DEX MEDIA EAST LLC - 10-Q Quarterly Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Effective July 27, 2004, the Company’s indirect parent, Dex Media, Inc. (“Dex Media”) consummated its initial public offering of common stock, (the “Offering”). Part of the proceeds related to the Offering were used to redeem $183.8 million of the Company’s senior subordinated notes on August 26, 2004 at a redemption price of 112.125% along with the accrued and unpaid interest. In connection with the Offering, the Company paid $5.0 million to each of the Sponsors (as defined below) to eliminate the aggregate $2.0 million annual advisory fee payable under its management consulting agreements.

On August 19, 2002, Dex Holdings LLC (“Dex Holdings”), the parent of Dex Media, both new entities formed by the private equity firms of The Carlyle Group and Welsh, Carson, Anderson & Stowe (“WCAS”) (together, the “Sponsors”), entered into concurrent purchase agreements (the “Dex East Purchase Agreement” and the “Dex West Purchase Agreement”) to purchase the business of Qwest Dex Holdings, Inc. and its wholly-owned subsidiary Qwest Dex, Inc. (together “Qwest Dex”) from Qwest Communications International Inc. (“Qwest”) in two separate phases.

In the first phase, consummated on November 8, 2002 (the “Acquisition”), Dex Holdings assigned its right to purchase the directory business in the Dex East States (as defined below) (“Dex West”) to Dex Media East LLC (“Dex Media East” or “the Company”), an indirect wholly-owned subsidiary of Dex Media. Dex Media East now operates the directory business in Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota (the “Dex East States”). The total amount of consideration paid for Qwest Dex’s directory business in the Dex East States was $2.8 billion (excluding fees and acquisition costs).

In the second phase, consummated on September 9, 2003, Qwest Dex contributed its remaining assets and liabilities relating to its directory business in the Dex West States (as defined below) to GPP LLC, a newly-formed limited liability company. Immediately following this contribution, Dex Media West LLC (“Dex Media West”), an indirect wholly-owned subsidiary of Dex Media, purchased all of the interests in GPP LLC for $4.3 billion (excluding fees and acquisition costs). Immediately following such purchase, Dex Media West merged with GPP LLC. Dex Media West now operates the directory business acquired in Arizona, Idaho, Montana, Oregon, Utah, Washington and Wyoming (the “Dex West States”). In conjunction with the acquisition, Dex West employees became employees of Dex Media West and were immediately transferred to Dex Media East. On January 1, 2004, all employees of Dex Media East were transferred to another indirect wholly-owned subsidiary of Dex Media, Dex Media Service LLC (“Service Co.”).

The Company is the exclusive official directory publisher for Qwest Corporation, Qwest’s local exchange carrier (“Qwest LEC”), in the Dex East States, which is the primary local exchange carrier in most service areas within the Dex East States. As a result, the Company is the largest telephone directory publisher of white and yellow pages directories to businesses and residents in the Dex East States. The Company provides directory and Internet solutions to local and national advertisers. Virtually all of the Company’s revenue is derived from the sale of advertising in its various directories. Published directories are distributed to businesses and residents in the Dex East States through third-party vendors.

The accompanying condensed consolidated interim financial statements are unaudited. In compliance with the instructions of the Securities and Exchange Commission (the “SEC”) for interim financial statements, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. In management’s opinion, the condensed consolidated financial statements reflect all adjustments (which consist of normal recurring adjustments) necessary to fairly present the condensed consolidated statements of financial position as of September 30, 2004 and December 31, 2003, the condensed consolidated statements of operations for the three months and nine months ended September 30, 2004 and 2003 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2004 and 2003. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company as of December 31, 2003 and 2002 and for the year ended December 31, 2003, for the periods from November 9 to December 31, 2002 and from January 1 to November 8, 2002, and for the year ended December 31, 2001 included in the Company’s Form 10-K as filed with the SEC. The condensed consolidated statements of operations for the three months and nine months ended September 30, 2004 are not necessarily indicative of the results expected for the full year.

The accompanying condensed consolidated statements of operations for the three months and nine months ended September 30, 2003 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2003 include all material adjustments required under purchase accounting.

Certain prior period amounts have been reclassified to conform to the 2004 presentation.

The condensed consolidated financial statements include the financial statements of Dex Media East and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts and disclosures reported in these condensed consolidated financial statements and accompanying notes. Actual results could differ significantly from those estimates.

The sale of advertising in printed directories published by the Company is the primary source of revenue. Revenue is recognized ratably over the life of each directory using the deferral and amortization method of accounting, with revenue recognition commencing in the month of delivery. The Company publishes white and yellow pages directories primarily with 12-month lives. From time to time, the Company may choose to change the publication dates of certain directories in order to more efficiently manage work and account flow. The lives of the effected directories will primarily be 12 months thereafter. Such extensions did not have a significant impact on the Company’s results of operations for the three months and nine months ended September 30, 2004 and they are not expected to have a material effect on revenue or cost of revenue in future

periods under the deferral and amortization method of accounting. For the three months ended September 30, 2004 and 2003, the Company published 25 and 26 directories, respectively. For the nine months ended September 30, 2004 and 2003, the Company published 117 and 114 directories, respectively, in the Dex East States.

The Company enters into transactions where the Company’s products and services are promoted by a third party and, in exchange, the Company carries the party’s advertisement. The Company accounts for these transactions in accordance with Emerging Issues Task Force (“EITF”) Issue No. 99-17, “Accounting for Advertising Barter Transactions.” Revenue and expense related to such transactions are classified in the consolidated statements of operations consistently with similar items sold or purchased for cash. Such barter transactions were not significant to the Company’s operations for the three months and nine months ended September 30, 2004 and 2003.

In certain cases, the Company enters into agreements with accounts that involve the delivery of more than one product or service. Revenue for such arrangements is allocated in accordance with EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.”

The Company accounts for cost of revenue under the deferral and amortization method of accounting. Accordingly, the cost of revenue recognized in a reporting period consists of (1) costs incurred in that period and recognized in that period, principally sales salaries and wages, (2) costs incurred in a prior period, a portion of which is amortized and recognized in the current period, and (3) costs incurred in the current period, a portion of which is amortized and recognized in that period and the balance of which is deferred until future periods. Consequently, there will be a difference between the cost of revenue recognized in any given period and the costs incurred in the given period, which may be significant.

Costs incurred in the current period and subject to deferral include direct costs associated with the publication of directories, including sales commissions, paper, printing, transportation, distribution and pre-press production and employee and systems support costs relating to each of the foregoing. Sales commissions include commissions paid to employees for sales to local advertisers and to third party certified marketing representatives, which act as the Company’s channel to national advertisers. All deferred costs related to the sale and production of directories are recognized ratably over the life of each directory under the deferral and amortization method of accounting, with cost recognition commencing in the month of delivery.

The Company accounts for the Stock Option Plan of Dex Media, Inc. and the Dex Media, Inc. 2004 Incentive Award Plan under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Had the Company accounted for employee stock options grants under the fair value method prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” the pro forma results of the Company for the three months and nine months ended September 30, 2004 and 2003 would have been as follows (in thousands):

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recorded to reflect the future tax consequences of temporary differences between the financial reporting bases of assets and liabilities and their tax bases at each year end. Deferred tax assets and liabilities are measured using the enacted income tax rates in effect for the period in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are adjusted for future income tax rate changes in the year the changes are enacted. Deferred tax assets are recognized for operating loss and tax credit carry forwards if management believes, based upon existing evidence, that it is more likely than not that the carry forward will be utilized. All deferred tax assets are reviewed for realizability and valuation allowances are recorded if it is more likely than not that the deferred tax assets will not be realized.

For the three months and nine months ended September 30, 2004 and 2003 no goodwill was acquired, impaired or otherwise adjusted.

The gross carrying amount and accumulated amortization of other intangible assets and their estimated useful lives are as follows (dollars in thousands):


⁽¹⁾	Amortization is calculated using a declining method in relation to estimated retention lives of acquired accounts.

Long-term debt is comprised of the following (in thousands, in descending order of right of payment):

A portion of the net proceeds from the Offering was used to redeem $183.8 million of the Company’s senior subordinated notes at a redemption price of 112.125% plus accrued and unpaid interest.

As of September 30, 2004, there were no borrowings under the revolving credit facility (although approximately $1 million is committed under a standby letter of credit). The Company paid interest and fees for the credit facilities, interest rate swaps, senior notes and senior subordinated notes of $119.6 million and $106.8 million during the nine months ended September 30, 2004 and 2003, respectively. Included in interest expense paid in 2004, were $22.3 million of early redemption premiums paid to redeem a portion of our senior subordinated notes and the accelerated payment of $6.3 million accrued interest on those notes. The premium and interest were paid from a portion of the net proceeds from the Offering. As of September 30, 2004, the Company was in compliance with all covenants under its credit facilities.

In connection with the amendment and restatement of the Company’s credit agreement, the applicable margins on the revolving credit facility, Tranche A term loan and Tranche B term loan have been reduced. The commitment fee on the unused portion of the revolving credit facility has been reduced to 0.375% from 0.5%. The reductions have been effective since June 11, 2004.

