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DXM > SEC Filings for DXM > Form 10-Q on 26-Apr-2013All Recent SEC Filings

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Form 10-Q for SUPERMEDIA INC.


26-Apr-2013

Quarterly Report


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

Overview

SuperMedia Inc. ("SuperMedia," "we," "our," "us" or the "Company"), is one of the largest yellow pages directory publishers in the United States as measured by revenue. We also offer digital advertising solutions. We place our clients' business information into our portfolio of local media solutions, which includes the Superpages directories, Superpages.com, our digital local search resource on both desktop and mobile devices, the Superpages.com network, a digital syndication network that places local business information across more than 250 websites, and our mobile sites and mobile applications. In addition, we offer solutions for social media, digital content creation and management, reputation management and search engine optimization.

We primarily operate and are the official publisher in the markets in which Verizon Communications Inc. ("Verizon"), or its formerly owned properties now owned by FairPoint Communications, Inc. ("FairPoint") and Frontier Communications Corporation ("Frontier"), are the incumbent local exchange carriers. We use their brands on our print directories in these and other specified markets. We have a number of agreements with them that govern our publishing relationship, including publishing agreements, branding agreements, and non-competition agreements, each of which has a term expiring in 2036.

Basis of Presentation

The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). Pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"), the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring items and accruals, necessary to fairly present the financial position, results of operations and cash flows of SuperMedia Inc. and its subsidiaries. These unaudited interim financial statements do not contain all information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP and, as such, should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2012. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of results of operations for the 2013 fiscal year.

The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements. Certain prior period amounts have been reclassified to conform to current year presentation.

Bankruptcy Filing and Proposed Merger with Dex One

Bankruptcy Filing

On March 18, 2013, SuperMedia and all of its domestic subsidiaries filed voluntary bankruptcy petitions in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") for reorganization relief under the provisions of Chapter 11 of the Bankruptcy Code. Concurrently with the bankruptcy petition, SuperMedia filed and requested confirmation of a prepackaged plan of reorganization (the "prepackaged plan"). The prepackaged plan seeks to effect the proposed merger and related transactions contemplated by our Merger Agreement (as defined below) with Dex One Corporation ("Dex One"), which is discussed in more detail below. Also on March 18, 2013, Dex One and its domestic subsidiaries filed separate voluntary bankruptcy petitions in the Bankruptcy Court, and Dex One is seeking approval of its separate prepackaged plan of reorganization (together with SuperMedia's prepackaged plan, the "prepackaged plans").

The Merger Agreement allows us to complete the proposed merger and the other transactions contemplated by the Merger Agreement, including required amendments (the "financing amendments") to SuperMedia's and Dex One's respective credit agreements (collectively, the "transaction") through Chapter 11 cases, if either SuperMedia or Dex One does not obtain its stockholders' approval of the Merger Agreement or unanimous lender approval of the financing amendments.

At a special meeting on March 13, 2013, our stockholders voted to approve and adopt the Merger Agreement and the proposed merger in the event that we were able to obtain unanimous lender approval of the transaction. In addition, prior to the March 13, 2013 voting deadline, our stockholders and lenders voted to accept the prepackaged plan in the event that we were unable to obtain unanimous lender approval of the transaction and, alternatively,


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elected to effect the transaction through Chapter 11 cases. Similarly, Dex One's stockholders also voted to approve and adopt the Merger Agreement and the proposed merger in the event that Dex One was able to obtain unanimous lender approval of the transaction, and Dex One's stockholders and lenders voted to accept the prepackaged plan in the event Dex One was not able to obtain unanimous lender approval of the transaction.

Subsequent to the special meeting, our board of directors determined that we had not obtained the unanimous lender approval required to effect the transaction outside of court. Accordingly, on March 18, 2013, we filed our voluntary bankruptcy petition in order to seek approval of the prepackaged plan and the completion of the transaction. The hearing to consider confirmation of the prepackaged plan is scheduled to commence on April 29, 2013 with April 18, 2013 as the last date for filing and serving objections to confirmation of the prepackaged plan.

