DEX MEDIA HOLDINGS, INC. INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

Transcription

1 DEX MEDIA HOLDINGS, INC. INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

2 INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2018 and 2017 (unaudited) 3 Condensed Consolidated Balance Sheets at March 31, 2018 (unaudited) and December 31, Condensed Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (unaudited) 5 Notes to Condensed Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 18 2

3 Dex Media Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Three Months Ended March 31, Operating Revenue $ 458,973 $ 185,621 Operating Expenses Selling 127,097 59,256 Cost of service (exclusive of depreciation and amortization) 179,730 78,315 General and administrative 59,919 17,331 Depreciation and amortization 66,928 57,470 Total Operating Expenses 433, ,372 Operating Income (Loss) 25,299 (26,751) Interest expense, net 23,337 9,508 Income (Loss) Before Gains on Early Extinguishment of Debt and Provision (Benefit) for Income Taxes 1,962 (36,259) Gains on early extinguishment of debt 328 Income (Loss) Before Provision (Benefit) for Income Taxes 1,962 (35,931) Provision for income taxes 1,032 32,014 Net Income (Loss) $ 930 $ (67,945 ) The accompanying notes are an integral part of the condensed consolidated financial statements. 3

4 Dex Media Holdings, Inc. and Subsidiaries Condensed Consolidated Balance Sheets March 31, December 31, (in thousands, except share data) (unaudited) Assets Current Assets Cash and cash equivalents $ 4,158 $ 2,038 Accounts receivable, net of allowances of $29,948 and $31, , ,803 Unbilled accounts receivable 15,602 48,142 Accrued tax receivable 28,166 25,117 Deferred directory costs 147, ,296 Prepaid expenses and other 32,400 16,398 Total current assets 404, ,794 Fixed assets and capitalized software, net 144, ,330 Goodwill 609, ,457 Intangible assets, net 477, ,394 Other non-current assets 35,919 36,953 Total Assets $ 1,671,295 $ 1,747,928 Liabilities and Shareholders' Equity Current Liabilities Current maturities of financing obligations $ 2,051 $ 3,480 Accounts payable and accrued liabilities 253, ,446 Accrued interest 3,259 2,692 Deferred revenue 78,041 75,270 Total current liabilities 336, ,888 Term loan 610, ,000 Line of credit 152, ,012 Financing obligations, net of current portion 56,913 56,980 Employee benefit obligations 219, ,389 Deferred tax liabilities 28,927 50,943 Unrecognized tax benefits 50,500 50,500 Other liabilities 1,997 2,660 Shareholders' Equity Common stock, par value $.01 per share, authorized 250,000,000 shares; issued and outstanding 103,196,920 shares at March 31, 2018 and December 31, ,032 1,032 Additional paid-in capital 1,006,363 1,006,363 Retained (deficit) (792,909) (793,839) Total shareholders' equity 214, ,556 Total Liabilities and Shareholders' Equity $ 1,671,295 $ 1,747,928 The accompanying notes are an integral part of the condensed consolidated financial statements. 4

5 Dex Media Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, Cash Flows from Operating Activities Net income (loss) $ 930 $ (67,945) Reconciliation of net income (loss) to net cash provided by operating activities: Depreciation and amortization 66,928 57,470 Amortization of debt issuance costs and other non-cash interest Deferred taxes (22,016) Accrued income taxes, net (2,061) 27,047 Provision for bad debts 8,896 1,497 Stock-based compensation expense 4,975 1,277 Employee retiree benefits 896 (166) Gains on early extinguishment of debt (328) Loss on sale of property, plant and equipment 236 (17) Changes in assets and liabilities: Accounts receivable, including unbilled 35,984 79,294 Deferred directory costs (11,313) (13,625) Deferred revenue 2,770 15,274 Other current assets (16,001) 6,926 Accounts payable and accrued liabilities (13,176) 2,509 Net cash provided by operating activities 57, ,320 Cash Flows from Investing Activities Additions to fixed assets and capitalized software (3,962) (2,806) Proceeds from sale of building/fixed assets 20 Net cash used in investing activities (3,962) (2,786) Cash Flows from Financing Activities Proceeds from line of credit 495, ,482 Paydowns on line of credit (502,802) (276,296) Paydowns on term loan (42,000) (116,959) Payments on short term borrowings (2,160) Net cash used in financing activities (51,360) (142,773) Increase (decrease) in cash and cash equivalents 2,120 (36,239) Cash and cash equivalents, beginning of period 2,038 41,409 Cash and cash equivalents, end of period $ 4,158 $ 5,170 Supplemental Information Cash interest on debt $ 22,375 $ 8,947 Cash income taxes, net $ 25,109 $ 4,967 The accompanying notes are an integral part of the condensed consolidated financial statements. 5