As discussed in Note 1(a), a portion of the net proceeds from the Offering was used to redeem $183.8 million of the Company’s senior subordinated notes at a redemption price of 112.125% plus accrued and unpaid interest.

During November 2002, the Company entered into four interest rate swap agreements to hedge against the effects of increases in the interest rates associated with floating rate debt on its credit facilities. All interest rate related derivative instruments had forward starting dates of May 8, 2003. The Company reclassified $1.5 million and $1.8 million of hedging losses into interest expense for the three months ended September 30, 2004 and 2003, respectively. The Company reclassified $5.2 million and $2.8 million of hedging losses into

interest expense for the nine months ended September 30, 2004 and 2003, respectively. For the three months ended September 30, 2004 and 2003, the Company had $0.8 million of unrealized losses and $1.8 million of unrealized gains, respectively, net of tax which are included in other comprehensive loss. For the nine months ended September 30, 2004 and 2003, the Company had $2.2 million of unrealized gains and $2.2 million of unrealized losses, respectively, net of tax which are included in other comprehensive loss. As of September 30, 2004 and December 31, 2003, $1.8 million and $4.0 million, respectively, of deferred losses, net of tax on derivative instruments are recorded in accumulated other comprehensive loss, of which $0.8 million, net of tax is expected to be reclassified to earnings during the next 12 months.

During November 2002, the Company entered into a foreign currency swap agreement to hedge against the effects of foreign currency fluctuation between the US Dollar and the Euro on its Tranche B-Euros. For the three months and nine months ended September 30, 2003, the Company recognized $0.6 million and $4.9 million, respectively, in unrealized gains on the foreign currency derivative instrument. These gains were offset by losses on foreign currency transaction adjustments to the underlying debt instrument of $0.4 million and $3.8 million for the three months and nine months ended September 30, 2003, respectively. In connection with a refinancing of the Tranche B and Tranche-B Euros in November 2003, the Company canceled its foreign currency swap agreement on November 10, 2003.

During November 2002, the Company entered into an interest rate cap agreement. Losses of less than $0.1 million for each of the three months ended September 30, 2004 and 2003, and less than $0.1 million and $0.6 million for the nine months ended September 30, 2004 and 2003, respectively, relating to this agreement are included in earnings for those periods.

Components of comprehensive income (loss) are changes in equity other than those resulting from investments by owners and distributions to owners. Net income (loss) is the primary component of comprehensive income (loss). For the Company, the component of comprehensive income (loss) other than net income (loss) is the change in unrealized gain or loss on derivatives qualifying for hedge accounting, net of tax. The aggregate amounts of such changes to equity that have not been recognized in net income are reported in the equity portion of the consolidated balance sheets as accumulated other comprehensive income (loss). Comprehensive income (loss) for the periods presented is as follows (in thousands):

On November 8, 2002, Dex Media adopted the Stock Option Plan of Dex Media, Inc. (the “2002 Plan”) that permits the grant of nonqualified and incentive stock options to its employees, consultants and independent directors or those of its wholly-owned subsidiaries. Effective May 2004, Dex Media adopted the Dex Media, Inc. 2004 Incentive Award Plan (the “2004 Plan”). The 2004 Plan provides for a variety of stock-based awards, including non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, deferred stock awards, dividend equivalents, performance-based awards and other stock-based awards. Effective with the adoption of the 2004 Plan, Dex Media discontinued grants under the 2002 Plan, while the 5,066,540 options outstanding under the 2002 Plan remain

outstanding pursuant to the terms of that plan. Upon adoption of the 2004 Plan, 210,110 shares available for issuance under the 2002 Plan became available for issuance under the 2004 Plan. As of September 30, 2004, the number of shares available for issuance under the 2004 Plan was 1,210,110 with 12,500 shares issued under a restricted stock award and 1,197,610 shares available for issuance pursuant to future awards.

The Compensation Committee of Dex Media determines the terms for each award. Generally, all outstanding stock options have an exercise price that is equal to the estimated fair value of the common stock on the date the stock option was granted, however, in certain instances stock options have been granted with an exercise price below the estimated fair value of the common stock on the date of grant. All outstanding options have a term of ten years. Outstanding options vest in two segments. Subject to the optionee’s continued employment with the Company, (1) 25% of the options granted will vest in equal annual installments of 5% each on each December 31 beginning in the year of grant or the following year, depending upon when during the calendar year the options are granted, and ending five years after; and (2) 75% of the options granted will vest on the eighth anniversary of the grant date; however, an installment equal to 15% of the options granted shall become vested following each of the fiscal years beginning the year of grant or the following year, depending upon when during the calendar year the options are granted, and ending five years after if certain earnings before interest, taxes, depreciation and amortization (“EBITDA”) targets are met with respect to each year. All shares issued under restricted stock awards are subject to restrictions on sales and transfer of shares. These restrictions lapse on one-third of the shares granted on each of the first three anniversary dates, provided that the recipient is still an employee or director of the Company.

On November 3, 2003, Dex Media declared a distribution to Dex Holdings of $750.2 million. As a result of the distribution and as provided under the 2002 Plan, Dex Media adjusted the exercise price of all outstanding options to $6.00, effective November 10, 2003. On January 28, 2004, Dex Media declared another distribution to its parent of $250.5 million. As a result of the distribution and as allowed under the 2002 Plan, Dex Media adjusted the exercise price of outstanding options to $4.64 and increased the number of outstanding options by 9.3587%, effective March 3, 2004. As the aggregate intrinsic value of the awards immediately after the changes in exercise price was not greater than the aggregate intrinsic value of the awards immediately prior to the changes in exercise price, and as the ratio of the exercise price per share to the market price per share was not reduced, the adjustments to the exercise price of the options did not result in any accounting recognition in the Company’s consolidated statements of operations in accordance with APB Opinion No. 25 and FASB Interpretation No. (“FIN”) 44, “Accounting for Certain Transactions Involving Stock Compensation.”

Effective November 8, 2002, Dex Media adopted a pension plan and effective December 1, 2002, Dex Media adopted a post-retirement benefit plan providing retiree healthcare (together, the “Dex Media Plans”). All individuals who became employees of Dex Media in connection with the Acquisition and who previously participated in the Qwest plans now participate in the Dex Media Plans. Employees of Qwest Dex who retired prior to the date of the Acquisition became retirees of Qwest and as such receive benefits under the Qwest plans. Dex Media has filed for a determination letter with the IRS for its pension plan.

Pension costs and other post-retirement costs are recognized over the periods in which the employee renders services and becomes eligible to receive benefits as determined by using the projected unit credit method. Dex Media’s funding policy is to make contributions with the objective of accumulating sufficient assets to pay all benefits when due. No pension funding was required for Dex Media for the three months and nine months ended September 30, 2004 and 2003. The post-retirement benefit plan is pay-as-you go and is

funded out of Dex Media’s operating cash as the costs are incurred. No other post-retirement benefit funding was required for Dex Media for the three months and nine months ended September 30, 2004 and 2003.

On September 9, 2003, Dex West employees became employees of Dex Media East. Effective January 1, 2004, all employees of Dex Media East were transferred to Service Co. As such, all employee-related liabilities, including pension and other post-retirement obligations, are now included in Service Co.’s reported liabilities. The Company records an affiliate payable for the portion of the liability associated with the employees who provide services to Dex Media East. Under the Shared Services and Employees Agreement dated September 9, 2003, costs related to employees providing services entirely for Dex Media East are allocated 100% to Dex Media East. Shared employee costs are allocated and charged to Dex Media East based upon Dex Media East’s proportional share of consolidated Dex Media revenue.

The components of net periodic benefit cost for the Company are as follows (in thousands):

The Company is involved, from time to time, in litigation arising in the normal course of business. The outcome of this litigation is not expected to have a material adverse impact on the Company.

In September of 2004, the Company announced a planned work force reduction primarily due to efficiencies gained by the replacement of our core production platform with technology from Amdocs. Accordingly, the Company accrued $3.8 million of severance costs in the third quarter of 2004.

As also described in Notes 1(a) and 9(a), upon consummation of the acquisition of Dex West on September 9, 2003 all Dex West employees transferred to Dex Media West and became legal employees of Dex Media East. Effective January 1, 2004, all employees of Dex Media East were transferred to Service Co. As such, all employee-related liabilities, including pension and other post-retirement obligations, are now included in Service Co.’s liabilities, with an offsetting asset recorded as an affiliate receivable. Dex Media East is charged and carries an affiliate payable for the portion of the liability associated with employees providing services to Dex Media East. Pursuant to Shared Services and Employees Agreement dated September 9, 2003, costs related to Dex Media East employees providing services entirely for Dex Media East are allocated 100% to Dex Media East. Shared employee costs are allocated and charged to Dex Media East based upon Dex Media East’s proportional share of consolidated Dex Media revenue. All cash related affiliate balances are settled at least monthly.

