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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission File Number 333-42085

TRANSWESTERN PUBLISHING COMPANY LLC

Registrant’s telephone number, including area code: (858) 467-2800

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) AND 12 (g) OF THE ACT:

Indicate by check mark whether each 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. [X] Yes [ ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Act). [ ] Yes [X] No

As of June 30, 2002, the aggregate market value of the registrant’s voting stock held by non-affiliates was zero. Equity interests held by directors and certain executive officers and by each person who owns or may be deemed to own 10% or more of our outstanding common equity have been excluded, since such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of June 30, 2002, the registrant had 1,000 voting equity interests and 0 non-voting equity interests issued and outstanding.

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TRANSWESTERN PUBLISHING COMPANY LLC
FORM 10-K
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PART I

This annual report on Form 10-K contains certain forward-looking statements that involve risks and uncertainties. The actual future results for TransWestern Publishing Company LLC may differ materially from those discussed herein. Additional information concerning factors that could cause or contribute to such differences can be found in Part II, Item 7 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” elsewhere throughout this Annual Report, and in the “Risk Factors” section of TransWestern’s Registration Statement on Form S-4, Registration No. 333-70470, filed with the SEC on October 19, 2001. Unless the context requires otherwise, “TransWestern,” refers to TransWestern Publishing Company LLC and the “Company,” “we,” “us” and “our” each refers to TransWestern, TransWestern Holdings L.P. (“Holdings” or the “Partnership”) and their direct and indirect wholly-owned subsidiaries collectively.

ITEM 1. BUSINESS

We are one of the largest independent yellow pages directory publishers in the United States. As of the date of this filing we own 333 directories which serve communities in 25 states, including Alabama, Arizona, California, Connecticut, Florida, Georgia, Indiana, Kansas, Kentucky, Louisiana, Massachusetts, Michigan, New Jersey, Nevada, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Texas, Utah, Vermont, and Washington. Our revenues are derived from the sale of advertising to a diversified base of approximately 265,000 accounts as of December 31, 2002, consisting primarily of small to medium-sized local businesses. In counting our number of accounts, we count a single customer that advertises in more than one directory as a separate account for each directory in which it advertises. Yellow pages are an important advertising medium for local businesses due to their low advertising cost, widespread distribution, lasting presence, and high consumer usage.

Since 1993, our management team has successfully executed its strategy of growing revenues from existing directories, improving operating efficiency, accelerating cash flows and starting and acquiring new directories. Over this period, we increased average revenue per account from $1,098 for the year ended December 31, 2000 to $1,320 for the year ended December 31, 2002 and increased our number of directories published from 231 for the year ended December 31, 2000 to 302 for the year ended December 31, 2002, driving our net revenues from $177.3 million for the year ended December 31, 2000 to $335.4 million for the year ended December 31, 2002 and our EBITDA from $57.0 million for the year ended December 31, 2000 to $100.1 million for the year ended December 31, 2002.

RECENT ACQUISITIONS

     During the year ended December 31, 2002 the Company acquired 19 directories in Arizona, California, Nevada, Oregon, Texas, and Utah as follows:

     Brazos Valley Telephone Directory Company. On February 26, 2002, the Company purchased certain tangible and intangible assets of Brazos Valley Telephone Directory Company for a total of $0.5 million. The Company acquired one directory in the Mansfield/Kennedale area of Texas.

     Phone Directories Company, Inc. On March 22, 2002, the Company purchased certain tangible and intangible assets of Phone Directories Company, Inc. for a total of $0.8 million. The Company acquired four directories in the Tucson, Arizona area.

     Arnold Advertising, Inc. On April 11, 2002, the Company purchased the outstanding common stock of Arnold Advertising, Inc. for a total of $8.1 million. The Company acquired three directories in the north Los Angeles, California area.

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     Western Directory, Inc. On May 1, 2002, the Company purchased certain tangible and intangible assets of Western Directory, Inc. for a total of $3.1 million. The Company acquired three directories in northern Oregon. Subsequently, the Company combined two of the directories into one.

     Pennco Publishing, Inc. On June 5, 2002, the Company purchased certain tangible and intangible assets of Pennco Publishing, Inc. for a total of $2.5 million. The Company acquired two directories in northwest Oregon.

     West Vista Advertising, Inc. On August 15, 2002, the Company purchased certain tangible and intangible assets of West Vista Advertising, Inc. for a total of $9.2 million. The Company acquired seven directories located in Oregon, Arizona, Utah, and Nevada.

     Subsequent to the year ended December 31, 2002 the Company acquired the following:

     TelFax, Inc. On February 6, 2003, the Company purchased certain tangible and intangible assets of TelFax, Inc. for a total of $2.0 million. The Company acquired two directories in Oregon and one in Washington.

INDUSTRY OVERVIEW

The United States yellow pages directory industry generated revenues of approximately $14.4 billion in 2002. The independent publisher segment of the yellow pages industry is highly fragmented and growing. Between 225 and 250 independent directory publishers circulated approximately 550 million directories and generated an estimated $1.7 billion in revenues during 2002.

Yellow pages directories accounted for approximately 6.0% of total advertising spending in 2002. Yellow pages directories compete with all other forms of media advertising, including television, radio, newspapers and direct mail. In general, media advertising may be divided into three categories:

•		market development or image advertising such as television, radio and newspaper advertisements;
•		direct response sales promotion such as direct mail; and
•		point of purchase or directional advertising such as classified directories.

Yellow pages directories are primarily directional advertising because they are used either at home or in the workplace when consumers are contemplating a purchase or are in need of a service.

Yellow pages advertising expenditures tend to be more stable than other forms of media advertising and do not fluctuate widely with economic cycles. Yellow pages directory advertising is considered a “must buy” by many small and medium-sized businesses since it is often their principal means of soliciting customers. The strength of the yellow pages as compared to other forms of advertising lies in its consumer reach, lasting presence and cost-effectiveness. Yellow pages are present in nearly every household and business in the United States. Once an advertisement is placed in a directory, it remains within reach of its target audience until the directory is replaced with the next annual edition or is discarded.

The independent publisher segment of the yellow pages industry is highly fragmented and growing. Successful independent publishers effectively compete with telephone utilities by differentiating their product based on geographical market segmentation, pricing strategy and enhanced product features. To maximize both advertiser value and consumer usage, independent

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directory publishers target their directory coverage areas based on consumer shopping patterns. In contrast, most directories published by telephone utilities coincide with their telephone service territories, which may incorporate multiple local markets or only portions of a single market. Also, independent publishers generally offer yellow pages advertisements at a significant discount to the price that competing telephone utilities usually charge. As a result, independent yellow pages directories allow local advertisers to better target their desired market and are often more useful for consumers.

     Independent yellow page publishers generally compete in suburban and rural markets more than major urban markets, where the high distribution quantities for each edition create a barrier to entry. In most markets, independent directory publishers compete with the telephone utility and with one or more independent yellow pages publishers. In markets where two or more directory publishers compete, advertisers frequently purchase advertisements in multiple directories.