6 DEX MEDIA HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 Description of Business and Summary of Significant Accounting Policies General Dex Media Holdings, Inc. ( DexYP, the Company ) is a leading provider of local marketing solutions to approximately 600,000 business clients across the United States. The Company's approximately 2,800 sales employees work directly with clients to provide multiple local marketing solutions to help clients connect with their customers. On June 30, 2017, the Company completed the acquisition of YP Holdings ( YP ), a leading marketing solutions and search platform provider and publisher of the Real Yellow Pages and YP.com. The Company acquired substantially all of the assets and assumed substantially all of the liabilities. From June 30, 2017 forward, the Company began doing business as DexYP and are led by the Company s current board of directors and executive management team. The Company's local marketing solutions are primarily sold under various Dex and YP brands, including print yellow page directories, online local search engine websites, mobile local search applications, and placement of client s information and advertisements on major search engine websites with which the Company is affiliated. DexYP's local marketing solutions also include website development, search engine optimization, market analysis, video development and promotion, reputation management, social media marketing, and tracking/reporting of customer leads. The Company also offers an all-in-one small business management software as a service (SAAS) solution under the brand name Thryv. This system provides the day-to-day essential tools needed to compete in the modern marketplace. The software solution comes complete with a customer relationship management tool (CRM), customer communication tools, invoicing and estimation tools, payment processing, appointment scheduling, social profile management, & text marketing, and online presence tools. DexYP's print yellow page directories are co-branded with various local telephone service providers; including Verizon Communications Inc., AT&T Inc., CenturyLink, Inc., FairPoint Communications, Inc., and Frontier Communications Corporation. The Company operates as the authorized publisher of print yellow page directories in some of the markets where they provide telephone service and hold multiple agreements governing relationships with each company, including publishing agreements, branding agreements, and non-competition agreements. In 2017, DexYP published approximately 2,000 distinct directory titles in 48 states and distributed approximately 116 million directories to businesses and residences in the United States. In 2017, the Company's top ten directories, as measured by revenue, accounted for approximately 2% of total revenue and no single directory or local client accounted for more than 1% of total revenue. Basis of Presentation The Company prepares its financial statements in accordance with generally accepted accounting principles ( GAAP ) in the United States. The condensed consolidated financial statements include the financial statements of Dex Media Holdings, Inc. and its wholly owned subsidiaries. The accompanying condensed consolidated financial statements included in this report 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 Company's condensed consolidated financial statements do not include any adjustments that might result from the resolution of this uncertainty. The condensed 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 the Company. All inter-company accounts and transactions have been eliminated. The Company is managed as a single business unit. 6

7 These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the 2017 Annual Report for the fiscal year ended December 31, Use of Estimates The preparation of the Company s financial statements requires management to make estimates and judgments that affect the reported amount of assets and liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. Examples of reported amounts that rely on significant estimates include the allowance for doubtful accounts, assets acquired and liabilities assumed in business combinations, certain amounts relating to the accounting for income taxes, the recoverability and fair value determination of fixed assets and capitalized software, net, goodwill, intangible assets and other long-lived assets, pension assumptions, and estimates of selling prices that are used for multiple-element arrangements. Summary of Significant Accounting Policies There have been no material changes to the Company's significant accounting policies that are referenced in the 2017 Annual Report. Note 2 Acquisition of YP Holdings On June 30, 2017 (the Acquisition Date ), the Company completed its acquisition of YP, a leading marketing solutions and search platform provider and publisher of the Real Yellow Pages and YP.com for total cash consideration of $600.7 million and 3,248,487 shares of the Company s common stock, valued at $18.2 million on the Acquisition Date. The Company acquired substantially all of the assets and assumed substantially all of the liabilities, in each case, other than certain specified assets and liabilities. The newly formed Company began doing business as DexYP and is led by the Company s current board of directors and executive management team. We accounted for the business combination using the acquisition method of accounting in accordance with ASC 805, Business Combinations. The financial results of YP have been included in our condensed consolidated financial statements since the date of the acquisition. The Company determined fair value by applying a combination of the income approach, the market approach, and the cost approach. At the Acquisition Date, the purchase price is preliminarily assigned to the acquired assets of approximately $1,049.0 million and assumed liabilities of approximately $430.1 million. The Company expects to finalize purchase price accounting during the six months ended June 30, Note 3 Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value. Level 1 - Valuations based on quoted prices for identical assets and liabilities in active markets; Level 2 - Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data; and Level 3 - Valuations based on unobservable inputs reflecting the Company's assumptions. These valuations require significant judgment. 7