In connection with the Acquisition, the Company entered into a management consulting agreement with each of the Sponsors. Each agreement allows the Company access to the Sponsors’ expertise in areas such as corporate management, financial transactions, product strategy, investment, acquisitions and other matters that relate to the Company’s business, administration and policies. Each of the two Sponsors received an annual advisory fee of $1.0 million for advisory, consulting and other services. Pursuant to these management consulting agreements, the Company incurred $0.5 million in pro-rated annual advisory fees for the three months ended September 30, 2003 and $1.0 million and $1.5 million for the nine months ended September 30, 2004 and 2003, respectively. The annual advisory fees payable under the agreements were terminated in conjunction with the Offering for a one-time fee of $5.0 million paid to each of the Sponsors. The Sponsors maintain the right to act as the Company’s financial advisor or investment banker in connection with any merger, acquisition, disposition, finance or the like in return for additional reasonable compensation and expenses as may be agreed upon by the parties.

Dex Media has entered into a two year network services agreement with SAVVIS Communications Corporation (“SAVVIS”), pursuant to which SAVVIS will provide network connections and other services to support the Company’s integrated production system and other systems. SAVVIS is an affiliate of WCAS. The Company and Dex Media West expect to pay SAVVIS approximately $2.2 million, collectively, over the two-year term of the contract, although the Company has the option to purchase additional services for which the Company would pay SAVVIS additional fees. As of September 30, 2004, approximately $1.2 million was not yet incurred under the contract.

The following discussion and analysis of our financial condition and results of operations covers periods subsequent to the consummation of the acquisition of the assets of Dex East (the “Acquisition”). “Dex East” refers to the operations of Qwest Dex Holdings, Inc. and its subsidiary in Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota (the “Dex East States”). References to “we,” “our” or “us” refers to Dex Media East, the successor to Dex East. We have operated as a stand-alone company since the Acquisition. The Acquisition was accounted for under the purchase method of accounting. Under this method, the pre-acquisition deferred revenue and related deferred costs associated with directories that were published prior to the acquisition date were not carried over to our balance sheet. The effect of this accounting treatment is to reduce revenue and related costs that would otherwise have been recognized during the twelve months subsequent to the acquisition date.

The statements in the discussion and analysis regarding industry outlook, our expectations regarding the future performance of our business and the other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties. Our actual results may differ materially from those contained in any forward-looking statements. See “— Disclosure Regarding Forward-Looking Statements.” You should read the following discussion together with our condensed consolidated financial statements and related notes thereto included elsewhere herein.

As a result of our conversion to the Amdocs software system (discussed below), certain of our customer account categories will be reclassified, which may result in a change in how we report our total number of customer accounts.

We are the largest directory publisher in the Dex East States. For the three months ended September 30, 2004 and 2003, we published 25 and 26 directories, respectively, and distributed 2.5 million and 3.1 million copies of these directories, respectively, to business and residential consumers in the Dex East States. For the nine months ended September 30, 2004 and 2003, we published 117 and 114 directories, respectively, and distributed 12.1 million and 12.0 million copies of these directories, respectively, to business and residential consumers in the Dex East States. We also provide related services, including an Internet-based directory, direct marketing lists and the sale of Dex directories and other publishers’ directories outside of the normal delivery schedule. For the three months and nine months ended September 30, 2004, we generated $182.9 million and $543.5 million in revenue, respectively. Approximately 98% of our total revenue for the three months and nine months ended September 30, 2004, respectively, was generated from the publication of directories.

Our strategy is centered on building relationships with our major account groups: small and medium-sized local businesses and national companies doing business in the Dex East States. We plan to continue to build our knowledge of their businesses and develop value-added content that can be distributed to business and residential consumers in a variety of forms. Currently, the primary method of distribution is our print directories. We also use the Internet and CD-ROMs to deliver our content. We plan to continue evaluating different methods of distribution as markets and electronic device acceptance change, particularly in the digital space. Additionally, we will look to enhance print product offerings such as Internet-related products and distribution.

Maximizing the utility of our content is an important aspect of our overall strategy. To accomplish this, we plan to continue: innovating new products such as advertising on book spines, covers and tabs; expanding on market segmentation such as bilingual directories in select markets; and enhancing our distribution

platforms. In addition, we plan to continue evaluating our related businesses based on the utility of these product offerings to our advertisers and consumers.

Also, now that we are a stand-alone company, our strategy is to focus on improving our infrastructure in order to achieve a more efficient cost structure and improve revenue opportunities in the long-term. Beginning in 2004, we began replacing our entire production system with Amdocs technology in a phased deployment. The first phase was deployed on September 1, 2004 with the last phase expected to be completed in 2005.

Our condensed consolidated financial statements included herein have been prepared on the basis of the deferral and amortization method of accounting, under which revenue and expenses are initially deferred and then recognized ratably over the life of each directory, commencing in the month of delivery. In 2003, we determined that the 12-month lives of five directories published in December 2002 would be extended. The new editions of these five directories were published in January 2004. These extensions were made to more efficiently manage work and account flow. The lives of the new editions of these directories are expected to be 12 months thereafter. These extensions did not have a significant impact on our results of operations for the three months and nine months ended September 30, 2004 and are not expected to have a material effect on revenue or cost of revenue in future periods under the deferral and amortization method of accounting.

We derive virtually all of our revenue from the sale of advertising in our printed directories, which we refer to as directory services revenue. We also provide related services, including an Internet-based directory, other Internet-related products, direct marketing lists and the sale of Dex directories and other publishers’ directories outside of the normal delivery schedule, which we refer to collectively as other revenue. Growth in directory services revenue is affected by several factors, including changes in the quantity and size of advertisements sold as well as the proportion of premium advertisements sold, changes in the pricing of advertising, changes in the quantity and mix of advertising purchased per account and the introduction of additional products which generate incremental revenue. Directory services revenue may also increase through the publication of new printed directories.

We enter into transactions where our products and services are promoted by a third party and, in exchange, we carry that party’s advertisement. We account for these transactions in accordance with Emerging Issues Task Force (“EITF”) Issue No. 99-17, “Accounting for Advertising Barter Transactions.” Revenue and expense related to such transactions are classified in the consolidated statements of operations consistently with similar items sold or purchased for cash. Such barter transactions were not significant to our operations for the three months and nine months ended September 30, 2004 and 2003.

In certain cases, we enter into agreements with accounts that involve the delivery of more than one product or service. We allocate revenue for such arrangements in accordance with EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.”

We account for cost of revenue under the deferral and amortization method of accounting. Accordingly, our cost of revenue recognized in a reporting period consists of (1) costs incurred in that period and recognized in that period, principally sales salaries and wages, (2) costs incurred in a prior period, a portion of which is amortized and recognized in the current period, and (3) costs incurred in the current period, a portion of which is amortized and recognized in that period and the balance of which is deferred until future periods. Consequently, there will be a difference between the cost of revenue recognized in any given period and the costs incurred in the given period, which may be significant.

press production, and employee and systems support costs relating to each of the foregoing. Sales commissions include commissions paid to employees for sales to local advertisers and to certified marketing representatives (“CMRs”), which act as our channel to national advertisers. All deferred costs related to the sale and production of directories are recognized ratably over the life of each directory under the deferral and amortization method of accounting, with cost recognition commencing in the month of delivery.

Our general and administrative expense consists primarily of the costs of advertising, promotion and marketing, administrative staff, information technology, training, account billing, corporate management, office and facilities expense and bad debt expense. All of our general and administrative expense is recognized in the period in which it is incurred. Historically, our general and administrative expense has included the costs of other services that were shared among Qwest affiliates, including real estate, information technologies, finance and human resources. However, since we have terminated the transition services agreements with Qwest as of December 31, 2003, we now incur these costs directly.

We account for income taxes under the asset and liability method of accounting. Deferred tax assets and liabilities are recorded to reflect the future tax consequences of temporary differences between the financial reporting bases of assets and liabilities and their tax bases at each year end. Deferred tax assets and liabilities are measured using the enacted income tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are adjusted for future income tax rate changes in the year the changes are enacted. Deferred tax assets are recognized for operating losses and tax credit carry forwards if management believes, based upon existing evidence, that it is more likely than not that the carry forward will be utilized. All deferred tax assets are reviewed for realizability and valuation allowances are recorded if it is more likely than not that the deferred tax assets will not be realized.

Our revenue and cost of revenue for the twelve months following the consummation of the Acquisition were $85.9 million and $22.2 million lower, respectively, than our revenue and cost of revenue would have been otherwise because the Acquisition was accounted for under the purchase method of accounting. For the three months ended September 30, 2003, our revenue and cost of revenue were $5.4 million and $1.4 million lower, respectively, as a result of the purchase method of accounting. For the nine months ended September 30, 2003, our revenue and cost of revenue were $43.6 million and $11.3 million lower, respectively, as a result of the purchase method of accounting. Under the purchase method of accounting, deferred revenue and related deferred directory costs associated with directories that were published and distributed prior to the Acquisition were not carried over to our balance sheet. The effect of this accounting treatment was to reduce revenue and related costs that would otherwise have been recognized in the twelve months subsequent to the Acquisition. The purchase method of accounting has not affected our revenue and directory costs subsequent to 2003. This purchase accounting adjustment was non-recurring and has no historical or future cash impact.

The results of operations below include the effects of purchase accounting for the three months ended September 30, 2003 and therefore the periods presented are not comparable. Please refer to the section “Items

Affecting Comparability Between Periods” and the discussion below for detail regarding the effects of these adjustments.