MARKETS SERVED

As of the date of this filing, we publish 333 yellow pages directories serving distinct communities in 25 states, including Alabama, Arizona, California, Connecticut, Florida, Georgia, Indiana, Kansas, Kentucky, Louisiana, Massachusetts, Michigan, New Jersey, Nevada, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Texas, Utah, Vermont, and Washington. Our directories are generally well-established in our local communities and are clustered in contiguous geographic areas to create a strong local market presence and to achieve selling efficiencies.

Our net revenues are not materially concentrated in any single directory, industry, geographic region or customer. For the year ended December 31, 2002, we served approximately 254,000 active accounts. Approximately 95.8% of net revenues are derived from local accounts and 4.2% from national companies advertising locally. Less than 0.5% of net revenues come from internet revenues. Our high level of diversification reduces exposure to adverse regional economic conditions and provides additional stability in operating results.

During the year ended December 31, 2002, we published 302 directories. Our geographic diversity throughout the United States is evidenced in the following table for the periods indicated:

PRODUCTS

Our yellow pages directories are designed to meet the informational needs of consumers and the advertising needs of local businesses. Each directory consists of:

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•		a yellow pages section containing display advertisements and a listing of businesses by various headings;
•		a white pages section listing the names, addresses, and phone numbers of residences and businesses in the area served;
•		a community information section providing reference information about general community services such as listings for government offices, schools and hospitals; and
•		a map of the geographic area covered by the directory.

Advertising space is sold throughout the directory, including in-column and display advertising space in the yellow pages, bold listings and business card listings in the white pages, banner advertising in the community pages, and image advertisements on the front, back, inside, and outside covers. We also have the production capacity to include options such as full color advertisements that generate significantly higher advertising rates. This diversity of product offerings enables us to create customized advertising programs that are responsive to specific customer needs and financial resources.

Our directories are an efficient source of information for consumers. With over 2,000 headings in our directories and an expansive list of businesses by heading in each local market, our directories are both comprehensive and conveniently organized. We believe that the completeness and accuracy of the data in a directory is essential to consumer acceptance.

Although we remain primarily focused on our printed directories, we extend our reach by marketing advertising in our Internet Yellow Pages located at http://www.WorldPages.com. WorldPages.com enables users to search for businesses or individuals through various options including location, distance, phone number, category or name. The site also provides maps, driving directions, email lookup, links to international directories and our corporate information.

We are in a strategic alliance with Switchboard Inc. to power WorldPages.com. We are responsible for selling the advertisement space while Switchboard is responsible for operating and maintaining the technical aspects of the site. The advertising on WorldPages.com consists primarily of enhanced business listings, premium placement, digital images of the advertisements that appear in our printed directories, and links to the advertisers’ web sites. As of December 31, 2002 approximately 45,000 TransWestern advertisers were advertising on WorldPages.com. Net revenues from the sale of Internet directory services amounted to less than 0.5% of total net revenues for the year ended December 31, 2002. The related direct incremental costs to provide the Internet services are not material. We anticipate that Internet revenues will be less than 1% of net revenues in 2003.

This arrangement with Switchboard enables us to avoid technical risks that we are not presently staffed to manage and permits us to participate in opportunities that may develop through the Internet. We believe that our experience, reputation and account relationships within our local markets will help us successfully market these services. We began to market our Internet directory product in 1998 and since then have made it available in all of our markets. Although the growing use of the Internet has not had a material impact on us to date, we have not yet determined how, if at all, the Internet will impact our performance, prospects or operations. We cross promote our Internet service with our printed directories. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated into this annual report.

SALES AND MARKETING

Yellow pages marketing is a direct sales business which requires both servicing existing accounts and developing new customers. Repeat customers comprise our core account base and a number of

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these customers have advertised in our directories for many years. For the fiscal years ended December 31, 2002, December 31, 2001 and December 31, 2000, accounts representing 79.5%, 82.2% and 84.3%, respectively, of the prior year’s net revenues have renewed their advertising program in the current edition of each directory. Management believes that this high revenue renewal rate reflects the importance of our directories to our local accounts for whom yellow pages directory advertising is a principal form of advertising. In addition, yellow pages advertising often comprises an integral part of the local advertising strategy for larger national companies operating at the local level. Advertisers have a strong incentive to increase the size of their advertisement and to renew their advertising programs because advertisements are placed within each heading of a directory based first on size then on seniority. Generally, larger advertisements are more effective than smaller advertisements and advertisements placed near the beginning of a heading generate more responses than similarly sized advertisements placed further back in the heading.

The Company has changed the way that it calculates renewal and account retention rates to include “unworked” accounts. Unworked accounts are those that went out of business or were written off to collections prior to the new start of a canvass. Previously, these accounts were excluded from the starting number of accounts and starting revenue. By including these accounts in the starting numbers, the resulting renewal and account retention rates declined by approximately four percentage points for each year presented. Comparative rates from year to year will be relatively unaffected. The historical renewal rates in this report were changed from prior year to reflect this new methodology.

We also build on our account base by generating new business leads from multiple sources including a comprehensive compilation of data about individual company advertising expenditures in competitive yellow page directories. We have developed a proprietary database of high potential customers based on each individual customer’s yellow page advertising expenditures and focused our sales resources on those potential customers. In support of this strategy, we have expanded our sales force from 296 employees at April 30, 1995 to 1,350 at December 31, 2002, representing an increase of approximately 356%. Management has observed a direct correlation between adding new sales force employees and revenue growth.

We employ eight executive vice presidents and 135 district and area sales managers who, together, are responsible for supervising the activities of the account executives. Our 1,350 account executives generate virtually all of our revenues and are responsible for servicing existing advertising accounts and developing new accounts within their assigned service areas.

We have well-established practices and procedures to manage the productivity and effectiveness of our sales force. All new account executives complete a formal two-week training program and receive continuous on-the-job training through the regional sales management structure. Each account executive has a specified account assignment consisting of both new business leads and renewal accounts and is accountable for daily, weekly and monthly sales and advance payment goals. Account executives are compensated in the form of base salary, commissions and car allowance. Although approximately 50% of the sales force still receives a base salary, we have been transitioning some markets to commission only. Sales force compensation is largely tied to sales performance and account collection. As of December 31, 2002, we employed approximately 1,941 people, 1,622 of whom were engaged in sales and sales support functions.

The sales cycle of a directory varies based on the size of the revenue base and can extend from a few weeks to as long as nine months. Once the canvass of customers for a directory is completed, the directory is “closed” and the advertisements are assembled into directories in the production cycle.

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PRODUCTION AND DISTRIBUTION

We develop a production planning guide for each directory, which is a comprehensive planning tool setting forth production specifications and the cost structure for that directory. Each production planning guide is incorporated into our annual production schedule and serves as the foundation for our annual budgeting process. Although we view our directories as annual publications, the actual interval between publications may vary from other than a twelve-month cycle. New directory starts can be incorporated into the production schedule without significant disruption because directory production is staggered throughout the year. As of December 31, 2002, we had a production staff of approximately 195 full-time employees.