There can be no assurance that the Bankruptcy Court will confirm the prepackaged plans in a timely manner. While operating under Chapter 11, the Company's operations are subject to oversight by the Bankruptcy Court, which could lead to uncertainties as to the realization of assets and satisfaction of obligations in the normal course of business.

Our prepackaged plan, including the effects of the transaction, could result in changes to our current debt and equity ownership structure. The prepackaged plan and the effects of the transaction will also result in our assets and liabilities being re-valued under applicable accounting guidelines.

Merger Agreement

On August 20, 2012, SuperMedia, Dex One, Newdex Inc. ("Newdex"), and Spruce Acquisition Sub, Inc. ("Merger Sub") entered into an Agreement and Plan of Merger (the "Original Merger Agreement," and as amended and restated, the "Merger Agreement"), providing for a business combination of SuperMedia and Dex One. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Dex One will be merged with and into Newdex, with Newdex continuing as the surviving corporation, and Merger Sub will be merged with and into SuperMedia, with SuperMedia continuing as the surviving corporation (the "Mergers"). As a result of the Mergers, Newdex will become a newly listed company and SuperMedia will become a direct wholly owned subsidiary of Newdex.

Following the announcement of the proposed Mergers, the current senior secured lenders for SuperMedia and Dex One formed a joint steering committee to evaluate the proposed amendments to the parties' respective credit agreements as set forth in the Original Merger Agreement.

On December 5, 2012, SuperMedia, Dex One, Newdex, and Merger Sub entered into an Amended and Restated Agreement and Plan of Merger which amended and restated the Original Merger Agreement to, among other things, (i) extend the date on which a party may unilaterally terminate the Merger Agreement from December 31, 2012 to June 30, 2013, (ii) reduce the number of directors of Newdex after the effectiveness of the Mergers from eleven to ten, and (iii) provide that if either Dex One or SuperMedia is unable to obtain the requisite consents to the Mergers from its stockholders and to the contemplated amendments to its respective financing agreements from its senior secured lenders, the Mergers could be effected through the prepackaged plans.

Also on December 5, 2012, we entered into a Support and Limited Waiver Agreement (the "Support Agreement") with certain of our senior secured lenders and the administrative agent under our senior secured credit facility. The Support Agreement sets forth the obligations and commitments of the parties with respect to the transaction. Specifically, the lenders party to the Support Agreement agreed, subject to the terms of the Support Agreement, (i) to support and take reasonable action in furtherance of the financing amendments and the Support Agreement, (ii) to timely vote to accept our prepackaged plan, and (iii) in the event that we elected to effect the Mergers through Chapter 11 cases, (a) to support approval of our lender disclosure statement and confirmation of our prepackaged plan, (b) to support certain relief to be requested by SuperMedia from the Bankruptcy Court, (c) to refrain from taking any action inconsistent with the confirmation of our prepackaged plan, and (d) not to propose, support, solicit, or participate in the formulation of any plan other than our prepackaged plan. On the same date, Dex One entered into a support agreement on substantially similar terms with the lenders and administrative agents under its senior secured credit facilities.

Subject to the terms of the Merger Agreement, which has been approved by the boards of directors of SuperMedia and Dex One, in each case by the unanimous vote of all directors voting (Messrs. Slater and McDonald, directors who may be deemed to have personal interests in the transaction, abstained from voting), at the effective


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time of the Mergers, (i) each outstanding share of Dex One common stock (other than shares held by SuperMedia, Dex One, Newdex or any of their respective subsidiaries) will be converted into the right to receive 0.20 shares of Newdex common stock, par value $0.001 per share (the "Newdex Common Stock"), which reflects a 1-for-5 reverse stock split of Dex One common stock, and (ii) each outstanding share of SuperMedia common stock (other than shares held by SuperMedia, Dex One, Newdex or any of their respective subsidiaries) will be converted into the right to receive 0.4386 shares of Newdex Common Stock. Outstanding SuperMedia stock options will be cancelled at the effective time of the Mergers and, to the extent that SuperMedia's closing stock price on the date of the Mergers exceeds the option strike price, will be settled in cash. All other outstanding SuperMedia equity awards will generally convert into Newdex Common Stock, after giving effect to the exchange ratio. Immediately after the completion of the Mergers, we anticipate that current SuperMedia stockholders will own approximately 40% and current Dex One stockholders will own approximately 60% of Newdex, the combined company.