8 In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When there is more than one input at different levels within the hierarchy, the fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Assessment of the significance of a particular input, to the fair value measurement in its entirety, requires substantial judgment and consideration of factors specific to the asset or liability. Assets and liabilities measured at fair value are based on one or more of the following valuation techniques: market approach, income approach or cost approach. The fair values of cash, trade receivables and accounts payable approximate their carrying amounts due to their short-term nature. The fair value of our indemnification asset is measured and recorded onto our Condensed Consolidated Balance Sheet using Level 2 inputs. At March 31, 2018, the fair value of this asset was $24.4 million and is included in Other non-current assets. The fair value of benefit plan assets and the related disclosure are included in Note 8. The fair value of our stock option liability awards are valued using Level 3 inputs as described further in Note 9. The fair value of debt instruments are determined based on the observable market data of a private exchange. The following table sets forth the carrying amount and fair value using Level 2 inputs of the Company s debt obligations at March 31, 2018 and December 31, 2017: Carrying Amount March 31, December 31, Fair Value Carrying Amount Fair Value Term loan $ 610,000 $ 626,043 $ 652,000 $ 667,518 Line of credit 152, , , ,012 Total debt obligations $ 762,812 $ 778,855 $ 812,012 $ 827,530 Note 4 Goodwill, Intangible Assets and Impairment Goodwill The Company had goodwill of $609.5 million as of March 31, 2018 and December 31, 2017, respectively, which is partially deductible for tax purposes. The Company performs its annual impairment test of goodwill as of October 1, in addition to interim periods should events and circumstances indicate that impairment may exist. The following table sets forth the balances of the Company s goodwill and accumulated impairment losses as of March 31, 2018 and December 31, 2017: Goodwill Gross Accumulated Impairment Losses Goodwill Net Ending balance at December 31, 2017 $ 1,322,252 $ (712,795) $ 609,457 Additions Impairments Ending balance at March 31, 2018 $ 1,322,252 $ (712,795) $ 609,457 8

9 Intangible Assets The Company had definite-lived intangible assets of $476.8 million and $532.4 million as of March 31, 2018 and December 31, 2017, respectively. Intangible assets are recorded separately from goodwill if they meet certain criteria. The Company reviews its definite-lived intangible assets whenever events or circumstances indicate that their carrying value may not be recoverable. Amortization expense was $55.2 million and $268.0 million for the three months ended March 31, 2018 and the year ended December 31, 2017, respectively. The following table outlines the estimated annual amortization expense for intangible assets: Year Ending December 31, Amortization Expense 2018 (remaining) $ 165, , , , ,476 Total $ 477,220 The following table sets forth the details of the Company's intangible assets at March 31, 2018 and December 31, 2017: Gross March 31, 2018 December 31, 2017 Accumulated Amortization Net Gross Accumulated Amortization Client relationships $ 701,100 $ 362,478 $ 338,622 $ 701,100 $ 320,027 $ 381,073 Trademarks and domain names 200,300 70, , ,300 58, ,496 Patented technologies 19,600 11,258 8,342 19,600 9,775 9,825 Total intangible assets $ 921,000 $ 443,780 $ 477,220 $ 921,000 $ 388,606 $ 532,394 Net The following table rolls forward the balances of intangible assets for the three months ended March 31, 2018: Client relationships Trademarks and domain names Patented technologies Total Intangible Assets Balance, December 31, 2017 $ 381,073 $ 141,496 $ 9,825 $ 532,394 Amortization expense (42,451 ) (11,240) (1,483) (55,174) Balance, March 31, 2018 $ 338,622 $ 130,256 $ 8,342 $ 477,220 Note 5 Integration Costs In connection with the Acquisition of YP on June 30, 2017 and other integration activities, the Company has incurred exit and disposal costs associated primarily with closing office facilities and the reduction of workforce for the purpose of business integration and operational efficiencies. These exit and disposal costs include severance costs, charges related to terminating 9

10 office facility leases, integration of systems to eliminate duplicative systems, legal costs, tax consulting, and accounting advisory services. The Company expects total charges associated with the YP Integration to be approximately $150 million to $200 million. YP Integration costs are recorded as general and administrative expense in the Company's Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 31, The following table sets forth the components of the Company's Integration costs for the three months ended March 31, 2018: Three Months Ended March 31, Severance costs $ 4,717 $ 1,277 Lease related costs 1, System consolidation costs 2,007 Legal costs (329) Tax and accounting advisory services 10,587 Other costs 2, Total Integration costs $ 21,650 $ 2,382 The following table reflects the Company's liabilities associated with Integration costs as of March 31, 2018: Beginning Balance Ending Balance January 1, 2018 Expense Payments March 31, 2018 Severance costs $ 12,364 $ 4,717 $ (11,110) $ 5,971 Lease related costs 6,024 1,680 (2,893) 4,811 System consolidation costs 861 2,007 (2,632) 236 Legal costs 3,565 (329) (125) 3,111 Tax and accounting advisory services 5,201 10,587 (11,135) 4,653 Other costs 3,684 2,988 (1,008) 5,664 Total Integration costs $ 31,699 $ 21,650 $ (28,903) $ 24,446 The following table reflects the Company's liabilities associated with Integration costs as of March 31, 2017: Beginning Balance Ending Balance January 1, 2017 Expense Payments March 31, 2017 Severance costs $ 1,059 $ 1,277 $ (1,775) $ 561 Lease related costs (331) 817 Tax and accounting advisory services 1,269 1,269 Other costs (2,479) (1,613) Total Integration costs $ 3,237 $ 2,382 $ (4,585) $ 1,034 10

