Back to GetFilings.com
1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended April 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ___________
Commission File Number 333-42085
TRANSWESTERN PUBLISHING COMPANY LLC
(Exact name of registrant as specified in its charter)
DELAWARE 33-0778740
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
---------------------
8344 CLAIREMONT MESA BOULEVARD 92111
SAN DIEGO, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (619) 467-2800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) AND 12 (g) OF THE ACT:
TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED
N/A N/A
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. Yes [ ] No [X]
================================================================================
2
TRANSWESTERN PUBLISHING COMPANY LLC
FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
ITEM 1 Business ............................................................. 2
ITEM 2 Properties ........................................................... 6
ITEM 3 Legal Proceedings .................................................... 7
ITEM 4 Submission of Matters to a Vote of Security Holders .................. 7
PART II
ITEM 5 Market for the Company's Common Equity and Related
Security Holder Matters ............................................... 7
ITEM 6 Selected Financial Data ............................................... 8
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................. 10
ITEM 7A Quantitative and Qualitative Disclosure about Market Risk ............. 16
ITEM 8 Financial Statements and Supplementary Data ........................... 16
ITEM 9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure .............................................. 16
PART III
ITEM 10 Directors and Executive Officers of the Company ....................... 17
ITEM 11 Executive Compensation ................................................ 19
ITEM 12 Security Ownership of Certain Beneficial Owners and Management ........ 22
ITEM 13 Certain Relationships and Related Transactions ........................ 23
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ....... 28
Signatures ............................................................ 30
1
3
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 ("TransWestern" or the "Company") may differ materially
from those discussed here. Additional information concerning factors that could
cause or contribute to such differences can be found in this Annual Report on
Form 10-K, Part II, Item 7 entitled "Management's Discussions and Analysis of
Financial Condition and Results of Operations" and elsewhere throughout this
Annual Report. Unless otherwise specified herein, all market and industry data
relating to independent yellow pages directory publishers are based on
information provided by Cowles/Simba Information, an independent market research
firm, as adjusted to reflect the Company's actual performance and events known
to the Company, including recent acquisitions and dispositions of directories by
certain of the publishers listed therein, and all other market and industry data
have been obtained from the Yellow Pages Publishers Association, an independent
trade association.
PART I
ITEM 1. BUSINESS
The Company is one of the largest independent yellow pages directory
publishers in the United States. The Company has 148 directories which serve
communities in the 13 states of California, Connecticut, Indiana, Kansas,
Kentucky, Louisiana, Massachusetts, Michigan, New York, Ohio, Oklahoma,
Tennessee and Texas. The Company's presence in its markets is well-established;
more than 70% of its directories have been in publication for more than 10
years. The Company's revenues are derived from the sale of advertising to a
diversified base of over 97,000 accounts (a single customer that advertises in
more than one directory is counted as a separate account for each directory in
which it advertises) consisting primarily of small to medium-sized local
businesses. Yellow pages are an important advertising medium for local
businesses due to their low advertising cost, widespread distribution, lasting
presence, and high consumer usage.
TransWestern Publishing Company, L.P. (the "Partnership") was formed in
1993 to acquire the TransWestern Publishing division of US West Marketing
Resources Group, Inc. (the "1993 Acquisition") and in October 1997, the
Partnership completed a $312.7 million recapitalization (the
"Recapitalization"). See "Certain Relationships and Related Transactions -
Recapitalization." In November 1997, the Partnership formed and contributed
substantially all of its assets to the Company, the Company assumed or
guaranteed all of the liabilities of the Partnership (the "Asset Drop-Down"),
and the Partnership changed its name to TransWestern Holdings L.P. ("Holdings").
As a result of the Asset Drop-Down, Holdings' only assets are all of the
Company's membership interests and all of the outstanding capital stock of TWP
Capital Corp. All of the operations that were previously conducted by the
Partnership are now being conducted by the Company.
Since the 1993 Acquisition, the Company has acquired 32 directories in
California, Indiana, Kentucky, Massachusetts, Michigan, Ohio, New York and
Tennessee. On February 2, 1998, the Company acquired eight directories from Mast
Advertising and Publishing, Inc. ("Mast") for approximately $9.0 million. The
purchase price consisted of (i) approximately $7.7 million of cash, (ii) a
$265,000 promissory note due in one year from the Company to Mast (subject to
adjustment based on the actual bad debt experience of the acquired directories)
and (iii) certain assumed liabilities of approximately $1.0 million. The cash
portion of the purchase price is subject to further adjustment based on the
actual net costs of the acquired directories. Six of the acquired directories
are located in northern Ohio and southern Michigan and serve the Toledo and
Columbus areas, and two of the acquired directories are contiguous with the
Nashville Market. The Company retained 2 area sales managers and 22 account
executives associated with the acquired directories. The eight directories
generated approximately $4.7 million of net revenue in 1997.