Completion of the Mergers is subject to conditions, including, among others:
(i) the Bankruptcy Court having confirmed the prepackaged plan of reorganization of such party substantially in the form provided in the Merger Agreement,
(ii) SuperMedia and Dex One, and certain of their respective subsidiaries, having entered into a tax sharing agreement and a shared services agreement, and
(iii) authorization having been obtained for the listing on the New York Stock Exchange or the Nasdaq Stock Market of the Newdex Common Stock to be issued as consideration in the Mergers.

As more fully described below, we are a party to that certain loan agreement with certain financial institutions and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (as amended, the "Loan Agreement"), providing for the issuance of $2,750 million of senior secured term loans with a maturity date of December 31, 2015. As part of the prepackaged plan, the Loan Agreement will be amended and restated to extend the maturity date to December 31, 2016 as well as modify certain other provisions, including the revision of interest rate spreads as follows:

                  ABR    Eurodollar
Current Spread   7.00%     8.00%
Revised Spread   7.60%     8.60%

The prepackaged plan will effect the transactions contemplated by the Merger Agreement, including the financing amendments, the tax sharing agreement and the shared services agreement.

The Merger Agreement contains certain termination rights for both SuperMedia and Dex One, including, among others, if the Mergers are not consummated on or before June 30, 2013. The Merger Agreement further provides that, upon termination of the Merger Agreement under specified circumstances following receipt from or announcement by a third party of an alternative transaction proposal, including termination of the Merger Agreement by SuperMedia or Dex One as a result of an adverse change in the recommendation of the Mergers by the other party's board of directors, SuperMedia may be required to pay to Dex One, or Dex One may be required to pay to SuperMedia, an expense reimbursement up to a maximum amount of $7.5 million.

The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The ability of the Company to continue as a going concern is predicated upon, among other things, the successful completion of the SuperMedia prepackaged plan. While the Company is committed to pursuing completion of the SuperMedia prepackaged plan and the Mergers, there can be no assurance that the SuperMedia prepackaged plan will be approved as submitted to the Bankruptcy Court; and therefore, there is uncertainty about the Company's ability to realize its assets or satisfy its liabilities in the normal course of business. The Company's consolidated financial statements do not include any adjustments that might result from this uncertainty.

The Company is currently operating as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of Chapter 11 of the Bankruptcy Code and orders of the Bankruptcy Court. In general, debtors-in-possession are authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without prior approval of the Bankruptcy Court. The Company business continues to generate positive cash flow necessary for daily operations.

While operating under bankruptcy, applicable accounting guidance requires that the financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations


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of the business. Accordingly, certain expenses (including professional fees), realized gains and losses and provisions for losses that are realized from the reorganization and restructuring process will be classified as reorganization items on the consolidated statements of comprehensive income. There were no reorganization items during the three months ended March 31, 2013. Based on the terms of the prepackaged plan, no liabilities were identified as being subject to compromise at March 31, 2013.

On March 21, 2013, we received notice from The NASDAQ Listing Qualifications Staff (the "Staff") stating that the Staff has determined that the Company's securities will be delisted from The NASDAQ Stock Market LLC. The decision was reached by the Staff under NASDAQ Listing Rules 5101, 5110(b) and IM-5101-1 following the Company's announcement on March 18, 2013 that it and all of its domestic subsidiaries filed voluntary bankruptcy petitions and requested confirmation of the prepackaged plan. Pursuant to the procedures set forth in the NASDAQ Listing Rules, we have appealed the Staff's determination to the NASDAQ Hearings Panel.

Advertising Sales and Revenue

We have been experiencing reduced advertising sales and revenue over the past several years driven by reduced advertiser spending, reflecting continued competition from other advertising media (including the Internet, cable television, newspaper and radio) and a weak economy. For the three months ended March 31, 2013, net advertising sales declined 17.0% compared to the same period in 2012. For the three months ended March 31, 2012, net advertising sales declined 17.0% compared to the same period in 2011. If the factors driving these declines continue, then we will continue to experience declining advertising sales and revenues.