Our current production process includes post-sales, national sales order processing, advertisement design and manufacturing, white pages licensing and production, yellow pages production, community pages production and pagination. Production operations are primarily managed in-house to minimize costs and to assure a high level of accuracy.

After the in-house production process is complete, the directories are then sent to outside vendors to be printed and distributed. We do not print any of our directories but instead contract with a limited number of printers to print and bind our directories. We contract with several outside vendors to distribute our directories to businesses and residences in our markets.

RAW MATERIALS

Our principal raw material is paper. We used approximately 67.9 million, 50.3 million, and 31.4 million pounds of directory grade paper for the fiscal years ended December 31, 2002, December 31, 2001, and December 31, 2000, respectively, resulting in a total cost of paper during such periods of approximately $21.9 million, $16.8 million, and $9.9 million, respectively. We do not purchase paper directly from the paper mills; instead, our printers purchase the paper on our behalf at prices negotiated by us.

COMPETITION

The yellow pages directory advertising business is highly competitive. Independent publishers operate in competition with the regional Bell operating companies and other telephone utilities. In most markets, we compete not only with the local utilities, but also with one or more independent yellow pages publishers. Other media in competition with yellow pages for local business and professional advertising include newspapers, radio, television, billboards and direct mail.

INTELLECTUAL PROPERTY

We have registered five trademarks and one service mark used in our business. In addition, each of our publications is protected under Federal copyright laws. Telephone utilities are required to license directory listings of names and telephone numbers that we then license for a set fee per name for use in our white pages listings. Total licensing fees paid by us were $0.8 million, $0.9 million, and $0.2 million in the years ended December 31, 2002, December 31, 2001 and December 31, 2000 respectively. In addition, we believe that the phrase “yellow pages” and the walking fingers logo are in the public domain in the United States. Otherwise, we believe that we own or license the intellectual property rights necessary to conduct our business.

EMPLOYEES

As of December 31, 2002, we employed approximately 1,941 full-time employees, none of whom are members of a union. We believe that we have good relations with our employees.

ITEM 2. PROPERTIES

     We house our corporate, administrative and production staff at our headquarters located at 8344 Clairemont Mesa Boulevard, San Diego, California. Information as of December 31, 2002 relating

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to our leased corporate headquarters and other leased regional sales offices is set forth in the following table:

We lease 86 other sales offices in more remote areas and periodically lease facilities for storage of directories.

ITEM 3. LEGAL PROCEEDINGS

     The Company is party to various litigation matters incidental to the conduct of its business. Management does not believe that the outcome of any of these matters will have a material adverse effect on the Company’s financial condition or the results of its operations.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

There is no established public trading market for TransWestern’s membership units, and it is not expected that such a market will develop in the future. As of February, 2003, TransWestern had 1,000 membership units outstanding, all of which are held by TransWestern Holdings L.P. (“Holdings” or the “Partnership”), which is the sole member of TransWestern.

Distributions on TransWestern’s membership units are governed by the Limited Liability Company Agreement of TransWestern Publishing Company LLC. The payment of distributions by TransWestern are restricted by the indenture relating to its Series F 9 5/8% Senior Subordinated Notes due 2007 (the “Series F notes”) and its senior credit facility.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth for the periods indicated selected historical consolidated financial data for the Company. The following selected historical consolidated financial data is qualified by the more detailed consolidated financial statements of the Company and the notes thereto included elsewhere in this annual report and should be read in conjunction with such consolidated financial statements and notes and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this annual report.

The consolidated statement of operations data for the years ended December 31, 2002, 2001, and 2000 and balance sheet data as of December 31, 2002 and 2001 have been derived from our audited consolidated financial statements included elsewhere in this annual report.

The statement of operations data for the year ended December 31, 1999 and the balance sheet data as of December 31, 1999 and 1998 have been derived from our audited consolidated financial statements, which do not appear in this annual report. The unaudited statement of operations data for the year ended December 31, 1998 has been derived from our consolidated financial statements which do not appear in this annual report.

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See accompanying notes to Selected Financial Data.

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NOTES TO SELECTED FINANCIAL DATA

(a) “Recapitalization transaction costs” were incurred as a result of recapitalization of the Partnership on June 28, 2001.

(b) “Extraordinary item” represents the write-off of unamortized debt issuance costs related to the repayment of debt prior to maturity. See Note 4 of the Notes to the Consolidated Financial Statements contained elsewhere in the annual report.

(c) “EBITDA” is defined as income (loss) before extraordinary item, discretionary contributions to the Company’s equity compensation plans (such contributions represent special distributions to the Company’s equity compensation plans in connection with refinancing transactions), non-recurring management bonuses and fees in connection with the June 2001 Recapitalization, plus interest expense, taxes, and depreciation and amortization and is consistent with the definition of EBITDA in the indentures relating to the Company’s notes and in the Company’s senior credit facility. Contributions to the equity compensation plans were approximately $5.5 million for the year ended April 30, 1998 and approximately $5.8 million for the year ended December 31, 2001. EBITDA is not a measure of performance under accounting principles generally accepted in the United States (GAAP). EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity. However, management has included EBITDA because it may be used by certain investors to analyze and compare companies on the basis of operating performance, leverage and liquidity and to determine a company’s ability to service debt. The Company’s definition of EBITDA may not be comparable to that of other companies and is derived as follows:

(d) “EBITDA margin” is defined as EBITDA as a percentage of net revenues. Management believes that EBITDA margin provides a valuable indication of the Company’s ability to generate cash flows available for debt service.

(e) “Bookings” is defined as the daily advertising orders received from accounts during a given period and generally occur at a steady pace throughout the year. Bookings generated by predecessor owners of acquired directories are excluded.

(f) “Advance payments as a percentage of net revenues” is defined as, for a given period, all cash deposits received on advertising orders prior to revenue recognition as a percentage of net revenues recognized upon directory distribution.

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(g) “Number of accounts” is defined as the total number of advertising accounts for all directories published during a given period. Customers are counted as multiple accounts if advertising in more than one directory.

(h) “Average net revenues per account” is defined as net revenues divided by the number of accounts.

(i) “Ratio of earnings to fixed charges” is calculated by dividing earnings by fixed charges. Earnings consist of income (loss) before extraordinary item plus fixed charges. Fixed charges consist of interest, whether expensed or capitalized, amortization of debt issuance costs, whether expensed or capitalized, and an allocation of one-fourth of the rental expense from operating leases which management considers to be a reasonable approximation of the interest factor of rental expense.