11 Note 6 Additional Financial Information Condensed Consolidated Statements of Comprehensive Income (Loss) General and administrative expense The Company's general and administrative expense for the three months ended March 31, 2018 and 2017 includes integration costs $18.2 million, including severance of $4.7 million. Depreciation and amortization The following table sets forth the components of depreciation and amortization expense for the Company for the three months ended March 31, 2018 and 2017, respectively: Three Months Ended March 31, Amortization of intangible assets $ 55,174 $ 52,490 Amortization of capitalized software 7,512 2,049 Depreciation of fixed assets 4,242 2,931 Total depreciation and amortization $ 66,928 $ 57,470 Interest expense, net The Company recorded interest expense, net of $23.3 million and $9.5 million during the three months ended March 31, 2018 and 2017, respectively. Interest expense consists primarily of interest expense associated with debt obligations and non-cash interest expense consists primarily of amortization of deferred financing cost. Non-cash interest expense for the Company was $0.4 million and $0.1 million for the three months ended March 31, 2018 and 2017, respectively. Balance Sheet The following table sets forth additional financial information related to the Company's allowance for doubtful accounts at March 31, 2018 and December 31, 2017: Allowance for doubtful accounts Three Months Ended March 31, 2018 Year Ended December 31, 2017 Balance at beginning of period $ 31,193 $ 7,708 Additions charged to revenue/expense (1) 16,849 49,087 Deductions (2) (18,094) (25,602) Ending balance $ 29,948 $ 31,193 (1) - Includes bad debt expense (in general and administrative expenses) and sales allowance (recorded as contra revenue). (2) - Amounts written off as uncollectible, net of recoveries and sales adjustments. 11

12 Accounts payable and accrued liabilities The following table sets forth additional financial information related to the Company's accounts payable and accrued liabilities at March 31, 2018 and December 31, 2017: March 31, December 31, Accounts payable $ 26,385 $ 53,280 Accrued salaries and wages 90,665 76,620 Accrued severance 8,818 15,207 Accrued income taxes 1,002 Accrued expenses 124, ,626 Customer refunds and advance payments 1,915 2,713 Total accounts payable and accrued liabilities $ 253,128 $ 265,446 Note 7 Debt Obligations On July 29, 2016, the outstanding debt obligations associated with the senior secured credit facilities were settled, with each of the existing holders of the senior secured credit facilities receiving as their recovery a pro rata share of the Company's common stock (99,948,333 shares), a pro rata share of the Company's $600.0 million term loan and their remaining cash collateral. The senior subordinated note holders received a payment of $5.0 million and stock warrants. The following table sets forth the Company's outstanding debt obligations at March 31, 2018 and December 31, 2017: Interest Rate Carrying Value March 31, December 31, March 31, December 31, Maturity Term loan July 29, % 11.4% $ 610,000 $ 652,000 Line of credit April 29, 2021 LIBOR % LIBOR % 152, ,012 Total debt obligations 762, ,012 Less: current maturities of long-term debt Long-term debt $ 762,812 $ 812,012 Term Loan On July 29, 2016, the Company entered into a credit agreement (the Dex Media Credit Agreement ) with several banks and other financial institutions or entities party hereto (the Lenders ) and Wilmington Trust, National Association, as administrative agent for such lenders with initial borrowings of $600.0 million. An additional $550.0 million was borrowed with the proceeds being used to finance the Company s purchase of YP. As of March 31, 2018, the outstanding balance of the term loan is $610.0 million. This term loan has a maturity date of July 29, The Dex Media Credit Agreement interest is paid on the last day of the interest period applicable to such borrowing. The applicable rate is 10.00% per annum plus the greater of (a) the rate per annum determined on the basis of the rate for deposits for a period equal to such interest period or (b) 1.00%. Accordingly, the minimum per annum rate was 11.00%. 12