Advertising sales for the three months ended March 31, 2011 included negative adjustments of $9 million related to the financial distress and operational wind down of a single certified marketing representative in our third-party national sales channel. Excluding this impact, advertising sales for the three months ended March 31, 2012 would have reflected a decline of 18.9%. As of June 2011, these accounts have been transitioned to other certified marketing representative firms.

To mitigate the effect of declining advertising sales and revenues, we continue to actively manage expenses and streamline operations to reduce our cost structure.

Results of Operations

The financial information and the discussion below should be read in conjunction with the accompanying consolidated financial statements and notes thereto. Our operating results for any quarter may not be indicative of our operating results in any future period.


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Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012



The following table sets forth our consolidated operating results for the three
months ended March 31, 2013 and 2012:



Three Months Ended March 31,          2013          2012         Change       % Change
                                                 (in millions, except %)
Operating Revenue                  $      293    $      363    $       (70 )      (19.3 )%
Operating Expense
Selling                                    75            90            (15 )      (16.7 )
Cost of sales (exclusive of
depreciation and amortization)             75            86            (11 )      (12.8 )
General and administrative                 11            41            (30 )      (73.2 )
Depreciation and amortization              31            40             (9 )      (22.5 )
Total Operating Expense                   192           257            (65 )      (25.3 )
Operating Income                          101           106             (5 )       (4.7 )
Interest expense, net                      38            46             (8 )      (17.4 )
Income Before Gains on Early
Extinguishment of Debt and
Provision for Income Taxes                 63            60              3          5.0
Gains on early extinguishment
of debt                                     -            28            (28 )     (100.0 )
Income Before Provision for
Income Taxes                               63            88            (25 )      (28.4 )
Provision for income taxes                 23            26             (3 )      (11.5 )
Net Income                         $       40    $       62    $       (22 )      (35.5 )

Operating Revenue

Operating revenue of $293 million in the three months ended March 31, 2013 decreased $70 million, or 19.3%, compared to $363 million in the three months ended March 31, 2012. This decrease was primarily due to reduced advertiser spending, reflecting continued competition from other advertising media (including the Internet, cable television, newspaper and radio).

Operating Expense

Operating expense of $192 million in the three months ended March 31, 2013 decreased $65 million, or 25.3%, compared to $257 million in the three months ended March 31, 2012, for the reasons described below.

Selling. Selling expense of $75 million in the three months ended March 31, 2013 decreased $15 million, or 16.7%, compared to $90 million in the three months ended March 31, 2012. This decrease resulted primarily from lower employee related costs, lower sales commissions due to lower sales volumes and lower employee benefit costs.

Cost of Sales. Cost of sales expense of $75 million in the three months ended March 31, 2013 decreased $11 million, or 12.8%, compared to $86 million in the three months ended March 31, 2012. This decrease was primarily due to lower printing and distribution costs as a result of lower volumes and reduced Internet traffic costs.

General and Administrative. General and administrative expense of $11 million in the three months ended March 31, 2013 decreased $30 million, or 73.2%, compared to $41 million in the three months ended March 31, 2012. The decrease was primarily due to a $29 million credit to expense in 2013 associated with the amortization of a deferred gain related to certain plan amendments and amortization of unrecognized losses associated with other post-employment benefits, a $4 million charge in 2012 associated with a nonqualified pension benefit for certain employees and reduced bad debt expense of $3 million. These decreases were partially offset by $6 million of merger transaction costs in 2013 associated with our proposed merger with Dex One. Bad debt expense of $3 million in the three months ended March 31, 2013 decreased by $3 million, or 50.0%, compared to $6 million in the three months ended March 31, 2012. Bad debt expense as a percent of total operating revenue was 1.0% for the three months ended March 31, 2013, compared to 1.7% for the three months ended March 31, 2012.

Depreciation and Amortization. Depreciation and amortization expense of $31 million in the three months ended March 31, 2013 decreased $9 million, or 22.5%, compared to $40 million in the three months ended March 31, 2012. This decrease was due to lower amortization expense of $6 million associated with intangible assets,


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including capitalized internal use software, and lower depreciation expense of $3 million associated with property, plant and equipment.