On July 16, 1998, the Company acquired all of the outstanding capital stock
of Target Directories of Michigan, Inc. ("Target") for $5.2 million plus the
book value of Target's assets as of the closing date. The cash portion of the
purchase price was funded with borrowings under the revolving credit facility
and is subject to further adjustment based on the actual net costs of the
acquired directories. Target publishes two directories in Michigan adjacent to
the Company's Monroe, MI directory. The Company retained one sales manager and
approximately 13 account executives associated with the acquired directories.
The two directories generate approximately $2.1 million of net revenue in 1997.
2
4
INDUSTRY OVERVIEW
The United States yellow pages directory industry generated revenues of
approximately $11.4 billion in 1997, with circulation of approximately 350
million directories. Yellow pages directories are published by both telephone
utilities and, in many markets, independent directory publishers, such as the
Company, which are not affiliated with the telephone service provider. More than
250 independent directory publishers circulated over 100 million directories and
generated an estimated $722 million in revenues during 1997. Between 1992 and
1997, while industry-wide yellow pages advertising revenues grew at a compound
annual rate of 4.2%, advertising revenues of independent directories grew at a
compound annual rate of approximately 6.4%. Concurrent with the overall
expansion of the yellow pages advertising market, independent directory
publishers have steadily increased their market share from 5.7% in 1992 to 6.4%
in 1997. This has occurred because the diverse needs of both consumers and
advertisers are often not satisfied by a single utility directory.
Yellow pages directories accounted for approximately 6.1% of total
advertising spending in 1997 and 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: (i) market
development or image advertising (e.g., television, radio and newspapers), (ii)
direct response sales promotion (e.g., direct mail), and (iii) point of purchase
or directional advertising (e.g., 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 in
need of a service.
The independent publisher segment of the yellow pages industry is highly
fragmented and growing. There are approximately 250 independent yellow pages
publishers in the United States and the five largest independent publishers
accounted for 67% of 1997 revenues in the independent publisher segment.
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 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 pages 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
The Company publishes 148 yellow pages directories serving distinct
communities in 13 states, including California, Connecticut, Indiana, Kansas,
Kentucky, Louisiana, Massachusetts, Michigan, New York, Ohio, Oklahoma,
Tennessee and Texas. The Company's directories are generally well-established in
their local communities and are clustered in contiguous geographic areas to
create a strong local market presence and to achieve selling efficiencies.
The Company's net revenues are not materially concentrated in any single
directory, industry, geographic region or customer. In fiscal 1998, the Company
served approximately 97,000 active accounts with its top 1,000 accounts
representing less than 17% of net revenues and no single directory accounting
for more than 5% of net revenues. Approximately 95% of the Company's net
revenues are derived from local accounts with the remaining 5% coming from
national companies advertising locally. The Company's high level of
diversification reduces exposure to adverse regional economic conditions and
provides additional stability in operating results. During fiscal 1998, the
Company published 139 directories with a total circulation of approximately 7.6
million copies. The Company's geographic diversity is evidenced in the table
below:
3
5
NUMBER OF DIRECTORIES NET REVENUES
REGION F'93 F'94 F'95 F'96 F'97 F'98 F'93 F'94 F'95 F'96 F'97 F'98
- --------------- ---------------------------------------- -------------------------------------------------
(DOLLARS IN MILLIONS)
Northeast 34 37 39 42 45 46 $23.9 $26.2 $29.2 $33.1 $38.0 $ 39.1
Central 25 26 28 35 42 50 9.9 11.2 12.5 14.8 19.7 23.5
Southwest 16 19 22 23 23 24 13.1 16.0 18.2 19.7 22.0 24.8
West 15 15 17 18 18 19 8.0 8.8 9.9 10.1 11.7 12.7
-- -- ---- ---- --- --- ----- ----- ----- ----- ----- -------
Total 90 97 106 118 128 139 $54.9 $62.2 $69.8 $77.7 $91.4 $ 100.1
== == ==== ==== === === ===== ===== ===== ===== ===== =======
PRODUCTS
The Company's yellow pages directories are designed to meet the
informational needs of consumers and the advertising needs of local businesses.