Total revenue increased by $7.6 million, or 4.4%, to $182.9 million for the three months ended September 30, 2004 from $175.3 million for the three months ended September 30, 2003. Total revenue for the three months ended September 30, 2003 was $5.4 million lower than it would have been due to the effects of purchase accounting. Excluding the effects of purchase accounting in 2003, total revenue increased $2.2 million, or 1.2%, in 2004. Total revenue included $178.9 million in directory services revenue and $4.0 million in revenue for all other products for the three months ended September 30, 2004.

Total directory services revenue, which consists of local and national directory services revenue, increased $8.1 million, or 4.8%, to $178.9 million for the three months ended September 30, 2004 from $170.8 million for the three months ended September 30, 2003. Total directory services revenue for the three months ended September 30, 2003 was $5.4 million lower than it would have been due to the effects of purchase accounting. Excluding the effects of purchase accounting in 2003, total directory services revenue increased $2.7 million, or 1.5%, in 2004.

Directory services revenue is affected by a variety of volume and pricing factors. Volume related factors include quantity of advertisements sold, the change in mix of advertisements among our product families and the proportion of advertisements sold with premium features and the volume of promotional services obtained from our advertisers in exchange for our publication of their advertisement in our directories and the number of local advertiser disconnects during a period. Pricing factors include price increases related to our standard rates that may be made from time to time in varying markets for varying categories, offset by discount programs that may be initiated in local markets for certain advertiser headings. Such factors generally affect the dollar volume of orders initiated in a period which are recognized as revenue over the life of a given directory, beginning in the month of delivery. Multiple factors contribute to changes in revenue, and although no single factor can be distinguished as the primary cause, improvements in product mix and pricing, combined with stable account renewal, contributed to our changes in directory services revenue.

Local directory services revenue increased $4.4 million, or 3.0%, to $150.3 million for the three months ended September 30, 2004 compared to $146.0 million for the three months ended September 30, 2003. Local directory services revenue for the three months ended September 30, 2003 was $1.0 million lower than it would have been due to the effects of purchase accounting. Excluding the effects of purchase accounting in 2003, local directory services revenue increased $3.3 million, or 2.2%, in 2004.

Revenue from national advertisers increased $3.8 million, or 15.2%, to $28.6 million for the three months ended September 30, 2004 as compared to $24.8 million for the three months ended September 30, 2003. Revenue from national advertisers for the three months ended September 30, 2003 was $4.4 million lower than it would have been due to the effects of purchase accounting. Excluding the effects of purchase accounting in 2003, revenue from national advertisers decreased $0.6 million, or 2.1%, in 2004.

Other revenue decreased by $0.5 million, or 11.3%, to $4.0 million for the three months ended September 30, 2004 from $4.5 million for the three months ended September 30, 2003. In 2004, we substantially reduced the number of products in our direct services product line which represented $0.3 million of the decline between periods.

Cost of revenue recognized was $55.0 million for the three months ended September 30, 2004 compared to $50.2 million for the three months ended September 30, 2003. Recognized cost of revenue for the three months ended September 30, 2003 was $1.4 million lower than it would have been due to the effects of purchase accounting. Excluding the effects of purchase accounting in 2003, cost of revenue recognized increased $3.4 million, or 6.6%, in 2004. Cost of revenue recognized represented 30.1% of revenue for the three months ended September 30, 2004, compared to 28.6% of revenue, excluding the effects of purchase accounting, for the three months ended September 30, 2003.

For the three months ended September 30, 2004 and 2003, we incurred costs subject to deferral and amortization of $45.9 million and $44.3 million, respectively. The increase in incurred costs is primarily a result of increased contracting and professional fees related to on-going support related to our new production system.

Employee costs incurred decreased by $1.8 million, or 6.7%, to $25.0 million for the three months ended September 30, 2004 from $26.8 million for the three months ended September 30, 2003. The decrease is due primarily to changes in sales incentives and a reduction in the number of employees.

Direct costs of publishing incurred, which primarily included paper, printing and distribution, were $10.2 million and $11.1 million for the three months ended September 30, 2004 and 2003, respectively. The decrease primarily results from lower copy counts of directories distributed and lower page counts of directories printed during the three months ended September 30, 2004.

Contracting and professional fees incurred increased $2.3 million to $4.2 million from $1.9 million for the three months ended September 30, 2004 and 2003, respectively. The increase is primarily due to increased on-going support related to our new production system.

Other cost of revenue incurred, which primarily includes systems expense, national commissions and office and facilities expense were $6.5 million and $4.5 million for the three months ended September 30, 2004 and 2003, respectively.

Our gross profit was $127.9 million for the three months ended September 30, 2004 compared to $125.1 million for the three months ended September 30, 2003. Gross profit for the three months ended September 30, 2003 was $4.0 million lower due to the effects of purchase accounting. Excluding the effects of purchase accounting in 2003, gross profit decreased $1.2 million in the third quarter of 2004 and gross margin decreased to 69.9% in 2004 from 71.4% in 2003.

General and administrative expense, excluding depreciation and amortization, increased $13.3 million, or 54.7%, to $37.7 million from $24.4 million for the three months ended September 30, 2003. The increase was primarily due to the termination of annual advisory fees and increases in employee costs, advertising expense and contracting and professional fees.

Employee costs, which include salaries and wages, benefits and other employee costs, increased $3.1 million, or 46.3%, to $9.8 million from $6.7 million for the three months ended September 30, 2004 and 2003. Salaries and wages were $3.5 million and $4.1 million for the three months ended September 30, 2004 and 2003, respectively. Benefits were $2.2 million and $2.4 million for the three months ended September 30, 2004 and 2003, respectively. Other employee costs were $4.1 million and $0.2 million for the three months ended September 30, 2004 and 2003, respectively. The increase in other employee costs is due primarily to accrued severance costs of $3.8 million related to the planned workforce reduction as a result of efficiencies gained by the replacement of our core production platform with technology from Amdocs.

Advertising expense increased $1.8 million, or 69.2%, to $4.4 million for the three months ended September 30, 2004 from $2.6 million for the three months ended September 30, 2003 due to additional media advertisements and exclusivity arrangements designed to increase consumer awareness, including promoting the new Dex trademark and product offerings. Advertising as a percent of revenue, excluding the effects of purchase accounting in 2003, increased to 2.4% for the three months ended September 30, 2004 from 1.4% for the three months ended September 30, 2003.

Contracting and professional fees were $4.4 million and $4.7 million for the three months ended September 30, 2004 and 2003, respectively.

Bad debt expense remained constant at $4.9 million for the three months ended September 30, 2004 and 2003. Bad debt expense as a percentage of revenue was 2.7% for each of the three months ended September 30, 2004 and the three months ended September 30, 2003, excluding the effects of purchase accounting.

In connection with the initial public offering of our parent, Dex Media (the “Offering), we paid $5.0 million to each of our two Sponsors to eliminate the $2.0 million aggregate annual fee payable under our management consulting agreements. This non-recurring termination fee was not incurred in the prior year period. The annual advising fee paid in prior periods is included in contracting and professional fees.

All other general and administrative expense, decreased $1.3 million, or 23.6%, to $4.2 million for the three months ended September 30, 2004 from $5.5 million for the comparable period in 2003.

For the three months ended September 30, 2004 and 2003 we recognized $45.3 million and $53.6 million, respectively, in amortization expense related to our identifiable intangible assets. The decrease in amortization from the prior year was the result of a declining method used to amortize the value of acquired accounts in proportion with their estimated retention lives.

We recognized interest expense of $68.6 million and $47.4 million for the three months ended September 30, 2004 and 2003. The increase in interest expense is primarily a result of the additional borrowings of $160.0 million Tranche A term loan in conjunction with the acquisition of Dex West on September 9, 2003, and the early redemption premiums paid of $22.3 million, the accelerated payment of $6.3 million accrued interest and the write off of $5.1 million deferred financing costs in conjunction with the redemption of $183.8 million of our senior subordinated notes.

SFAS No. 109 requires that we recognize deferred income tax assets on net operating losses to the extent realization of these assets is more likely than not. As of September 30, 2004, we have recorded $53.3 million of deferred income tax assets resulting primarily from net operating loss carryforwards. Based upon current projections of income and expenses, we have determined that it is more likely than not that we will utilize these deferred tax assets before the expiration of the net operating loss carryforward periods. Accordingly, no valuation allowance has been recorded.

The results of operations below include the effects of purchase accounting for the nine months ended September 30, 2003 and therefore the periods presented are not comparable. Please refer to the section “Items Affecting Comparability Between Periods” and the discussion below for detail regarding the effects of these adjustments.

Total revenue increased by $51.1 million, or 10.4%, to $543.5 million for the nine months ended September 30, 2004 from $492.4 million for the nine months ended September 30, 2003. Total revenue for the nine months ended September 30, 2003 was $43.6 million lower than it would have been due to the effects of purchase accounting. Excluding the effects of purchase accounting in 2003, total revenue increased $7.5 million, or 1.4%, in 2004. Total revenue included $531.3 million in directory services revenue and $12.2 million in revenue for all other products for the nine months ended September 30, 2004.