Interest Expense

Interest expense, net of interest income, of $38 million in the three months ended March 31, 2013 decreased $8 million, or 17.4%, compared to $46 million in the three months ended March 31, 2012 due to lower outstanding debt obligations.

Gains on Early Extinguishment of Debt

During the three months ended March 31, 2012, the Company recorded a non-taxable gain of $28 million related to the early extinguishment of a portion of our senior secured term loans. The Company utilized $31 million in cash to prepay $60 million of the senior secured term loans at a rate of 52% of par. This transaction resulted in the Company recording a non-taxable gain of $28 million ($29 million gain offset by $1 million in administrative fees).

Provision for Income Taxes

Provision for income taxes of $23 million in the three months ended March 31, 2013 decreased $3 million, or 11.5%, compared to $26 million in the three months ended March 31, 2012, primarily due to the impact of the items listed above. Our effective tax rates for the three months ended March 31, 2013 and 2012 were 36.5% and 29.5%, respectively. The lower March 31, 2012 rate was primarily impacted by non-taxable cancellation of indebtedness income ("CODI"). Generally, the discharge of a debt obligation for an amount less than its adjusted issue price creates CODI, which must be included in the Company's taxable income; however, provisions of the Internal Revenue Code allowed the Company to permanently exclude this CODI from taxation. The results for the three months ended March 31, 2013 and 2012, include the effects of one-time discrete items. The Company anticipates the effective tax rate, including interest expense and other one-time discrete items, to approximate 26% for 2013 which includes an estimated rate reduction for lapsing of uncertain tax positions due to expiration of the statute of limitations in various jurisdictions. Without this reduction from lapsing uncertain tax positions, our anticipated effective tax rate would approximate 37% for 2013. Our estimated effective tax rate for 2013 may be subject to changes in future periods. The full year effective tax rate for 2012 was 30.3%. The full year effective tax rate for 2012 was primarily impacted by non-taxable CODI related to the Company's below par debt repurchases.

Liquidity and Capital Resources



The following table sets forth a summary of the Company's cash flows for the
three months ended March 31, 2013 and 2012:



Three Months Ended March 31,                       2013    2012     Change
                                                        (in millions)
Cash Flows Provided By (Used In):
Operating activities                               $  51   $ 105   $    (54 )
Investing activities                                  (4 )    (2 )       (2 )
Financing activities                                   -     (36 )       36
Increase (Decrease) In Cash and Cash Equivalents   $  47   $  67   $    (20 )

Our primary source of funds continues to be cash generated from operations. Net cash provided by operating activities of $51 million during the three months ended March 31, 2013 decreased $54 million compared to $105 million in the three months ended March 31, 2012 primary due to lower cash collections associated with lower revenues and merger transaction costs of $6 million, representing professional fees, associated with our proposed merger with Dex One. These decreases in net cash provided by operating activities were partially offset by reduced expenditures in 2013 and lower debt interest payments associated with reduced debt obligations.

Cash used in investing activities of $4 million during the three months ended March 31, 2013 increased $2 million compared to $2 million during the three months ended March 31, 2012, primarily due to increased capital expenditures.

Net cash used in financing activities of $36 million during the three months ended March 31, 2012 primarily represents the repayment of debt principal. The Company did not make any debt principal payments during the


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three months ended March 31, 2013. The Company expects to make a $36 million mandatory principal payment related to the three months ended March 31, 2013, under the terms of the Loan Agreement.

During the three months ended March 31, 2012, the Company made cash debt payments of $35 million, which reduced the Company's debt obligations by $64 million. On March 2, 2012, the Company utilized $31 million in cash to prepay $60 million of the senior secured term loans at a rate of 52% of par. This transaction resulted in the Company recording a $28 million non-taxable gain ($29 million gain offset by $1 million in administrative fees), which was recorded as early extinguishment of debt on the Company's 2012 consolidated statement of comprehensive income. For the three months ended March 31, 2012, the Company also made additional debt principal payments, at par, of $4 million.

We believe the net cash provided by our operating activities and existing cash . . .

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