Each directory consists of (i) a yellow pages section containing display
advertisements and a listing of businesses by various headings, (ii) a white
pages section listing the names, addresses, and phone numbers of residences and
businesses in the area served, (iii) a community information section providing
reference information about general community services such as listings for
government offices, schools and hospitals, and (iv) 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. The Company
is also currently in the process of upgrading its production capacity to include
options such as full color advertisements which generate significantly higher
advertising rates. This diversity of product offerings enables the Company to
create customized advertising programs that are responsive to specific customer
needs and financial resources.
The Company's directories are an efficient source of information for
consumers. With over 2,000 headings in its directories and an expansive list of
businesses by heading in each local market, the Company's directories are both
comprehensive and conveniently organized. The Company's management believes that
the completeness and accuracy of the data in a directory is essential to
consumer acceptance.
Although the Company remains primarily focused on its printed directories,
it has recently initiated an Internet directory service. The Company has entered
into a strategic alliance with InfoSpace Inc. to offer electronic directory
services in each of its local markets. Under this strategic alliance, Infospace
Inc. is responsible for the technical aspects of the alliance and the Company is
providing local content and selling advertisement space in this electronic
directory. This arrangement enables the Company to avoid technical risks which
it is not presently staffed to manage and permits the Company to participate in
any opportunities that develop through the Internet. Management believes that
the Company's experience, reputation and account relationships within its local
markets will help it successfully market this service. The Company began to test
market its Internet product in March of 1998 in Houston, TX and Nashville, TN.
Although the growing use of the Internet has not had an appreciable impact on
the Company to date, management has not yet determined how, if at all, the
Internet will impact its performance, prospects or operations. The Company cross
promotes its Internet service and its printed directories. The Company's web
site is at http://www.transwesternpub.com.
SALES AND MARKETING
Yellow pages marketing is a direct sales business which requires both
servicing existing accounts and developing new customers. Repeat customers
comprise the Company's core account base and a number of these customers have
advertised in the Company's directories for many years. On average, since fiscal
1993, accounts representing 88% of the prior year's net revenues for each
directory have renewed their advertising program in the current edition of each
directory. Management believes that this high revenue renewal rate reflects the
importance of the Company's directories to its 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
4
6
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 also builds on its 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. The Company has developed a proprietary database of high potential
customers based on each individual customer's yellow page advertising
expenditures and focuses its sales resources on those potential customers. In
support of this strategy, the Company has expanded its sales force from 223
employees at the end of fiscal 1993 to 443 employees as of April 30, 1998,
representing an increase of approximately 100%. Management has observed a direct
correlation between adding new sales force employees and revenue growth.
The Company employs three executive vice presidents and 53 regional,
district and area sales managers who, together, are responsible for supervising
the activities of the account executives. The Company's 443 account executives
generate virtually all of the Company's revenues and are responsible for
servicing existing advertising accounts and developing new accounts within their
assigned service areas.
The Company has well-established practices and procedures to manage the
productivity and effectiveness of its 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. Approximately 50% of total account
executive compensation is in the form of commissions, such that sales force
compensation is largely tied to sales performance and account collection. As of
April 30, 1998, the Company employed approximately 680 people, 530 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 six 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.
PRODUCTION AND DISTRIBUTION
The Company develops 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 the Company's annual production schedule and serves as the
foundation for the Company's annual budgeting process. Although the Company
views its directories as annual publications, the actual interval between
publications may vary from 11 to 13 months. New directory starts can be
incorporated into the production schedule without significant disruption because
directory production is staggered throughout the year. As of April 30, 1998, the
Company had a production staff of approximately 90 full-time employees.
The 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. The Company does not print any of its
directories but instead contracts with a limited number of printers to print and
bind its directories. The Company contracts with two outside vendors to
distribute its directories to each business and residence in its markets.
5
7
RAW MATERIALS
The Company's principal raw material is paper. The Company used
approximately 16.4, 17.6 and 18.2 million pounds of directory grade paper in its
fiscal years ended April 30, 1996, 1997 and 1998, respectively, resulting in a
total cost of paper during such periods of approximately of $6.0 million, $5.8
million and $5.7 million, respectively. The Company does not purchase paper
directly from the paper mills; instead, the Company's printers purchase the
paper on behalf of the Company at prices negotiated by the Company.