(j) Member deficit is the value of equity contributions to the Company by its member, TransWestern Holdings L.P., plus net income less Member distributions for income taxes and distributions related to recapitalization transactions completed during the years ended April 30, 1998 and December 31, 2001. Member distributions for income taxes during the years ended April 30, 1997 and 1998 totaled $5.8 million and $2.1 million, respectively. In connection with the October 1997 refinancing of the Partnership, $174.4 million was distributed to the limited and general partners of the Partnership. Furthermore, in connection with the June 2001 refinancing of the Partnership, approximately $38.0 million was distributed to the limited and general partners of the Partnership. Member distributions for income taxes during the year ended December 31, 2002 totaled approximately $1.6 million. Member distributions for the payoff of Holdings’ 11 7/8% senior discount notes in 2002 totaled approximately $32.3 million.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     TransWestern Publishing Company, L.P. (the “Partnership” or “Holdings”) was formed in 1993 to acquire the TransWestern Publishing Division of US West Marketing Resources Group, Inc., a subsidiary of US West Inc. In November 1997, the Partnership formed and contributed substantially all of its assets to TransWestern and TransWestern assumed or guaranteed all of the liabilities of the Partnership and the Partnership changed its name to TransWestern Holdings L.P. As a result of this transaction, the Partnership’s only assets are all of the membership interests of TransWestern and all of the stock of TWP Capital Corp. All of the operations that were previously being conducted by the Partnership are being conducted by TransWestern and its subsidiaries.

     In June 2001, the Partnership completed a recapitalization in which it received equity and debt proceeds totaling approximately $435.1 million (the “Recapitalization”). In the Recapitalization, new investors including Thomas H. Lee Equity Fund V, L.P. and its affiliates along with other investors, existing limited partners of the Partnership and the Partnership’s senior managers invested new and continuing capital of approximately $125.1 million in the Partnership. The proceeds of the equity investment together with approximately $310.0 million of Senior Credit Facility and senior subordinated debt financing were used (i) for approximately $30.0 million of consideration paid to redeem a portion of the Partnership’s limited partnership interests from certain existing limited partners, (ii) to acquire all of the outstanding stock of WorldPages for approximately $141.4 million, (iii) to repay approximately $137.5 million of outstanding debt and accrued interest under the Company’s existing credit facilities, (iv) to repay approximately $74.2 million of existing WorldPages debt and accrued interest after the consummation of the acquisition, (v) to pay approximately $28.7 million of costs, fees, and expenses associated with the Recapitalization and acquisition of WorldPages, (vi) to pay approximately $3.3 million to senior management for bonuses and deal fees associated with the Recapitalization of the Partnership, (vii) to pay approximately $5.2 million net of taxes and benefits to the equity compensation trust for payment to senior and middle management associated with the Recapitalization, (viii) to pay approximately $2.7 million in fees and the discount associated with the issuance of $75.0 million

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of Series E Senior Subordinated Notes and (ix) approximately $12.1 million for general corporate purposes, including working capital.

     The Recapitalization was financed with (i) the $125.1 million equity investment, (ii) borrowings of $235.0 million under a $300.0 million (maximum) variable interest rate Senior Credit Facility and (iii) the issuance of $75.0 million of Series E 9 5/8 % Senior Subordinated Notes.

     On May 1, 1998, the Board of Directors of TransWestern Communications Company, Inc. (“TCC”), the general partner of the Partnership, the sole member of our Company, authorized the change of our fiscal year from a fiscal year ending April 30 to a fiscal year ending December 31. Starting with the quarter ending September 30, 1998, we began reporting on a calendar year end basis.

OVERVIEW

Revenue Recognition. We recognize net revenues from the sale of advertising placed in each directory when the completed directory is distributed. Costs directly related to sales, production, printing and distribution of each directory are capitalized as deferred directory costs and then matched against related net revenues upon distribution. All other operating costs are recognized during the period when incurred. As the number of directories increases, the publication schedule is periodically adjusted to accommodate new books. In addition, changes in distribution dates are caused by market and competitive conditions and the staffing level required to achieve the individual directory revenue goals. As a result, our directories may be published in a month earlier or later than the previous year which may move recognition of related revenues from one fiscal quarter or year to another. Year to year results depend on both timing and performance factors.

Notwithstanding significant monthly fluctuation in net revenues and EBITDA recognized based on actual distribution dates of individual directories, quarterly recognition of net revenues and EBITDA fluctuate more throughout the year and typically increase at a higher rate than bookings, advance payments and total cash receipts when the Company is growing. This is primarily the result of the fact that revenues and the associated EBITDA related to a directory are only recognized when a directory is distributed. Our bookings and cash collection activities generally occur at a steady pace throughout the year and reflect the growth of our portfolio of directories and business more rapidly as we add additional account executives from acquired companies as a result of recognizing bookings and cash activities as they occur. The table below demonstrates that quarterly bookings, collection of advance payments and total cash receipts generally fluctuate less than net revenues and EBITDA.

A significant portion of 2001 Q3 and Q4 net revenues associated with WorldPages was generated from advertising sold prior to the acquisition of WorldPages on June 28, 2001. The chart below does not reflect the bookings associated with net revenues recognized in 2001 Q3 and Q4 sold prior to the acquisition. Additionally, bookings generated by predecessor owners of acquired directories are excluded. Total cash receipts reflects cash received on accounts receivable or revenue recognized both prior to and after TransWestern’s acquisition of WorldPages.

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For definitions of “EBITDA,” “Bookings,” and “advance payments” see the notes to Item 6 “Selected Financial Data.”

Revenue Growth. A key factor in our Company’s revenue growth has been the increase in the number of directories published. Compared to the year ended December 31, 2000, the number of directories published has increased by 71, from 231 to 302 as of December 31, 2002, and we increased our total number of accounts from approximately 162,000 to approximately 254,000 over the same period. The growth in directories was primarily due to acquiring directories that expanded our presence in California, Florida, Ohio, Oklahoma, Texas, Georgia, Alabama, and Michigan. Excluding acquired directories, our net revenues grew 5.0%, 8.0%, and 7.0% for the years ended December 31, 2002, December 31, 2001 and December 31, 2000 respectively. Our average revenue per account increased from $1,098 for the year ended December 31, 2000 to $1,320 for the year ended December 31, 2002. Our revenue renewal rate decreased from 84.3% for the year ended December 31, 2000 to 79.5% for the year ended December 31, 2002 and our account renewal rate decreased from 72.8% for the year ended December 31, 2000 to 68.8% for the year ended December 31, 2002. These declining renewal rates are primarily due to our more stringent credit policies which do not allow past due customers to renew their advertising.

Net revenues from the sale of Internet directory services amounted to less than 0.5% of net revenues for the year ended December 31, 2002. We anticipate that Internet revenues will be less than 0.5% of net revenues in 2003.

Bookings. The length of the measurement periods for revenues and bookings are the same; however, the measurement period for bookings for each month is a four week period ending between the 10th and the last day of the month. Consequently, the measurement period for bookings lags the measurement period for revenue and other items by as much as 21 days. Growth in bookings year over year, which is closely correlated with the number of account executives, was 23.4%, 48.8%, and 25.1% for the years ended December 31, 2002, December 31, 2001 and December 31, 2000 respectively. To facilitate future growth, we increased the size of our sales force by approximately 1.6% from an average of 1,284 in the year ended December 31, 2001, to an average of 1,304 in the year ended December 31, 2002 and are aggressively hiring sales associates in all of our markets around the country.