13 Principal Payments Dex Media is required to repurchase debt equal to 75% of Excess Cash Flow ( ECF ) for each full fiscal quarter, or if the leverage ratio is above 1.25, Dex Media is required to repurchase debt equal to 100% of ECF, subject to certain limitations. ECF repurchases are required starting with the fiscal quarter commencing on October 1, 2016, based on (a) net cash provided by operating activities of Dex Media and its subsidiaries for such quarterly period as reflected in the statement of cash flows on the condensed consolidated financial statements of the Company, minus (b) the amount of capital expenditures made during such period, minus (c) minimum cash balance requirements. Repurchases shall be made within 45 days after the date on which financial statements for such fiscal quarter are (or are required to have been) delivered to the administrative agent and lenders. During the three months ended March 31, 2018, the Company repaid $42.0 million on its term loan. Line of Credit On December 15, 2016, the Company entered into a revolving credit agreement with Wells Fargo Bank, National Association, as Administrative Agent, whereby the Company may draw to finance ongoing general corporate and working capital needs. The Company may borrow up to $150.0 million, subject to the terms and conditions of the credit agreement. The line of credit is secured by the Company s accounts receivable and unbilled accounts receivable. The line of credit matures on April 29, 2021, and the interest rate is 3-month LIBOR plus 4.0%. To enter into the revolving credit agreement, the Company incurred debt issuance costs of $2.1 million. The debt issuance costs were reflected as an asset on December 31, 2016 and will be amortized ratably over the term of revolving credit agreement. On December 31, 2016 the Company had drawn $100.0 million on the line of credit. On April 21, 2017, the revolving line of credit agreement was amended to increase the line of credit from $150.0 million to $200.0 million. On June 30, 2017, the revolving line of credit agreement was amended to increase the line of credit from $200.0 million to $350.0 million and incurred additional debt issuance costs of $3.9 million. At March 31, 2018, due to the level of accounts receivable and unbilled accounts receivable available as security, the total availability under the line of credit was $260.9 million. The Company had a balance of $4.9 million and $5.3 million of debt issuance costs which are included in other non-current assets on the Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017, respectively. These costs are amortized to interest expense over the remaining term of the revolving credit agreement on a straight line basis. Other Financing Obligations As part of the YP acquisition on June 30, 2017, the Company assumed certain financing obligations including a failed saleleaseback liability associated with land and a building in Tucker, Georgia. In conjunction with this financing liability, the fair value of the land and building was included as a part of the total tangible assets acquired in the Acquisition. As of March 31, 2018, these financing obligations totaled $59.0 million, of which $2.1 million is reflected within the Current maturities of financing obligations and the long-term portion is recorded within Financing obligations, net of current portion on the Company's Condensed Consolidated Balance Sheet. Note 8 Employee Benefits Pension The Company has non-contributory defined benefit pension plans that provide pension benefits to certain employees. The accounting for pension benefits reflects the recognition of these benefit costs over the employee s approximate service period based on the terms of the plan and the investment and funding decisions made. The determination of the benefit obligation and the net periodic pension cost requires management to make actuarial assumptions, including the discount rate and expected return on plan assets. For these assumptions, management consults with actuaries, monitors plan provisions and demographics, and reviews public market data and general economic information. Changes in these assumptions can have a significant impact on the projected benefit obligation, funding requirement and net periodic benefit cost. 13

14 Effective January 1, 2017, the four qualified pension plans, the Dex One Retirement Account, the Dex Media, Inc. Pension Plan, the SuperMedia Pension Plan for Management Employees and the SuperMedia Pension Plan for Collectively Bargained Employees were merged into one consolidated pension plan (the Consolidated Pension Plan of Dex Media ). On June 30, 2017 Dex Media Holdings, Inc. purchased YP Holdings LLC. Dex Media Holdings, Inc. became the plan sponsor for the YP Holdings LLC Pension Plan with liabilities of $116 million and assets of $78 million. The Company also maintains two nonqualified pension plans for certain executives, the Dex One Pension Benefit Equalization Plan and the SuperMedia Excess Pension Plan. Pension assets related to the Company's qualified pension plans, which are held in master trusts and recorded on the Company's Condensed Consolidated Balance Sheet, are valued in accordance with applicable accounting guidance on fair value measurements. All pension plans have been frozen and no employees accrue future pension benefits under any of the pension plans. The Company immediately recognizes actuarial gains and losses in its operating results in the year in which the gains and losses occur. The Company estimates the interest cost component of pension net periodic cost by utilizing a full yield curve approach in the estimation of this component by applying the specific spot rates along the yield curve used in the determination of the benefit obligation of the relevant projected cash flows. This method provides a more precise measurement of interest costs by improving the correlation between projected cash flows to the corresponding spot yield curve rates. Pension Net Periodic Cost The components of net periodic cost for the pension plans are shown in the following table: Three Months Ended March 31, in thousands Interest cost $ 1,031 $ (166) Settlement (gain) (7) Remeasurement (gain) (128) Net periodic cost $ 896 $ (166) Since all pension plans have been frozen and no employees accrue future pension benefits under any of the pension plans, the Company no longer incurs service cost as a component of net periodic cost. During the three months ended March 31, 2018 and 2017, respectively, the Company made no cash contributions to the qualified pension plans, and contributions of $0.5 million and $0.2 million, respectively, to the non-qualified plans, as required under pension accounting guidelines. Savings Plans Benefits The Company sponsors defined contribution savings plans to provide opportunities for eligible employees to save for retirement. The savings plans include the Dex Media Inc. Savings Plan and as of June 30, 2017, the YP Holdings LLC Retirement Savings Plan, YP Holdings LLC Success Sharing Plan, Print Media LLC 401(k) Plan for Bargained Employees, and the Print Media LLC 401(k) Plan for Non Bargained Employees. Substantially all of the Company's employees are eligible to participate in the plans. Participant contributions may be made on a pre-tax, after-tax, or Roth basis. Under the plans, a certain percentage of eligible employee contributions are matched with Company cash contributions that are allocated to the participants' current investment elections. The Company recognizes its contributions as savings plan expense based on its matching obligation to participating employees. For the three months ended March 31, 2018 and 2017, the Company recorded total savings plan expense of $3.2 million for the Dex Media, Inc. Savings Plan and YP Plans and $1.9 million for the Dex Media, Inc. Savings Plan. 14