Total directory services revenue, which consists of local and national directory services revenue, increased $51.9 million, or 10.8%, to $531.3 million for the nine months ended September 30, 2004 from $479.5 million for the nine months ended September 30, 2003. Total directory services revenue for the nine months ended September 30, 2003 was $43.6 million lower than it would have been due to the effects of purchase accounting. Excluding the effects of purchase accounting in 2003, total directory services revenue increased $8.2 million, or 1.6%, in 2004.

Directory services revenue is affected by a variety of volume and pricing factors. Volume related factors include quantity of advertisements sold, the change in mix of advertisements among our product families and the proportion of advertisements sold with premium features and the volume of promotional services obtained from our advertisers in exchange for our publication of their advertisement in our directories. Pricing factors include price increases related to our standard rates that may be made from time to time in varying markets for varying categories, offset by discount programs that may be initiated in local markets for certain advertiser headings. Such factors generally affect the dollar volume of orders initiated in a period which are recognized as revenue over the life of a given directory, beginning in the month of delivery. Multiple factors contribute to changes in revenue, and although no single factor can be distinguished as the primary cause, improvements in product mix and pricing, combined with stable account renewal, contributed to our changes in directory services revenue.

Local directory services revenue increased $19.3 million, or 4.6%, to $443.1 million for the nine months ended September 30, 2004 compared to $423.8 million for the nine months ended September 30, 2003. Local directory services revenue for the nine months ended September 30, 2003 was $13.4 million lower than it

would have been due to the effects of purchase accounting. Excluding the effects of purchase accounting in 2003, local directory services revenue increased $5.9 million, or 1.3%, in 2004.

Revenue from national advertisers increased $32.6 million, or 58.4%, to $88.3 million for the nine months ended September 30, 2004 as compared to $55.7 million for the nine months ended September 30, 2003. Revenue from national advertisers for the nine months ended September 30, 2003 was $30.2 million lower than it would have been due to the effects of purchase accounting. Excluding the effects of purchase accounting in 2003, revenue from national advertisers increased $2.4 million, or 2.8%, in 2004.

Other revenue decreased by $0.8 million, or 6.0%, to $12.2 million for the nine months ended September 30, 2004 from $13.0 million for the nine months ended September 30, 2003. In 2004, we substantially reduced the number of products in our direct marketing services product line which represented $0.5 million of the decline between periods.

Cost of revenue recognized was $165.6 million for the nine months ended September 30, 2004 compared to $147.4 million for the nine months ended September 30, 2003. Recognized cost of revenue for the nine months ended September 30, 2003 was $11.3 million lower than it would have been due to the effects of purchase accounting. Excluding the effects of purchase accounting in 2003, cost of revenue recognized increased $6.9 million, or 4.3%, in 2004. Cost of revenue recognized represented 30.5% of revenue for the nine months ended September 30, 2004, compared to 29.6% of revenue, excluding the effects of purchase accounting, for the nine months ended September 30, 2003.

For the nine months ended September 30, 2004 and 2003, we incurred costs subject to deferral and amortization of $157.3 million and $147.8 million, respectively. The increase in incurred costs is primarily a result of increased contracting and professional fees related to on-going support related to our new production system and to the shifts in publication schedules of five directories from December 2003 to the first quarter of 2004.

Employee costs incurred were $74.1 million and $74.2 million for the nine months ended September 30, 2004 and 2003, respectively.

Direct costs of publishing incurred, which primarily included paper, printing and distribution, were $49.6 million and $45.0 million for the nine months ended September 30, 2004 and 2003, respectively. The difference in directory publication schedules between the periods contributed to $3.6 million of the increase.

Contracting and professional fees incurred increased $5.4 million to $9.1 million from $3.7 million for the nine months ended September 30, 2004 and 2003, respectively. The increase is primarily due to increased on-going support related to our new production system.

Other costs of revenue incurred, which primarily includes systems expense, national commissions and office and facilities expense were $24.5 million and $24.9 million for the nine months ended September 30, 2004 and 2003, respectively.

Our gross profit was $377.9 million for the nine months ended September 30, 2004 compared to $345.0 million for the nine months ended September 30, 2003. Gross profit for the nine months ended September 30, 2003 was $32.3 million lower due to the effects of purchase accounting. Excluding the effects of purchase accounting in 2003, total gross profit increased $0.6 million, or 0.2%, in 2004 and gross margin decreased to 69.5% in 2004 from 70.4% in 2003.

General and administrative expense, excluding depreciation and amortization, increased $13.8 million, or 19.3%, to $85.5 million from $71.6 million for the nine months ended September 30, 2003. The increase was primarily due to the termination of annual advisory fees and increases in employee costs, advertising expense

and contracting and professional fees offset by decreases in bad debt expense and other general and administrative expenses.

Employee costs, which include salaries and wages, benefits and other employee costs, increased $3.8 million, or 19.5%, to $23.3 million for the nine months ended September 30, 2004 from $19.5 million for the nine months ended September 30, 2003. Salaries and wages were $11.6 million and $12.0 million for the nine months ended September 30, 2004 and 2003, respectively. Benefits were $6.7 million and $6.6 million for the nine months ended September 30, 2004 and 2003, respectively. Other employee costs were $5.0 million and $0.9 million for the nine months ended September 30, 2004 and 2003, respectively. The increase in other employee costs is primarily due to accrued severance costs of $3.8 million related to the planned workforce reduction as a result of the efficiencies gained by the replacement of our core production platform with technology from Amdocs.

Advertising increased $6.2 million to $12.3 million for the nine months ended September 30, 2004 from $6.1 million for the nine months ended September 30, 2003 due to additional media advertisements and exclusivity arrangements designed to increase consumer awareness, including promoting the new Dex trademark and product offerings. Advertising as a percent of revenue, excluding the effects of purchase accounting in 2003, increased to 2.3% for the nine months ended September 30, 2004 compared to 1.1% for the nine months ended September 30, 2003.

Contracting and professional fees increased $0.6 million, or 5.0%, to $12.7 million from $12.1 million for the nine months ended September 30, 2003. The increase is primarily due to increased receivable collection efforts by external collection agencies and legal fees.

Bad debt expense decreased $2.2 million, or 11.8%, to $16.3 million from $18.4 million for the nine months ended September 30, 2004 and 2003, respectively. Bad debt expense as a percentage of revenue was 3.0% for the nine months ended September 30, 2004 compared to 3.4% of revenue, excluding the effects of purchase accounting, for the nine months ended September 30, 2003. The decrease in bad debt expense is primarily a result of improvement in aged receivable balances.

In connection with the Offering, we paid $5.0 million to each of our two Sponsors to eliminate the $2.0 million aggregate annual advisory fee payable under our management consulting agreements. This non-recurring termination fee was not incurred in the prior year period. The annual advisory fee paid in prior periods is included in contracting and professional fees.

All other general and administrative expense, decreased $4.6 million, or 29.7%, to $10.9 million for the nine months ended September 30, 2004 from $15.5 million for the comparable period in 2003. For the nine months ended September 30, 2003, other general and administrative expense includes shared services with Qwest, including services for finance, human resources, real estate and information technology with the costs of such services incurred directly in salaries and wages for the nine months ended September 30, 2004.

For the nine months ended September 30, 2004 and 2003 we recognized $135.8 million and $160.8 million, respectively, in amortization expense related to our identifiable intangible assets. The decrease in amortization from the prior year was the result of a declining method used to amortize the value of acquired accounts in proportion with their estimated retention lives.

We recognized interest expense of $163.1 million and $145.8 million for the nine months ended September 30, 2004 and 2003, respectively. The increase in interest expense is primarily a result of additional borrowings of $160.0 million Tranche A term loan in conjunction with the acquisition of Dex West on September 9, 2003 as well as the early redemption premiums paid, an accelerated accrued interest payment and an additional write off of deferred financing costs related to the redemption of a portion of our senior subordinated notes. Interest expense for the nine months ended September 30, 2004 and 2003 includes $25.3 million and $13.0 million, respectively, of amortization of deferred financing costs. Interest expense for

the nine months ended September 30, 2004 also includes the $22.3 million of early redemption premiums paid, the $6.3 million accelerated accrued interest payment and the $5.1 million write off of deferred financing costs related to the redemption of our senior subordinated notes.

Following the transactions related to the Acquisition, our primary source of liquidity continues to be cash flow generated from operations. We also have availability under our revolving credit facility, subject to certain conditions.

In connection with the Acquisition, we incurred $1,280.0 million of borrowings under our credit facilities and $975.0 million of indebtedness with the issuance of the outstanding notes. In connection with the acquisition in September 2003, of Dex West by Dex Media, our indirect parent, we borrowed an additional $160.0 million under our credit facilities. As of September 30, 2004, we had outstanding $1,789.7 million in aggregate indebtedness due primarily to aggregate debt repayments since the Acquisition of $631.3 million and foreign exchange loss through November 2003 of $6.0 million. In connection with the Offering, we redeemed $183.8 million of our 12 1/8% senior subordinated notes at a redemption price of 112.125% plus accrued and unpaid interest on August 26, 2004 with a portion of the proceeds from the Offering.