Cost of Revenues. Our costs of revenue are: production, paper, printing, distribution and licensing. Cost of revenues represented 17.8% of net revenues for the year ended December 31, 2002 compared to 20.6% for the year ended December 31, 2001 and 18.8% for the year ended December 31, 2000. At the individual directory level, production, printing, distribution and licensing costs are largely fixed for an established circulation, resulting in high marginal profit contribution from incremental advertising sales into an existing directory. Since 2000, our constant focus on process improvement and increased productivity has enabled us to minimize additional production and administrative costs while increasing the number of directories.

Our principal raw material is paper. We used approximately 67.9 million, 50.3 million, and 31.4 million pounds of directory grade paper for the fiscal years ended December 31, 2002, December 31, 2001, and December 31, 2000, respectively, resulting in a total cost of paper during such periods of approximately $21.9 million, $16.8 million, and $9.9 million, respectively.

White pages listings are licensed from telephone utilities for a set fee per name and the number of listings correspond directly to planned circulation and does not fluctuate. Total licensing fees incurred by us were $0.8 million, $0.9 million, and $0.2 million for the years ended December 31, 2002, December 31, 2001 and December 31, 2000, respectively. Distribution is provided by several third-party vendors at a fixed delivery cost per directory as established by individual market.

Selling and Marketing Expenses. Direct sales expense correlates closely with the size of our sales force. As we continue to increase the number of directories and to expand our total customer base,

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the number of account executives required to complete the annual selling cycle grows accordingly. Our ability to complete selling each directory within a prescribed time frame depends on account executive staffing levels and productivity. Historically, we have experienced a high turnover rate among our account executives, particularly among new hires, and therefore continue to invest in recruiting and training account executives to build the size of our sales force and to continue to grow revenue. The number of account executives has grown from an average of 610 in the year ended December 31, 1999, to an average of 1,304 in the year ended December 31, 2002.

Cash Flow Management. We have instituted several policies to accelerate customer payments including:

•		requiring customers to make minimum deposits on their annual purchase at the time of contract signing;
•		requiring customers with small advertising purchases to pay 100% at the time of contract signing;
•		offering a cash discount to customers who pay 100% at the time of contract signing;
•		providing commission incentives to account executives to collect higher customer deposits earlier in the sales process;
•		shortening customer payment terms from twelve months to eight months or less; and
•		requiring new customers to begin payments immediately after contract signing rather than waiting for the directory to be distributed.

Although we collect an advance payment from most advertisers, credit is extended based upon the size of the advertising program and customer collection history. While our accounts receivable are not subject to any concentrated credit risk, credit losses represent a cost of doing business due to the nature of our customer base, largely local businesses, and the use of extended credit terms. Generally, credit is extended under eight to twelve month installment payment terms. In addition, customers are given credits for the current year when errors occur in their advertisements. A reserve for bad debt and errors is established when revenue is recognized for individual directories. The estimated bad debt expense is determined on a market by market basis taking into account prior years’ collection history.

Actual write-offs are taken against the reserve when management determines that an account is uncollectible, which typically will be determined after completion of the next annual selling cycle. Therefore, actual account write-offs may not occur until 12 to 18 months after a directory has been published. The estimated provision for bad debt equaled 12.2%, 11.1%, and 9.8% of net revenues for the years ended December 31, 2002, December 31, 2001 and December 31, 2000, respectively. Management regularly reviews actual write-offs of accounts receivable as compared to the reserve estimates made at the time individual directories are published.

RESULTS OF OPERATIONS

The following table summarizes the Company’s results of operations as a percentage of revenue for the periods indicated:

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For the definition of “EBITDA,” see the notes to Item 6, “Selected Financial Data.”

Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001

Net revenues increased $93.0 million, or 38.4%, from $242.4 million in the year ended December 31, 2001 to $335.4 million in the same period in 2002. We published 302 directories in the year ended December 31, 2002 compared to 273 in the same period in 2001. The net revenue growth was due to year to year growth in the same 251 directories published during both periods of $11.5 million, $83.6 million from 39 new directories, $2.8 million from one prototype directory published during both periods, and $8.9 million from 11 directories for which the publication date moved into the period; offset by $13.8 million of net revenues associated with 21 directories published in the year ended December 31, 2001 but not in the same period in 2002. Of the $83.6 million from new directories, $82.9 was due to directories acquired and $0.7 million was due to new internally developed directories.

As a result of a combination of factors, including the addition of new customers, price increases, increases in the amount of advertising by current customers and new directory features such as colorization of ads, additional ad sizes and additional headings, same book revenue growth for the 251 directories published in both periods was 5.0%.

Cost of revenues increased $10.0 million, or 20.1%, from $49.8 million in the year ended December 31, 2001 to $59.8 million in the same period in 2002. The increase was the result of $16.9 million of costs associated with 39 new directories published in the year ended December 31, 2002, and $1.8 million in costs associated with 11 books published in the year ended December 31, 2002, but not in the same period in 2001; offset by a $0.1 million decrease in costs for the prototype directory published during both periods and $2.2 million of costs associated with 21 directories published during the year ended December 31, 2001, but not in the same period in 2002. Direct costs of publishing the same 251 books in the year ended December 31, 2002 as compared to 2001 decreased $7.2 million. Indirect production costs increased $0.8 million for the 2002 period.

As a result of the above factors, gross profit increased $83.1 million, or 43.2%, from $192.5 million in the year ended December 31, 2001 to $275.6 million in the same period in 2002. Gross margin increased from 79.4% in the year ended December 31, 2001 to 82.2% in the same period in 2002 as a result of lower direct costs on the same 251 books published during both periods.

Selling and marketing expenses increased $39.9 million, or 35.7%, from $111.6 million in the year ended December 31, 2001 to $151.5 million in the same period in 2002. The increase in direct sales costs was attributable to $21.0 million of costs associated with 39 new directories, $0.6 million of additional sales costs for the prototype directory published during both periods, $2.3 million of costs associated with 11 directories that published in the year ended December 31, 2002 but not in the same period in 2001 offset by a $0.3 million decrease in costs for the same 251 directories published during both periods and $3.6 million of costs associated with 21 books that published in the year ended December 31, 2001 but not in the same period in 2002. Indirect sales management costs increased $6.5 million. $5.8 million of these costs are associated with acquired sales offices and $0.7 million is related to increased support costs over the prior year. Our provision for bad debt for write-offs increased $14.0 million, or 52.0%, from $26.9 million in 2001 to $40.9 million in 2002. The increase in bad debts was attributable to $9.3 million of costs associated with 39 new directories, $4.7 million of additional provision for bad debt for the same

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251 directories published during both periods inclusive of an increase of $2.8 million due to potentially higher write-offs primarily associated with an increase in customer claims and delinquent customers, $1.0 million of costs associated with 11 directories that published in the year ended December 31, 2002 but not in the same period in 2001 and $0.3 million of costs for the prototype directory published during both periods, offset by $1.3 million of costs associated with 21 books that published in the year ended December 31, 2001 but not in the same period in 2002. Selling and marketing expense as a percentage of net revenues decreased from 46.1% in the year ended December 31, 2001 to 45.2% in the same period in 2002 primarily as a result of decreased direct sales costs associated with publishing the same 251 directories in 2002 compared to 2001 and decreased indirect costs as a percentage of net revenues.

