mobile applications, Dex Mobile and CityCentral. Our digital lead generation solutions are powered by our search engine marketing product, DexNet, which extends our customers' reach to our leading Internet and mobile partners to attract consumers searching for local businesses, products and services within our markets.


In conjunction with the Company's continuous evaluation of strategic alternatives in response to the challenging industry and economic environment we face, in August 2012, we announced the proposed merger between Dex One and SuperMedia. The purpose of this proposed transaction is to increase market share and improve our competitive position while benefiting from improved operating scale, significant service and cost synergies and enhanced cash flow, preserving access to tax attributes to offset future taxable income, and to better position the combined entity to retire debt with amended and extended credit facilities. Completion of the proposed merger is subject to certain conditions noted in the Merger Agreement. See "Forward-Looking Information" and "Recent Trends and Developments Related to Our Business - Agreement and Plan of Merger" above for additional information on the proposed merger.

Separate from the proposed merger, the Company continues to work on improving the value we deliver to our customers by (1) providing targeted solution bundles that combine offline and online media platforms, which includes our Dex Guaranteed Actions ("DGA") program and (2) expanding the number of platforms and media through which we deliver their message to consumers. Our growing list of marketing solutions includes local business and market analysis, message and image creation, target market identification, advertising and digital profile creation, web sites, mobile web sites, reputation management, online video development and promotion, keyword optimization strategies and programs, distribution strategies, social strategies and tracking and reporting. In addition, as the Company continues to transition to a compete-and-collaborate business model, we believe that partnerships will enable us to offer a broader and more robust array of products and services to our customers than we would be able to do on a proprietary basis and without the risks, capital investment, and ongoing maintenance associated with development in house.

We also continue to invest in our business and our people through strategic programs, initiatives and technology such as: (1) the Dex One Account Management System, which provides the ability for customers to log in and make real-time changes to their online marketing as well as view real-time performance data and also enables our marketing consultants to construct proposals on their mobile devices wherever they may be, (2) the Dex One Sales Academy, which provides initial training, ongoing knowledge and skills enhancement, and additional support to marketing consultants throughout the business, (3) the Digital Media Learning Program, which provides our marketing consultants the resources needed to obtain a Google sales certification, and (4) sales force technology, with the introduction of Webex virtual sales presentations for our telephone marketing consultants and the purchase of iPads for our premise marketing consultants. We recently made a strategic change to centralize the telephone marketing consultants from our local markets to three inside sales center locations in Overland Park, Kansas, Denver, Colorado and Omaha, Nebraska. In these locations we expect to be able to leverage scale of resources to allow greater efficiency and focus equally across the geography we serve as well as out of market opportunities. We also expect to be able to utilize state of the art telephone technology to increase reach, contact rates and efficiencies. The Overland Park center was fully staffed in 2011 and the Denver and Omaha centers were fully staffed during 2012. As local business conditions recover in our markets, we believe these strategic investments will help us drive incremental revenue over time.

We continue to actively manage expenses and are considering and acting upon various initiatives and opportunities to streamline operations and reduce our cost structure. One such initiative centers around print product optimization ("PPO") and the evaluation of all print related expenses and processes. The focus of PPO includes initiatives such as transforming our print product's design and content as well as distribution optimization. We believe that PPO will drive significant savings in annual print costs while continuing to provide valuable products and quality service to our customers. We also continue to assess our organizational structure to ensure it properly supports our base of business and is optimized to compete in a rapidly evolving marketplace.

In addition to the proposed merger and associated refinancing of our Credit Facilities, the Company continues to evaluate all options for reducing leverage, extending the maturities of our Credit Facilities and reducing refinancing risk in response to the challenging industry and economic environment we face. The Company's strategic objective is to build on our existing strengths and assets to maximize value for our shareholders and other constituents. The Company has recently taken significant steps towards reducing its leverage by obtaining the Amendments to our Credit Facilities in March 2012, which resulted in the repurchase of $142.1 million of loans under our Credit Facilities at a purchase price of $69.5 million. In addition, in April 2012 we repurchased $98.2 million aggregate principal amount of Dex One Senior Subordinated Notes for a purchase price of $26.5 million. We retain the option of making additional repurchases of our outstanding debt below par in the future, as permitted. The Company also continues to assess additional alternatives for the strategic objectives noted above including, but not limited to, further amendments to our Credit Facilities, obtaining additional financing and/or refinancing our existing indebtedness, and partnerships both within our industry and in complementary industries.


Liquidity and Going Concern Analysis

As more fully described below in "Liquidity and Capital Resources," the Company's primary sources of liquidity are existing cash on hand and cash flows generated from operations and our primary liquidity requirements are to fund operations and service our indebtedness. The Company's projected decline in print advertising sales will result in a decline in cash flows in future periods. In addition, while improvements in local business conditions are anticipated in our long-term financial forecast as noted above, these improvements will not have a significant immediate impact on our cash flows. Lastly, on October 25, 2012, the Company announced that possible alternatives to the current transaction structure to effect the Mergers include a "prepackaged" restructuring of Dex One and SuperMedia's senior secured indebtedness through proceedings instituted under Chapter 11 of the Bankruptcy Code to implement possible amendments that may garner sufficient, though not unanimous, support from Dex One and SuperMedia's lenders while otherwise maintaining the basic economic terms of the Merger Agreement. At this time, amendments to Dex One and SuperMedia's senior secured term loans and completion of the proposed merger are not contingent on the prepackaged restructuring alternative.

Despite these conditions and circumstances, based on current financial projections, which do not include the impact of the proposed merger with SuperMedia but do include the impact of projected growth in our digital operations, the recent repurchases of our outstanding debt below par and continuous expense management, the Company expects to be able to continue to generate cash flows from operations in amounts sufficient to fund operations and meet debt service requirements for at least the next 12-15 months.

Impairment and Useful Life Analysis

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. 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.

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. The Company evaluated the remaining useful lives of definite-lived intangible assets and other long-lived assets during the first quarter of 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 of 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. See Item 1, "Financial Statements (Unaudited)" - Note 2, "Summary of Significant Accounting Policies - Identifiable Intangible Assets" for additional information. 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. 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 current weighted average useful lives continue to be deemed appropriate.

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.

Climate Change

There is a growing concern about global climate change and the emissions of carbon dioxide. This concern has led to the possibility of federal climate change legislation as well as litigation relating to greenhouse gas emissions. While we cannot predict the impact of any proposed legislation until final, we do not believe current regulation or litigation related to global climate change is likely to have a material impact on our business, future financial position, results of operations and cash flow. Accordingly, our current financial projections do not include any impact of climate change regulation or litigation.


Healthcare Reform Legislation
During March 2010, the Patient Protection and Affordable Care Act and the Healthcare and Education Reconciliation Act of 2010 were signed into law. There has been no significant impact on our financial position, results of operations or cash flows as a result of this new legislation and we do not anticipate any significant impact in the foreseeable future. Segment Reporting

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

New Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board ("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, . . .

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