Our credit facilities consist of a revolving credit facility and term loan facilities. The revolving credit facility expiring in November 2008 is comprised of total principal of up to $100.0 million available for general corporate purposes, subject to certain conditions. The term loan facilities consist of a Tranche A term loan facility and a Tranche B term loan facility, which mature in November 2008 and May 2009, respectively.


	•	a base rate used by JPMorgan Chase Bank, plus an applicable margin; or

	•	a eurocurrency rate on deposits for one, two, three or six-month periods (or nine or twelve-month periods if, at the time of the borrowing, all lenders agree to make such a duration available), plus an applicable margin.

The applicable margins on loans under our revolving credit facility, the Tranche A term loan facility and the Tranche B term loan facility are subject to change depending on our leverage ratio.

In addition to paying interest on outstanding principal amounts under our credit facilities, we are required to pay an annual commitment fee of 0.375% (reduced from 0.5% when the credit facilities were amended on June 11, 2004) to the lenders for the unused commitments under our revolving credit facility. The commitment fee is payable quarterly in arrears and is subject to change depending on our leverage ratio.

On June 11, 2004, we entered into an amended and restated credit agreement to, among other things, (i) reduce the applicable margins on loans under our credit facilities and the commitment fee on the revolving credit facility, (ii) permit the redemption of all of Dex Media’s 5% Series A preferred stock, which was held by our Sponsors and management, plus accrued and unpaid dividends, (iii) permit the redemption of up to 35% of our outstanding 12 1/8% senior subordinated notes due 2012 and its associated redemption premium, plus accrued and unpaid interest from proceeds from the Offering of Dex Media’s common stock, (iv) make a final lump sum payment to our Sponsors to terminate the annual advisory fees payable under the management

consulting agreements, and (v) permit us to distribute to Dex Media 42% of the funds required to fund the dividends on Dex Media’s common stock if and when such dividends are declared, up to $29.4 million annually. The amendments to the credit agreement, except the repricing of the applicable margins and commitment fees which were effective on June 11, 2004, were effective immediately upon the consummation of the Offering on July 27, 2004.

Our credit facilities contain negative and affirmative covenants and requirements affecting us and domestic subsidiaries that we create or acquire, with certain exceptions set forth in our credit agreement. Our credit facilities contain the following negative covenants and restrictions, among others: restrictions on liens, sale-leaseback transactions, incurrence of debt, payment of dividends and other restricted junior payments, redemptions and stock repurchases, consolidations and mergers, acquisitions, asset dispositions, investments, loans, advances, changes in line of business, changes in fiscal year, restrictive agreements with subsidiaries, transactions with affiliates, capital expenditures, amendments to charter, by-laws and other material documents, hedging agreements and inter-company indebtedness. Our credit facilities also require us to meet certain financial covenants, including leverage ratios, an interest coverage ratio and a fixed charges coverage ratio.

We entered into a billing and collection services agreement with Qwest LEC upon the consummation of the Acquisition which was renewed effective November 1, 2004. Under this renewed agreement, Qwest LEC will continue until December 31, 2008, to bill and collect, on our behalf, amounts owed by our accounts, that are also Qwest local telephone customers, for our directory services. In 2003, Qwest LEC billed approximately 43% of our revenue, excluding the effects of purchase accounting, on our behalf, and we billed the remaining 57% directly. Qwest LEC bills the account on the same billing statement on which it bills the customer for local telephone service. In conjunction with the Acquisition, we developed and continue to maintain the ability to transition those accounts billed by Qwest from the Qwest LEC billing and collection system to our own billing and collection system within approximately two weeks should we choose to do so.

Net cash provided by operations was $167.6 million and $182.3 million for the nine months ended September 30, 2004 and 2003, respectively. Cash provided by operations was generated primarily from cash receipts from the sale of directory advertisements, reduced by cash disbursements for cost of revenue incurred, general and administrative expenses and interest expense.

Net cash used for investing activities was $22.4 million and $26.2 million for the nine months ended September 30, 2004 and 2003, respectively. The principal use of cash for investing activities for the nine months ended September 30, 2004 and 2003 was expenditures for property, plant and equipment and software.

Net cash used for financing activities was $148.0 million and $152.5 million for the nine months ended September 30, 2004 and 2003, respectively. Significant sources of cash flows for the nine months ended September 30, 2004 included $212.3 million of contributions from parent to fund the redemption of the senior subordinated notes in conjunction with the Offering. Significant uses of cash flows for the nine months ended September 30, 2004 included $351.2 million in total debt repayments of which $183.8 million was the redemption of the senior subordinated notes in conjunction with the Offering. The principal sources of cash flows for the nine months ended September 30, 2003 were borrowings of $160.0 million and contributions from parent of $50.0 million which were distributed to the parent to fund the acquisition of Dex West. Other significant uses of cash flows for the nine months ended September 30, 2003 were $149.9 million of repayments on long-term borrowings.

Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures will depend to a large extent on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our credit facilities will be adequate to meet our future liquidity needs for at least the next 12 months.

We cannot assure you, however, that our business will generate cash flow from operations in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. The restrictive covenants under the note indentures and credit agreement prohibit us from commingling the funds of Dex Media West with ours. They also prohibit us from borrowing any funds from Dex Media West. Despite the restrictive covenants under the note indentures and credit agreement limiting our ability to incur additional indebtedness and dispose of our assets, the covenants allow for multiple sources of limited liquidity that we may access to meet our ongoing business needs, including:


	i.	Cash from operating cash flow.

	ii.	Up to $99.1 million of the revolving credit facility available to us as of September 30, 2004.

	iii.	Other unsecured indebtedness which we may incur up to an aggregate principal amount of $50.0 million.

	iv.	We may sell, or dispose of, assets up to $10.0 million annually, subject to an aggregate amount of $20.0 million.

	v.	The proceeds from any debt issuance which we may use as long as our leverage ratio is at or below 4.0 to 1.0.

	vi.	We may use the proceeds from any equity offering as follows: a) 50%, if our leverage ratio is above 4.0 to 1.0 or b) 100%, if our leverage ratio is at or below 4.0 to 1.0. As a condition to the closing of the Offering, we amended our credit facilities to, among other things, allow us access to a portion of the proceeds from the Offering irrespective of our leverage ratio.

The credit agreement and indentures governing the notes permit us to pursue the option of financing our capital expenditures with capital leases as long as the aggregate outstanding balance of capital leases is not in excess of $30.0 million at any time. As of September 30, 2004, the outstanding balance of capital leases was $0.4 million.

Our access to liquidity will improve significantly when our leverage ratio drops below 4.0 to 1.0. The leverage ratio can be improved by reducing debt levels or increasing the amount of earnings before interest, taxes, depreciation and amortization (“EBITDA”). When our leverage ratio is under 4.0 to 1.0, we may retain any proceeds from debt or equity issuances for any business purpose, except for optional repayment of non-credit facility related debt with equity proceeds. If we use equity proceeds to optionally repay a cumulative amount of non-credit facility related debt in excess of $20.0 million, we are required to repay equal amounts of debt under our term facilities with the proceeds from the same equity issuances.

We expect that our primary liquidity requirements will be for debt service on our credit facilities and notes, capital expenditures and working capital. During the nine months ended September 30, 2004, we used the funds generated from operations in excess of liquidity requirements to make optional repayments under our credit facilities.

We made optional repayments in an aggregate principal amount of $167.4 million under our credit facilities and $183.8 million on our senior subordinated notes in the nine months ended September 30, 2004 using the excess cash flow generated from operations and a portion of the proceeds from the Offering. Our debt portfolio, consisting of the amounts borrowed under the credit facilities, senior notes and senior subordinated notes, is comprised of 64.9% fixed rate debt and 35.1% floating rate debt as of September 30, 2004. Mandatory repayments or optional repayments under the credit facilities in the future will cause the percentage of fixed rate debt in our debt portfolio to increase. As our fixed rate debt as a percentage of our total debt increases, the effective interest rate of our debt portfolio will rise. Due to the current low interest rate environment, the floating rate debt under the credit facilities has significantly lower interest rates than the fixed interest rates of our senior notes and senior subordinated notes. If short-term interest rates rise, the effective interest rate of our portfolio will also increase.

Tranche A and Tranche B of our term loan credit facilities have required quarterly principal repayments that were scheduled to begin September 30, 2003 and continue until the maturity dates of the facilities. Any optional repayment is applied to reduce the subsequent scheduled repayments of each tranche in direct order of the first four scheduled repayments, and thereafter, ratably. As a result of the optional repayments made, the required quarterly payments from each tranche in the period from September 30, 2003 to June 30, 2004 were reduced to zero. The first mandatory repayment was due and paid on September 30, 2004 in the amount of $22.4 million.