General and administrative expense excluding depreciation and amortization increased $1.7 million, or 7.2%, from $23.5 million for the year ended December 31, 2001 to $25.2 million for the same period in 2002 primarily as a result of additional personnel and related costs in the first six months in 2002 compared to the first six months in 2001 as a result of the acquisition of WorldPages and an increase of approximately $1.7 million in due diligence fees related to unsuccessful acquisitions compared to the prior year. This was partially offset by a reduction of general and administrative expenses of $1.5 million due to the settlement of a lawsuit during January 2003 which the Company reduced the accrual based on the final settlement. The Company had previously established the reserve associated with the lawsuit during the final allocation of purchase price of WorldPages during 2002. Depreciation and amortization decreased $10.3 million, or 20.0%, from $51.5 million in the year ended December 31, 2000 to $41.2 million for the same period in 2002 primarily due to $15.8 of amortization of goodwill in the year ended December 31, 2001 and no amortization of goodwill in the year ended December 31, 2002 due to adoption of SFAS 142.

There were no costs incurred in the year ended December 31, 2002 as compared to $15.4 million for the year ended December 31, 2001 as a result of the recapitalization of the Partnership on June 28, 2001.

There were no contributions to the equity compensation plan incurred in the year ended December 31, 2002 as compared to $5.8 million for the year ended December 31, 2001 made on June 28, 2001 in connection with the recapitalization.

As a result of the above factors, income (loss) from operations increased $73.0 million, from a loss of $15.3 million in the year ended December 31, 2001 to income of $57.7 million in the same period in 2002. Income (loss) from operations as a percentage of net revenues increased from (6.3%) in the year ended December 31, 2001 to 17.2% in the same period in 2002.

Interest expense increased $2.0 million, or 6.2%, from $32.3 million in the year ended December 31, 2001 to $34.3 million in the same period in 2002 due to higher average debt balance outstanding in connection with the acquisition of WorldPages.

Income (loss) before extraordinary item increased $71.9 million, from a loss of $47.2 million in the year ended December 31, 2001 to income of $24.7 million in the same period in 2002.

Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000

Net revenues increased $65.1 million, or 36.7%, from $177.3 million in the year ended December 31, 2000 to $242.4 million in the same period in 2001. We published 273 directories in the year ended December 31, 2001 compared to 231 in the same period in 2000. The net revenue growth was due to year to year growth in the same 216 directories published during both periods of $13.7 million, $53.3 million from 52 new directories and $3.7 million from five directories for which the publication date moved into the period; offset by $5.6 million of net revenues associated with 15 directories published in the year ended December 31, 2000 but not in the same period in 2001.

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Of the $53.3 million from new directories, $52.7 was due to directories acquired during the year and $0.6 million was due to new internally developed directories.

As a result of a combination of factors, including the addition of new customers, price increases, increases in the amount of advertising by current customers and new directory features such as colorization of ads, additional ad sizes and additional headings, same book revenue growth for the 216 directories published in both periods was 8.0%.

Cost of revenues increased $16.6 million, or 49.7%, from $33.3 million in the year ended December 31, 2000 to $49.9 million in the same period in 2001. The increase was the result of $13.9 million of costs associated with 52 new directories published in the year ended December 31, 2001 and $0.7 million in costs associated with five books published in the year ended December 31, 2001, but not in the same period in 2000; offset by $1.3 million of costs associated with 15 directories published during the year ended December 31, 2000, but not in the same period in 2001. Direct costs of publishing the same 216 books in the year ended December 31, 2001 as compared to 2000 increased $1.3 million. Indirect production costs increased $2.0 million for the 2001 period.

As a result of the above factors, gross profit increased $48.5 million, or 33.7%, from $144.0 million in the year ended December 31, 2000 to $192.5 million in the same period in 2001. Gross margin decreased from 81.2% in the year ended December 31, 2000 to 79.4% in the same period in 2001 as a result of higher direct costs on newly acquired directories and higher indirect production costs as a result of the WorldPages acquisition.

Selling and marketing expenses increased $38.7 million, or 53.1%, from $72.9 million in the year ended December 31, 2000 to $111.6 million in the same period in 2001. The increase in direct sales costs was attributable to $13.8 million of costs associated with 52 new directories, $5.3 million of additional sales costs for the same 216 directories published during both periods, $0.9 million of costs associated with five directories that published in the year ended December 31, 2001 but not in the same period in 2000 offset by $1.5 million of costs associated with 15 books that published in the year ended December 31, 2000 but not in the same period in 2001. Indirect sales management costs increased $11.0 million. $7.5 million of these costs are associated with acquired sales offices and $3.5 million is related to increased support costs over the prior year. Our provision for bad debt for write-offs increased $9.6 million, or 55.5%, from $17.3 million in 2000 to $26.9 million in 2001. The increase in the provision for bad debts was attributable to $6.4 million of costs associated with 52 new directories, $3.4 million of additional bad debt for the same 216 directories published during both periods inclusive of an increase of $2.4 million due to potentially higher write-offs primarily associated with an increase in customer claims, $0.4 million of costs associated with five directories that published in the year ended December 31, 2001 but not in the same period in 2000 offset by $0.6 million of costs associated with 15 books that published in the year ended December 31, 2000 but not in the same period in 2001. Selling and marketing expense as a percentage of net revenues increased from 41.1% in the year ended December 31, 2000 to 46.1% in the same period in 2001 primarily as a result of increased direct sales costs associated with publishing the same 216 directories in 2001 compared to 2000 and direct and indirect costs associated with new books and offices as well as increasing the reserve for bad debts by $2.3 million due the deterioration of historical collection trends on various directories.

General and administrative expense excluding depreciation and amortization increased $8.7 million, or 58.8%, from $14.8 million for the year ended December 31, 2000 to $23.5 million for the same period in 2001 primarily as a result of additional personnel hired to transition and support the acquisition of WorldPages, of which $6.2 million are non-recurring expenses. Depreciation and amortization increased $23.6 million, or 84.8%, from $27.9 million in the year ended December 31, 2000 to $51.5 million for the same period in 2001 due to the amortization of acquired intangibles attributed to recently acquired directories, primarily WorldPages.

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Recapitalization transaction costs of $15.4 million were incurred for the year ended December 31, 2001 as compared to zero for the same period in 2000 as a result of the recapitalization of the Partnership on June 28, 2001.