15 Note 9 Long-Term Incentive Compensation The Dex Media, Inc Stock Incentive Plan ( Stock Incentive Plan ) provides for several forms of incentive awards to be granted to designated eligible employees, non-management directors, and independent contractors providing services to the Company. The maximum number of shares of Dex Media common stock authorized for issuance under the Stock Incentive Plan is 11,100,000. Stock Options The Stock Incentive Plan permits grants of cash-settled stock options. These awards are classified as liability awards based on the criteria established by the applicable accounting rules for stock-based compensation. No grants were issued during the three months ended March 31, During the year ended December 31, 2017 the Company granted stock option awards to certain employees and non-management directors, at a weighted-average exercise price of $6.26 that vest over a three-year period ending on January 1, 2021, and have a 10-year term from the date of grant. A stock option holder may pay the option exercise price in cash, by delivering unrestricted shares to the Company having a value at the time of exercise equal to the exercise price, by a cashless broker-assisted exercise, by a loan from the Company, or by a combination of these methods. Any unvested portion of the stock option award will be forfeited upon the employee s termination of employment with the Company for any reason before the date the option vests, except that the Compensation and Benefits Committee of the Company, at its sole option and election, may provide for the accelerated vesting of the stock option award. If the Company terminates the employee without cause or the employee resigns for good reason, then the employee is eligible to exercise the stock options that vested on or before the effective date of such termination or resignation. If the Company terminates the employee for cause, then the employee's stock options, whether or not vested, shall terminate immediately upon termination of employment. The Compensation and Benefits Committee of the Company shall have the authority to determine the treatment of awards in the event of a change in control of the Company or the affiliate which employs the award holder. Changes in the Company's outstanding stock option awards were as follows for the three months ended March 31, 2018: Number of Stock Option Awards Three Months Ended March 31, 2018 Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (years) Aggregate Intrinsic Value Outstanding stock option awards at January 1, ,100,000 $ $ 59,324,500 Granted Exercises Forfeitures/expirations (95,000) 2.16 Outstanding stock option awards at March 31, ,005,000 $ $ 58,816,800 Exercisable at March 31, ,849,808 $ $ 21,019,952 Stock-Based Compensation Expense Stock-based compensation expense recognized by the Company for the three months ended March 31, 2018 and 2017 was $5.0 million and $1.3 million, respectively. These costs were recorded as part of general and administrative expense on the Company's Condensed Consolidated Statement of Comprehensive Income (Loss). 15

16 As of March 31, 2018 unrecognized stock-based compensation expense related to the unvested portion of the Company's stock option awards was approximately $35.5 million, and is expected to be recognized over a weighted-average period of approximately 1.8 years. The following table sets forth stock-based compensation expense recognized by the Company for the three months ended March 31, 2018 and 2017: Three Months Ended March 31, Stock-based compensation expense $ 4,975 $ 1,277 Note 10 Income Taxes The Company accounts for income taxes under the asset and liability method in accordance with ASC 740, Income Taxes, ( ASC 740 ). Deferred tax assets or liabilities are recorded to reflect the expected future tax consequences of temporary differences between the financial reporting basis of assets and liabilities and their tax basis at each year-end. These amounts are adjusted as appropriate to reflect enacted changes in tax rates expected to be in effect when the temporary differences reverse. The likelihood that deferred tax assets can be recovered must be assessed. If recovery is not likely, the provision for taxes must be increased by recording a reserve in the form of a valuation allowance for deferred tax assets that are estimated not to be ultimately recoverable. In this process, certain relevant criteria are evaluated, including the existence of deferred tax liabilities that can be used to absorb deferred tax assets and taxable income in future years. A valuation allowance is established to offset any deferred income tax assets if, based on the available evidence, it is more likely than not that some or all of the deferred income tax assets will not be realized. The Company has netted deferred tax assets for net operating losses with related uncertain tax positions, if such settlement is required or expected in the event the uncertain tax position is disallowed. Note 11 Contingent Liabilities Litigation The Company is subject to various lawsuits and other claims in the normal course of business. In addition, from time to time, the Company receives communications from government or regulatory agencies concerning investigations or allegations of noncompliance with laws or regulations in jurisdictions in which the Company operates. The Company establishes reserves for the estimated losses on specific contingent liabilities, for regulatory and legal actions where the Company deems a loss to be probable and the amount of the loss can be reasonably estimated. In other instances, the Company is not able to make a reasonable estimate of liability because of the uncertainties related to the outcome or the amount or range of potential loss. The Company does not expect that the ultimate resolution of pending regulatory and legal matters in future periods will have a material adverse effect on the Condensed Consolidated Statements of Comprehensive Income (Loss). There have been no material changes to the Company's contingencies that are referenced in the 2017 Annual Report. 16