On November 10, 2003, our indirect parent, Dex Media, issued $500.0 million of 8% Notes due 2013 and $389.0 million aggregate principal amount at maturity of 9% Discount Notes due 2013 for aggregate gross proceeds of $750.2 million. On February 11, 2004, our indirect parent, Dex Media, issued another $361.0 million aggregate principal amount at maturity of 9% Discount Notes due 2013 for gross proceeds of $250.5 million. The gross proceeds of $750.2 million and $250.5 million were paid by Dex Media as a distribution to its parent and ultimately to our Sponsors. These notes are expected to be serviced and repaid from distributions to Dex Media from us and our affiliate, Dex Media West, subject in each case to restrictions contained in our respective debt agreements. These discount notes defer interest until May 2009 at which time we, along with our affiliate, Dex Media West, will be expected to service and repay this debt in the form of distributions to Dex Media, subject in each case to restrictions contained in our respective debt agreements.

Dex Media has no operations of its own and derives all of its cash flow and liquidity from its subsidiaries. It depends on the earnings and the distribution of funds from us and Dex Media West to meet its cash needs. Although we are not obligated to make funds available to Dex Media for any purpose, we are expected to make cash distributions of $8.4 million to Dex Media semi-annually to service its cash interest obligations on its 8% Notes due 2013, subject to certain covenant requirements under the note indentures and credit agreement. The indentures relating to our senior notes and senior subordinated notes prohibit us from distributing funds to Dex Media if the amount of such distribution, together with all other restricted payments made by us since November 8, 2002, would exceed the sum of an amount calculated pursuant to a formula taking into account, among other things, the amount of adjusted consolidated net income accrued by us since January 1, 2003. In addition, in order to make any such distribution of funds to Dex Media, we would have to meet the coverage tests relating to the issuance of indebtedness under the indentures relating to our senior notes and senior subordinated notes. Although the terms of our credit facilities permit us to pay cash distributions to Dex Media in an amount not to exceed 42% of the regularly scheduled interest payments on $250.0 million of the $500.0 million of 8% Notes due 2013, we must meet an interest coverage ratio for the four consecutive fiscal quarters prior to the payment of the distribution to Dex Media to cover our 42% portion of the regularly scheduled interest payments on the remaining $250.0 million of the $500.0 million of 8% Notes due 2013. Accordingly, our cash requirements will increase in May 2009 when cash interest becomes payable on Dex Media’s 9% Discount Notes.

Directory services revenue is our most significant source of revenue. Competition from other yellow pages publishers affects our ability to attract and retain advertisers and to increase advertising rates.

Paper is our principal raw material. Substantially all of the paper that we use (other than for covers) is supplied by two companies: Nippon Paper Industries USA Co, Ltd. (formerly Daishowa America Co., Ltd.) and Norske Skog Canada (USA), Inc. Prices under the two agreements with these vendors are negotiated each year based on prevailing market rates, which have been declining consistent with general U.S. market trends for directory paper over the last three years.

Based on industry sources, overall usage of printed yellow pages directories in the U.S. declined by a compound annual rate of approximately 2% between 1999 and 2003. Several factors, including the publication of competing directories and the increased usage of Internet-based directories, could cause usage of our printed directories to continue to decline. Any declines in usage could limit our ability to maintain or increase our advertising prices, cause businesses that purchase advertising in our yellow pages directories to reduce or discontinue those purchases and discourage businesses that do not purchase advertising in our yellow pages directories from doing so. Any of these factors could affect our ability to generate revenue and have a material adverse effect on our business.

Although we remain primarily focused on our printed directories, we also market an Internet-based directory service, DexOnline.com (formerly Qwestdex.com), to our advertisers. We view our Internet-based directory as a complement to our print product rather than as a stand-alone business. We believe that any decline in the usage of our printed directories could be offset in part by an increase in usage of our Internet-based directory. We also believe that increased usage of Internet-based directories will continue to support overall usage and advertising rates in the U.S. directory advertising industry and could provide us with growth in advertisements. However, if we cannot provide services over the Internet successfully or compete successfully with other Internet-based directory services, our business could be negatively impacted.

In anticipation of the Offering of common stock by Dex Media and the use of a portion of the proceeds to reduce debt, on May 17, 2004 Standard and Poors revised the outlook on our credit ratings to stable from negative.

On July 28, 2004, Moody’s Investor Service upgraded the credit ratings of our credit facilities, senior notes and senior subordinated notes by two notches. The rating upgrade does not have any immediate impact on our financing costs.

The U.S. directory advertising industry is competitive. There are a number of independent directory publishers and publishers affiliated with local exchange carriers with which we compete in one or more of the Dex East States. For example, new competitive directories were introduced in two of our top ten markets in 2003 compared to just one new competitive directory in 2002.

Through our Internet-based directory, we compete with these publishers and with other Internet sites providing search and classified directory information. In addition, we compete against other forms of media, including newspapers, radio, television, the Internet, billboards and direct mail, for business and professional advertising.

The foregoing discussion of material trends, known facts and uncertainties should not be construed as exhaustive or as an admission regarding the adequacy of disclosure made by us. We disclaim any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

We have identified the policies below as critical to our business operations and the understanding of our results of operations. The effect and any associated risks related to these policies on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where these policies affect our reported and expected financial results.

The sale of advertising in printed directories published by us is our primary source of revenue. We recognize revenue ratably over the life of each directory using the deferral and amortization method of accounting, with revenue recognition commencing in the month of delivery. Our directories are initially published with an estimated 12-month useful life, although we may revise the estimate of a directory life subsequent to its publication in order to better manage account and production workflow as it relates to other directories published in the same period. Because we generally have the right to bill and collect revenue related to the extension of directory publishing dates, a revision in the estimated life of a given directory should not have a significant impact on our results of operations or cash flows.

Direct costs related to the sales, production and distribution of directories are recognized ratably over the life of each directory under the deferral and amortization method of accounting, with cost recognition commencing in the month of delivery. Direct costs include sales commissions, graphics costs and the costs of printing, publishing and distribution. Revisions in the estimated useful lives of directories after their initial publication may cause the acceleration or deceleration of cost recognition related to the amortization of deferred directory costs. Although we cannot predict the extent such changes could have on future cost recognition, the movement of book publishing dates has historically had a minimal impact on cost recognition between periods.

We periodically make judgments regarding the collectibility of outstanding receivables and provide appropriate allowances when collectibility becomes doubtful. Although we believe our allowance for doubtful accounts adequately reflects that portion of our receivables that are uncollectible, we may revise our estimates in future periods based upon new circumstances and such revisions may be material.

It is our determination that it is more likely than not that we will utilize our deferred tax assets before the expiration of the net operating loss carryforward periods. This determination is based upon our estimation of projected book and taxable income over the next several years. To the extent our projections vary significantly from actual results, a portion of our deferred tax benefits may not be realizable, resulting in a charge to income tax expense.

This Form 10-Q contains forward-looking statements. These statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These forward-looking statements are made as of the date of this Form 10-Q and, except as required under the federal securities laws and the rules and regulations of the SEC, we assume no obligation to update or revise them or to provide reasons why actual results may differ.

As of September 30, 2004, we had a total outstanding debt balance of $1,789.7 million comprising of $998.4 million of variable rate debt drawn under the secured credit facilities, $450.0 million of senior notes and $341.3 million of senior subordinated notes. The credit facilities were made up of $495.2 million of Tranche A term loan maturing in November 2008 and $503.2 million of Tranche B term loan maturing in May 2009. Due to the variable rate characteristics of the credit facilities, the carrying amounts of Tranche A term loan and Tranche B term loan approximated fair values.

The $450.0 million of unsecured senior notes bearing a fixed interest rate of 9.875% matures in November 2009. Due to changes in interest rates and market conditions since the issuance of these fixed rate notes, the fair value of the senior notes was $517.5 million at September 30, 2004.

The $341.3 million of unsecured senior subordinated notes bearing a fixed interest rate of 12.125% matures in November 2012. Due to changes in interest rates and market conditions since the issuance of these fixed rate notes, the fair value of the senior subordinated notes was $424.9 million at September 30, 2004.

As of September 30, 2004, we had no borrowings outstanding under our revolving credit facility (although approximately $1 million is committed under a stand-by letter of credit), $495.2 million of debt outstanding under our Tranche A term loan facility and $503.2 million of debt outstanding under our Tranche B term loan facility. Our revolving credit facility and each of our term loan facilities are subject to variable rates. Accordingly, our earnings and cash flow are affected by changes in interest rates. As required by the terms of our credit facilities, we have hedged a portion of our interest rate risk. The interest rate swap agreements have an aggregate notional amount of $370.0 million and applicable fixed rates ranging from 2.354% to 4.085%. They will expire in various terms ranging from November 2004 to May 2008. The notional amount of our interest rate cap totals $200.0 million, has a cap interest rate of 4.75% and expires in May 2005. Assuming we had incurred this level of borrowings on January 1, 2004 at variable rates and assuming a one percentage point increase in the average interest rate under these borrowings, our interest expense for the three months and nine months ended September 30, 2004 would have increased by $1.6 million and $4.8 million, respectively. We do not intend to use any financial derivative instruments for speculative purposes.

Dex Media East maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to Dex Media East’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, Dex Media East carried out an evaluation, under the supervision and with the participation of Dex Media East’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Dex Media East’s disclosure controls and procedures. Based on the foregoing, Dex Media East’s Chief Executive Officer and Chief Financial Officer concluded that Dex Media East’s disclosure controls and procedures were effective as of the end of the period covered by this report.