Contributions to the equity compensation plan of $5.8 million were incurred for the year ended December 31, 2001 as compared to zero for the same period in 2000 in connection with the recapitalization of the Partnership on June 28, 2001.

As a result of the above factors, income (loss) from operations decreased $43.8 million, or 153.7%, from income of $28.5 million in the year ended December 31, 2000 to a loss of ($15.3) million in the same period in 2001. Income from operations as a percentage of net revenues decreased from 16.1% in the year ended December 31, 2000 to (6.3%) in the same period in 2001.

Interest expense increased $6.4 million, or 24.6%, from $25.9 million in the year ended December 31, 2000 to $32.3 million in the same period in 2001.

Income (loss) before extraordinary item decreased $50.2 million, from income of $2.7 million in the year ended December 31, 2000 to a loss of $47.2 million in the same period in 2001.

LIQUIDITY AND CAPITAL RESOURCES

Capital expenditures were $1.4 million, $1.3 million, and $2.1 million for the years ended December 31, 2002, December 31, 2001 and December 31, 2000, respectively. Capital spending is used largely for computer hardware and software upgrades for the maintenance of production and financial operating systems. As of December 31, 2002, we did not have any material commitments for capital expenditures.

Working capital decreased $0.6 million from $73.7 million at December 31, 2001 to $73.1 million at December 31, 2002. Net accounts receivable, which represents the largest component of working capital, increased to $104.3 million as of December 31, 2002 compared to $92.7 million as of December 31, 2001 due to an increase in net revenues. Cash decreased to $17.4 million as of December 31, 2002 from $26.9 million as of December 31, 2001. Current liabilities increased to $76.3 million as of December 31, 2002 from $74.9 million as of December 31, 2001, primarily as a result of increased customer deposits from our increased portfolio size as a result of acquisitions. Advance payments as a percentage of net revenues decreased from 40.9% for the year ended December 31, 2001 to 36.1% in the same period in 2002 due to lower advance payments on acquired books, specifically WorldPages books which were each published at least once in 2002 as opposed to 2001 when only 19 of the 42 books acquired were published.

Net cash provided by (used for) operating activities was $54.1 million, ($7.3) million, and $17.2 million in the years ended December 31, 2002, December 31, 2001, and December 31, 2000, respectively. The increase from the year ended December 31, 2001 compared to the year ending December 31, 2002 of $61.4 million was primarily due to an increase in net income. The decrease from the year ended December 31, 2000 compared to the year ending December 31, 2001 of $24.5 million was due to: a decrease in the level of trade receivables subsequent to the WorldPages transaction, an increase in the amount of deferred directory costs, and a lower level of accrued liabilities in December 2001 compared to December 2000.

Net cash used for investing activities was approximately ($25.6) million, ($167.8) million, and ($32.8) million in the years ended December 31, 2002, December 31, 2001 and December 31, 2000, respectively. Cash outflows for investing activities primarily relate to directory acquisitions. The increase in the year ended December 31, 2001 as compared to the years ended December 31, 2002 and December 31, 2000 was mainly due to the WorldPages acquisition during 2001.

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Net cash (used for) provided by financing activities was approximately ($37.9) million, $200.0 million, and $16.4 million in the years ended December 31, 2002, December 31, 2001, and December 31, 2000, respectively. The cash used in 2002 was primarily due to distributions to Holdings for the redemption of the Partnership’s 11 7/8% senior discount notes. The increase in the cash provided by financing activities in the year ended December 31, 2001 was due to the borrowings under the senior term loan and revolving credit facility, as well as the issuance of senior subordinated notes offset in part by the repayment of the old revolving credit facility and the old senior term loan in connection with the recapitalization of the Partnership and acquisition of WorldPages in June of 2001. The $16.4 million of funds borrowed in the year ended December 31, 2000 was used to finance acquisitions during 2000.

In connection with the Recapitalization of the Partnership in June 2001, we incurred significant debt. As of December 31, 2002 we had total outstanding long term indebtedness of $436.9 million, which represented a decrease of $6.7 million, or 1.5%, from total outstanding long term indebtedness of $443.6 million as of December 31, 2001. The outstanding long term indebtedness as of December 31, 2002 included: $215.0 million of TransWestern’s Series F 9 5/8% Senior Subordinated Notes due 2007 (excluding unamortized premium and discount), $26.1 million of outstanding borrowings under the Term A loan, $195.0 million of outstanding borrowings under the Term B loan, and $0.2 million in acquisition related debt. As of December 31, 2002 we had $65.0 million of additional borrowing availability under the revolving credit facility, none of which was outstanding.

Our principal sources of funds are cash flows from operating activities and $65.0 million of available funds under our revolving credit facility. Based upon the successful implementation of our business and operating strategy, we believe that these funds will provide us with sufficient liquidity and capital resources to meet our current and future financial obligations for the next twelve months, including the payment of principal and interest on our notes, as well as to provide funds for our working capital, capital expenditures and other needs. Our future operating performance will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. There can be no assurance that such sources of funds will be adequate and that we will not require additional capital from borrowings or securities offerings to satisfy such requirements. In addition, we may require additional capital to fund future acquisitions and there can be no assurance that such capital will be available.

In connection with our strategy of growing revenues from existing directories, we have increased our sales force from 532 employees at December 31, 1998 to 1,350 employees at December 31, 2002. We seek to continue to increase the absolute size of our sales force, however, exclusive of the effect of the increase in the sales force due to acquisitions, we currently do not believe that our sales force will increase at a rate equal to the percentage increase from 1998 to 2001. We do not believe that increases in the number of sales personnel will materially impact our liquidity.

On November 15, 2002, the Partnership redeemed $29.0 million in aggregate principal amount of its 11 7/8% senior discount notes using cash on hand to fund the redemption. On January 15, 2003, the Partnership redeemed the remaining balance of $28.9 in aggregate principal amount of these notes by borrowing $15.0 million of the available $65.0 million on the Company’s revolving line of credit and using cash on hand to fund the redemption.

The senior credit facility and the indentures governing TransWestern’s notes significantly restrict the distribution of funds by TransWestern and the other indirect subsidiaries of the Partnership. We cannot assure you that the agreements governing the indebtedness of the Partnership’s subsidiaries will permit such subsidiaries to distribute funds to the Partnership.

On January 15, 2003, the Partnership redeemed the remaining $28.9 million in aggregate principal amount of Partnership’s Discount Notes. As a result of the redemption the Company distributed $32.3 million to the Partnership. In addition, in connection with the redemption the Company

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borrowed $15.0 million of the available $65.0 million on its revolving line of credit and used cash on hand to fund the remaining distribution.