17 Note 12 Subsequent Events We have evaluated all subsequent events through June 15, 2018, the date the condensed consolidated financial statements were available to be issued. 17

18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity, and capital resources. This discussion and analysis should be read in conjunction with the accompanying condensed consolidated financial statements. Overview Dex Media Holdings, Inc. ( DexYP, the Company ) is a leading provider of local marketing solutions to approximately 600,000 business clients across the United States. The Company's approximately 2,800 sales employees work directly with clients to provide multiple local marketing solutions to help clients connect with their customers. On June 30, 2017, the Company completed the acquisition of YP Holdings ( YP ), a leading marketing solutions and search platform provider and publisher of the Real Yellow Pages and YP.com. The Company acquired substantially all of the assets and assumed substantially all of the liabilities. From June 30, 2017 forward, the Company began doing business as DexYP and are led by the Company s current board of directors and executive management team. Refer to Note 2, Acquisition of YP Holdings, to the condensed consolidated financial statements. The Company's local marketing solutions are primarily sold under various Dex and YP brands, including print yellow page directories, online local search engine websites, mobile local search applications, and placement of client s information and advertisements on major search engine websites with which the Company is affiliated. DexYP's local marketing solutions also include website development, search engine optimization, market analysis, video development and promotion, reputation management, social media marketing, and tracking/reporting of customer leads. The Company also offers an all-in-one small business management software as a service (SAAS) solution under the brand name Thryv. This system provides the day-to-day essential tools needed to compete in the modern marketplace. The software solution comes complete with a customer relationship management tool (CRM), customer communication tools, invoicing and estimation tools, payment processing, appointment scheduling, social profile management, & text marketing, and online presence tools. The Company s print yellow page directories are co-branded with various local telephone service providers, including Verizon Communications Inc., AT&T Inc., CenturyLink, Inc., FairPoint Communications, Inc., and Frontier Communications Corporation. The Company operates as the authorized publisher of print yellow page directories in some of the markets where they provide telephone service and hold multiple agreements governing relationships with each company, including publishing agreements, branding agreements, and non-competition agreements. Basis of Presentation The Company prepares its financial statements in accordance with generally accepted accounting principles ( GAAP ) in the United States. The condensed consolidated financial statements include the financial statements of Dex Media Holdings, Inc. and its wholly owned subsidiaries. The accompanying condensed 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. All inter-company accounts and transactions have been eliminated. The Company is managed as a single business unit. These unaudited interim financial statements, prepared in accordance with GAAP, do not contain all information and footnote disclosures normally included in audited annual financial statements and, as such, should be read in conjunction with the Dex Media Holdings, Inc Annual Report for the year ended December 31, Our operating results for any quarter may not be indicative of our operating results in any future period. 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 liabilities at the date of the financial statements. Actual results could differ from those estimates. 18

19 Critical Accounting Policies and Use of Estimates Since the date of our 2017 Annual Report, there have been no material changes to our critical accounting policies. Condensed Consolidated Results of Operations The results of operations presented and discussed herein are presented on a non-gaap proforma consolidated basis for DexYP as if the Acquisition had occurred on January 1, We believe that non-gaap proforma results provide more meaningful information to management and investors relative to the underlying financial performance of the Company. The unaudited proforma information is not necessarily indicative of the condensed consolidated results of operations that would have been realized had the Acquisition been completed as of the beginning of 2017, nor is it meant to be ind icative of future results of operations that the combined entity will experience. In addition, these non-gaap financial measures are used internally by management for budgeting, forecasting and compensation. The adjustments made below to our GAAP results in arriving at our non-gaap proforma results, work to remove the impact of certain balance sheet account adjustments recorded through fresh start accounting. These adjustments also remove the impact of adjusting certain balance sheet accounts during our acquisition of YP. In addition, certain non-recurring costs which include reorganization activities, and non-cash expenses associated with pension and long-term incentive compensation, were removed from our non-gaap adjusted proforma results. Results of Operations The Company has included non-gaap financial information as we believe that it provides a better indication of our actual operating performance of the Company. These results adjust the GAAP results of operations as discussed above, to reflect non-gaap operating results for the three months ended March 31, 2018: Table Three Months Ended March 31, GAAP Adjustments to GAAP Non-GAAP Three Months Ended March 31, Proforma Adjustments Proforma Results Operating Revenue $ 458,973 $ 38,719 (1) $ 497,692 Operating Expenses Selling 127,097 6,141 (2) 133,238 Cost of service (exclusive of depreciation and amortization) 179,730 7,020 (3) 186,750 General and administrative 59,919 (28,322) (4) 31,597 Depreciation and amortization 66,928 66,928 Total Operating Expenses 433,674 (15,161) 418,513 Operating Income 25,299 53,880 79,179 Interest expense, net 23,337 23,337 Income Before Provision (Benefit) for Income Taxes $ 1,962 $ 53,880 $ 55,842 (1) Represents the recognition of deferred revenue amortization associated with YP deferred revenue balances written off in acquisition accounting in