There have been no significant changes in Dex Media East’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date Dex Media East completed its evaluation.

From time to time, we are a party to litigation matters arising in connection with the normal course of our business. In many of these matters, plaintiffs allege that they have suffered damages from errors or omissions or improper listings contained in directories published by us. Although we have not had notice of any such claims that we believe to be material, any pending or future claim could have a material adverse effect on our business.

In addition, we are exposed to defamation and breach of privacy claims arising from our publication of directories and our methods of collecting, processing and using personal data. The subjects of our data and users of data that we collect and publish could have claims against us if such data were found to be inaccurate, or if personal data stored by us was improperly accessed and disseminated by unauthorized persons. Although we have not had notice of any material claims relating to defamation or breach of privacy claims to date, we may be party to litigation matters that could have a material adverse effect on our business.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, Dex Media East LLC has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	By:	/s/ ROBERT M. NEUMEISTER, JR.



	Robert M. Neumeister, Jr.
	Executive Vice President
	and Chief Financial Officer
	(principal financial officer and
	duly authorized officer)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, 2004
OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to


Delaware		42-1554575
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No)


		Page
		Nos.

PART I: FINANCIAL INFORMATION			2
Item 1.	Financial Statements		2
	Condensed Consolidated Balance Sheets (unaudited) — September 30, 2004 and December 31, 2003		2
	Condensed Consolidated Statements of Operations (unaudited) — Three Months and Nine Months Ended September 30, 2004 and 2003		3
	Condensed Consolidated Statements of Cash Flows (unaudited) — Nine Months Ended September 30, 2004 and 2003		4
	Notes to Condensed Consolidated Financial Statements (unaudited)		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		29
Item 4.	Controls and Procedures		29
PART II: OTHER INFORMATION			30
Item 1.	Legal Proceedings		30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3.	Defaults upon Senior Securities		30
Item 4.	Submission of Matters to a Vote of Security Holders		30
Item 5.	Other Information		30
Item 6.	Exhibits		30
Signature			31
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906


			As of			As of
			September 30,			December 31,
			2004			2003

ASSETS
Current assets:
	Cash and cash equivalents		$	—		$	2,758
	Accounts receivable, net			40,207			62,176
	Deferred directory costs			122,383			128,333
	Current deferred taxes			5,162			5,979
	Amounts due from affiliates			—			28,554
	Other current assets			8,984			5,906

		Total current assets		176,736			233,706
Property, plant and equipment, net				52,906			39,667
Goodwill				890,731			890,731
Intangible assets, net				1,408,955			1,544,800
Deferred income taxes				48,178			42,151
Deferred financing costs				54,486			78,925
Amounts due from affiliate related to post-retirement and other post-employment benefit obligations				—			35,519
Other assets				1,339			1,719

		Total Assets	$	2,633,331		$	2,867,218


LIABILITIES AND OWNER’S EQUITY
Current liabilities:
	Accounts payable		$	21,446		$	49,062
	Amounts due to affiliate			14,744			—
	Employee compensation			—			32,783
	Deferred revenue and customer deposits			82,549			99,522
	Accrued interest payable			35,945			18,684
	Current portion of long-term debt			101,840			50,845
	Other accrued liabilities			10,535			9,120

		Total current liabilities		267,059			260,016
Long-term debt				1,687,837			2,090,268
Post-retirement and other post-employment benefit obligations				—			69,381
Amounts due to affiliate related to post-retirement and other post-employment obligations				37,693			—
Other liabilities				2,049			7,195

		Total Liabilities		1,994,638			2,426,860

Commitments and contingencies (Note 10)
Accumulated deficit				(78,348	)		(69,902	)
Accumulated other comprehensive loss				(1,810	)		(4,026	)
Owner’s interest				718,851			514,286

		Total Owner’s Equity		638,693			440,358

		Total Liabilities and Owner’s Equity	$	2,633,331		$	2,867,218



			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2004			2003			2004			2003

Revenue			$	182,891		$	175,259		$	543,488		$	492,410
Operating Expenses:
	Cost of revenue			54,984			50,150			165,634			147,420
	General and administrative expense			22,741			19,454			59,205			53,203
	Bad debt expense			4,935			4,899			16,267			18,446
	Termination of annual advisory fees			10,000			—			10,000			—
	Depreciation and amortization expense			3,488			2,707			9,117			8,074
	Amortization of intangibles			45,282			53,590			135,845			160,770

		Total operating expenses		141,430			130,800			396,068			387,913

		Operating income		41,461			44,459			147,420			104,497
Other (income) expense:
	Interest income			(327	)		(118	)		(645	)		(592	)
	Interest expense			68,573			47,449			163,121			145,764
	Other expense, net			—			2,769			43			11,299

		Loss before income taxes		(26,785	)		(5,641	)		(15,099	)		(51,974	)
Income tax benefit				(11,350	)		(2,259	)		(6,653	)		(20,816	)

	Net loss		$	(15,435	)	$	(3,382	)	$	(8,446	)	$	(31,158	)

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		Gross
		Carrying		Accumulated			Net Book
Intangible Assets		Value		Amortization			Value		Life

Account relationships — local		$	897,000	$	(282,910	)	$	614,090		20 years	⁽¹⁾
Account relationships — national			241,000		(58,567	)		182,433		25 years	⁽¹⁾
Non-compete/publishing agreements			251,000		(11,900	)		239,100		40 years
Dex Trademark			311,000		—			311,000		Indefinite
Qwest Dex Trademark agreement			68,000		(25,770	)		42,230		5 years
Advertising agreements			23,000		(2,898	)		20,102		15 years

	Totals	$	1,791,000	$	(382,045	)	$	1,408,955



	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,

	2004			2003			2004			2003

Net loss	$	(15,435	)	$	(3,382	)	$	(8,446	)	$	(31,158	)
Unrealized gain (loss) on derivatives, net of tax		(792	)		1,785			2,216			(2,155	)

Total comprehensive income (loss)	$	(16,227	)	$	(1,597	)	$	(6,230	)	$	(33,313	)



	Three Months Ended						Three Months Ended
	September 30, 2004						September 30, 2003

	Pension			Post-Retirement			Pension			Post-Retirement
	Benefit			Benefits			Benefit			Benefits

Service cost	$	1,254		$	282		$	1,078		$	265
Interest cost		1,387			386			1,527			660
Expected return on plan assets		(1,916	)		—			(1,617	)		—
Amortization of prior service costs		—			(43	)		—			—

Net periodic benefit cost	$	725		$	625		$	988		$	925


(12)	Related Party Transactions, Other than Affiliates


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


	*The Three Months Ended September 30, 2004 Compared to the Three Months Ended September 30, 2003.*


			Three Months		Three Months
			Ended		Ended
			September 30,		September 30,
			2004		2003


			(Dollars in thousands)
Revenue:
	Local directory services		$	150,319	$	145,962
	National directory services			28,594		24,813

		Total directory services		178,913		170,775
Other revenue				3,978		4,484

		Total revenue		182,891		175,259
Cost of revenue				54,984		50,150

	Gross profit		$	127,907	$	125,109
	Gross margin			69.9%		71.4%
General and administrative expense, including bad debt expense and termination of annual advisory fees			$	37,676	$	24,353


	*The Nine Months Ended September 30, 2004 Compared to the Nine Months Ended September 30, 2003.*


			Nine Months		Nine Months
			Ended		Ended
			September 30,		September 30,
			2004		2003


			(Dollars in thousands)
Revenue:
	Local directory services		$	443,066	$	423,757
	National directory services			88,253		55,703

		Total directory services		531,319		479,460
Other revenue				12,169		12,950

		Total revenue		543,488		492,410
Cost of revenue				165,634		147,420

	Gross profit		$	377,854	$	344,990
	Gross margin			69.5%		70.1%
General and administrative expense, including bad debt expense and termination of annual advisory fees			$	85,472	$	71,649


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*


Item I.	*Financial Statements*


(1)	Description of Business


*(a)*	*Dex Media Initial Public Offering*


*(b)*	*Acquisition*


Item 2.	*Unregistered Sale of Equity Securities and Use of Proceeds*


Item 4.	*Submission of Matters to a Vote of Security Holders*


Exhibit 31.1	—	Certification of Chief Executive Officer of Dex Media East LLC pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	—	Certification of Chief Financial Officer of Dex Media East LLC pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1	—	Certification of Chief Executive Officer of Dex Media East LLC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2	—	Certification of Chief Financial Officer of Dex Media East LLC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibits 32.1 and 32.2 are being furnished solely to accompany this Report pursuant to 18 U.S.C. § 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by references into any of our filings, whether made before or after the date hereof, regardless of any general incorporation language in such filing.


Exhibit
Number		Description

Exhibit 31.1	—	Certification of Chief Executive Officer of Dex Media East LLC pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	—	Certification of Chief Financial Officer of Dex Media East LLC pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1	—	Certification of Chief Executive Officer of Dex Media East LLC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2	—	Certification of Chief Financial Officer of Dex Media East LLC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibits 32.1 and 32.2 are being furnished solely to accompany this Report pursuant to 18 U.S.C. § 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by references into any of our filings, whether made before or after the date hereof, regardless of any general incorporation language in such filing.