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations at December 31, 2002, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

General

     TransWestern’s discussion and analysis of its financial condition and results of operations is based upon TransWestern’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires TransWestern to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, TransWestern evaluates its estimates, which are based on its historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

     TransWestern believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue Recognition

     We recognize net revenues from the sale of advertising placed in each directory when the completed directory is distributed. Costs directly related to sales, production, printing and distribution of each directory are capitalized as deferred directory costs and then matched against related net revenues upon distribution. As the number of directories increases, the publication schedule is periodically adjusted to accommodate new books. In addition, changes in distribution dates are caused by market and competitive conditions as well as the staffing levels required to achieve the individual directory revenue goals. As a result, our directories may be published in a month earlier or later than the previous year which may move recognition of related revenues from one fiscal quarter or year to another.

     Net revenues from the sale of Internet directory services amounted to less than 1% of net revenues for the year ended December 31, 2002. We anticipate that Internet revenues will be less than 1% of net revenues in 2003.

Credit and Bad Debt

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     Generally, advertising contracts with a cost no greater than $300 are paid in full at the time of sale. In addition, credit is typically extended for accounts exceeding $300 to new and renewal customers after receipt of a 33% down payment. The remaining balance is billed over no more than eight months beginning the month after sale. Renewal customer accounts can be no more than sixty days past due at the time next year’s directory is published. Some renewal customers are not required to make a down payment and are billed over eight to twelve monthly periods.

     We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments and for estimated losses for claims resulting from publication errors and omissions in customer advertising. Allowances are established on each directory by reviewing the prior year’s cash collection experience for that directory. We assume the collection experience in the current directory will be comparable to that of the prior year. We review the cash collection experience on an on-going basis for each directory in our entire portfolio. If the portfolio’s cash collection experience begins to perform below that of the prior year, management may choose to accrue additional allowances if the deceleration is believed to be anything more than temporary. If the financial condition of TransWestern’s customers were to deteriorate, resulting in an impairment of their ability to make payments, or if TransWestern’s claims for production errors were to increase, additional allowances may be required. Our historical experience currently indicates that annualized bad debts are approximately 12% of our revenues. If events such as those described above increase our historical rates by 1%, our bad debt expense could increase by approximately $3.3 million.

     The Company regularly retains collection agencies in an effort to collect on past due accounts. Actual write-offs are taken against the allowance when management determines an account is uncollectible. Recoveries of previously written-off amounts are recorded as other income at the point in time they are recovered.

Goodwill Impairment

     The Company assessed impairment of its goodwill based on the provisions of SFAS 142. In assessing impairment, the Company must make assumptions regarding the future cash flows and other factors to determine the fair value of goodwill or impairment thereof. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for this asset not previously recorded. During the year ended December 31, 2002, the Company did not record any impairment loss related to goodwill.

     The Company applied SFAS 142 in the first quarter of 2002. Application of the nonamortization provisions of SFAS 142 resulted in an increase in net income of $33.0 million in 2002. The Company reclassified an assembled workforce intangible asset with an unamortized balance of $0.8 million to goodwill. In accordance with SFAS 142 the Company tested goodwill for impairment using the two-step process prescribed in SFAS 142. The first step was a screen for potential impairment, while the second step measured the amount of the impairment, if any. The Company performed the required impairment tests of goodwill as of January 1, 2002 and December 31, 2002 and determined that there was no impairment.

Contingencies

     We are subject to proceedings, lawsuits and other claims related to labor, product, and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies are made after careful analysis of each individual issue. The required reserve may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters.

Taxes and Valuation Allowance

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     As required by Statement of Financial Accounting Standards No. 109 (“FAS 109”), we recognize tax assets on the balance sheet if it is “more likely than not” that they will be realized on future tax returns. At December 31, 2001, we have fully provided a full valuation allowance against deferred tax assets of $27.9 million, reflecting uncertainty associated with our future profitability. During 2002, we reassessed the valuation allowance previously established against the net deferred assets. Factors considered by us included the history of earnings and projected earnings based on current and future operations. Based on the positive evidence, we concluded that it is more likely than not that a portion of the deferred tax assets would be realized. Accordingly we released approximately $9.9 million of against deferred tax assets, of which $3.8 million related to the acquisition of WorldPages and was recorded as a reduction to goodwill. Where the usage of net deferred tax assets may be limited due to a cumulative change in ownership of more than 50% within the last three years, we concluded that there may be a limitation and a valuation allowance of $18.0 million was maintained. Should some or all of the deferred tax assets associated with the acquisition of WorldPages ultimately be recognized, the reversal of the valuation allowance will be allocated to reduce goodwill recorded in the acquisition.

FORWARD LOOKING STATEMENTS

     This Annual Report on Form 10-K contains forward-looking statements which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on the beliefs of our management as well as on assumptions made by and information currently available to us at the time such statements were made. When used in this Annual Report on Form 10-K, the words “anticipate,” “believe,” “estimate,” “expect,” “intends” and similar expressions, as they relate to our Company are intended to identify forward- looking statements. Actual results could differ materially from those projected in the forward-looking statements. Important factors that could affect our results include, but are not limited to, (i) our high level of indebtedness; (ii) the restrictions imposed by the terms of our indebtedness; (iii) the turnover rate amongst our account executives; (iv) the variation in our quarterly results; (v) risks related to the fact that a large portion of our sales are to small, local businesses; (vi) our dependence on certain key personnel; (vii) risks related to the acquisition and start-up of directories; (viii) risks related to substantial competition in our markets; (ix) risks related to changing technology and new product developments; (x) the effect of fluctuations in paper costs; and (xi) the sensitivity of our business to general economic conditions. Additional information with respect to these and other factors that could cause our actual results to differ from those projected are included in the “Risk Factors” section of TransWestern’s Registration Statement on Form S-4, Registration No. 333-70470, filed with the SEC on October 19, 2001.

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     We are exposed to interest rate risk in connection with the term loans and the revolving credit facility outstanding under our senior credit facility, which bear interest at floating rates based on LIBOR or the prime rate plus an applicable borrowing margin. As of December 31, 2002, there was approximately $30.4 million outstanding under the Term A loan (at an interest rate of 4.2% at such time), $197.0 million outstanding under the Term B loan (at an interest rate of approximately 4.6% at such time), and nothing outstanding under the revolving credit facility. Based on such balances, an increase of one percentage point in the applicable interest rate would cause an increase in interest expense of approximately $2.3 million on an annual basis. We do not attempt to mitigate this risk through hedging transactions. All of our sales are denominated in U.S. dollars, thus we are not subject to any foreign currency exchange risks.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TRANSWESTERN PUBLISHING COMPANY LLC
INDEX TO FINANCIAL STATEMENTS

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Member
TransWestern Publishing Company LLC

We have audited the accompanying consolidated balance sheets of TransWestern Publishing Company LLC as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in member deficit, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TransWestern Publishing Company LLC at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 1 to the consolidated financial statements, TransWestern Publishing Company LLC changed its method of accounting for purchased goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards (“Statement”) No.142 during the first quarter of fiscal 2002.

ERNST & YOUNG LLP

San Diego, California
January 31, 2003
except for Note 13, as to which the date is
February 6, 2003.

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TRANSWESTERN PUBLISHING COMPANY LLC
CONSOLIDATED BALANCE SHEETS
(In thousands)