20 (2) Represents the recognition of deferred sales commissions associated with YP deferred sales commission balances written off in acquisition accounting in (3) Represents the recognition of deferred directory costs associated with YP deferred directory cost balances written off in acquisition accounting in (4) Represents the removal of certain non-recurring costs, including reorganization activities, pension, and long-term incentive compensation. These results adjust the GAAP results of operations to reflect non-gaap operating results for the three months ended March 31, 2017: Table Three Months Ended March 31, GAAP Adjustments to GAAP Non-GAAP Three Months Ended March 31, YP Results Three Months Ended March 31, Proforma Adjustments Proforma Results Operating Revenue $ 185,621 $ 350,790 $ 80,537 (1) $ 616,948 Operating Expenses Selling 59, ,053 (991) (2) 165,318 Cost of service (exclusive of depreciation and amortization) 78, ,055 13,654 (3) 233,024 General and administrative 17,331 63, (4) 81,751 Depreciation and amortization 57,470 19,152 76,622 Total Operating Expenses 212, ,785 13, ,157 Operating (Loss) Income (26,751) 20,005 66,979 60,233 Interest expense, net 9,508 13,642 23,150 (Loss) Income Before Gains on Early Extinguishment of Debt and Provision (Benefit) for Income Taxes (36,259) 6,363 66,979 37,083 Gains on early extinguishment of debt 328 (328) (Loss) Income Before Provision (Benefit) for Income Taxes $ (35,931 ) $ 6,363 $ 66,651 $ 37,083 (1) Primarily represents the recognition of deferred revenue amortization associated with Dex Media's deferred revenue balances written off in fresh start accounting. (2) Primarily represents the recognition of deferred sales commissions associated with Dex Media's deferred sales commission balances written off in fresh start accounting, offset by accounting conformity adjustments associated with YP's recognition of deferred sales commissions. (3) Primarily represents the recognition of deferred directory costs associated with Dex Media's deferred directory cost balances written off in fresh start accounting. (4) Primarily represents the recognition of bad debt expense associated with the recognition of Dex Media's deferred revenue amortization related to deferred revenue balances written off in fresh start accounting, partially offset by the removal of certain non-recurring costs, including business transformation and pension. 20

21 The following table sets forth the consolidated operating results for the three months ended March 31, 2018 and 2017 (non- GAAP): Non-GAAP Proforma Results Table Table Three Months Ended March 31, $ % Change Change Operating Revenue $ 497,692 $ 616,948 $ (119,256) (19.3)% Operating Expenses Selling 133, ,318 (32,080) (19.4)% Cost of service (exclusive of depreciation and amortization) 186, ,024 (46,274) (19.9)% General and administrative 31,597 81,751 (50,154) (61.3)% Depreciation and amortization 66,928 76,622 (9,694) (12.7)% Total Operating Expenses 418, ,715 (138,202) (24.8)% Operating Income 79,179 60,233 18, % Interest expense, net 23,337 23, % Income Before Provision (Benefit) for Income Taxes $ 55,842 $ 37,083 $ 18, % Three Months Ended March 31, 2018 Compared to March 31, 2017 Operating Revenue Operating revenue of $497.7 million for the three months ended March 31, 2018 decreased $119.2 million, or 19.3%, compared to operating revenue of $616.9 million for the three months ended March 31, This decline in operating revenue was due to reduced advertiser spending, reflecting continued competition from other advertising media (including the Internet, cable television, newspaper and radio). Operating Expenses Operating expense of $418.5 million for the year three months ended March 31, 2018 decreased $138.2 million, or 24.8%, compared to operating expense of $556.7 million for the three months ended March 31, These decreases were primarily driven by synergies associated with cost savings initiatives. Selling. Selling expense of $133.2 million for the three months ended March 31, 2018 decreased $32.1 million, or 19.4%, compared to selling expense of $165.3 million for the three months ended March 31, Selling expenses include base salaries and sales commissions paid to our local sales force, national sales commissions paid to independent certified marketing representatives, sales training, and client care expenses. This decrease was primarily driven by sales force synergies associated with YP integration related cost savings initiatives. Cost of Service. Cost of service expense of $186.8 million for the three months ended March 31, 2018 decreased $46.2 million, or 19.9%, compared to cost of service expense of $233.0 million for the three months ended March 31, Cost of service expense includes publishing, paper, printing and distribution costs of our print directories, digital fulfillment costs, contract services and information technology expenses. This decrease was primarily driven by print and distribution processing efficiencies associated with YP integration related initiatives, as well as a reduction in these direct costs in line with our decline in sales volume. 21