COMPETITION
The yellow pages directory advertising business is highly competitive.
There are over 250 independent publishers operating in competition with the
regional Bell operating companies and other telephone utilities. In most
markets, the Company competes 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
The Company has registered one trademark and one service mark used in its
business. In addition, each of the Company's publications is protected under
Federal copyright laws. Telephone utilities are required to license directory
listings of names and telephone numbers that the Company then licenses for a set
fee per name for use in its white pages listings. Total licensing fees paid by
the Company were $1.1 million in fiscal 1998. In addition, the Company believes
that the phrase "yellow pages" and the walking fingers logo are in the public
domain in the United States. Otherwise, the Company believes that it owns or
licenses the intellectual property rights necessary to conduct its business.
EMPLOYEES
As of April 30, 1998, the Company employed approximately 680 full-time
employees, none of whom are members of a union. The Company believes that it has
good relations with its employees.
ITEM 2. PROPERTIES
The Company houses its corporate, administrative and production staff at
its headquarters located at 8344 Clairemont Mesa Boulevard, San Diego,
California. Information relating to the Company's corporate headquarters and
other regional sales offices is set forth in the following table:
SQUARE TERM DESCRIPTION
LOCATION ADDRESS FOOTAGE EXPIRATION OF USE
-------- ------- ------- ---------- -----------
San Diego, CA ....... 8344 Clairemont Mesa Boulevard 35,824 10/31/03 Corporate/Office/
Sales/Production
Houston, TX ......... 11243 Fuqua 9,600 3/31/01 Sales Office
Elmsford, NY ........ 150 Clearbrook Road 8,775 12/31/00 Sales Office
Albany, NY .......... 501 New Karner Road, Suite 1 7,565 3/31/99 Sales Office
Bedford, TX ......... 4001 Airport Fwy., Suite 230 5,697 7/31/00 Sales Office
Louisville, KY ...... 2300 Envoy Circle, #2301 5,600 3/31/02 Sales Office
Highland, NY ........ 7-9 Cummings Lane 5,000 4/30/99 Sales Office
Stamford, CT ........ 333 Ludlow Street 4,895 8/31/02 Sales Office
Nashville, TN ....... 2525 Perimeter Drive, Suite 105 3,637 5/31/01 Sales Office
Oklahoma City, OK ... 4901 W. Reno, Suite 800 2,931 6/30/02 Sales Office
The Company leases 29 other sales offices for more remote sales areas and
periodically leases small facilities for temporary storage of directories.
6
8
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various litigation matters incidental to the
conduct of its business. Management does not believe that the outcome of any of
the matters in which it is currently involved will have a material adverse
effect on the financial condition or results of operations of the Company.
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 the Company's membership
units, and it is not expected that such a market will develop in the future. As
of June 30, 1998 the Company had 1,000 membership units outstanding, all of
which are held by Holdings.
Distributions on the Company's membership units are governed by the Limited
Liability Company Agreement of TransWestern Publishing Company LLC. The payments
of distributions by the Company is restricted by the indenture relating to its
Series B 9 5/8% Senior Subordinated Notes due 2007 (the "Notes") and the Senior
Credit Facility.
On November 12, 1997, the Company, together with its wholly-owned
subsidiary TWP Capital Corp. II, issued $100,000,000 aggregate principal amount
of the Notes. The net proceeds to the Company from such issuance were $96.5
million, after deducting underwriting discounts of approximately $3,000,000 and
other expenses payable by the Company of approximately $500,000. The Notes were
initially sold by the Company and TWP Capital Corp. II to CIBC Oppenheimer and
First Union Capital Markets Corp., who subsequently placed the Notes with
qualified institutional buyers pursuant to Rule 144A under the Securities Act of
1933, as amended (the "Securities Act") and qualified buyers outside the United
States in reliance upon Regulation S under the Securities Act. The initial sale
of the Notes by the Company and TWP Capital Corp. II was exempt from
registration under the Securities Act pursuant to section 4(2) thereof, as a
transaction not involving any public offering.
7
9
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data and,
insofar as they relate to each of the five fiscal years in the period ended
April 30, 1998, have been derived from the audited financial statements of the
Company. The audited statements of operations of the Company for each of the
three years in the period ended April 30, 1998 and the audited balance sheet of
the Company as of April 30, 1998 and 1997 and the notes thereto appear elsewhere
in this Annual Report. The balance sheet data at April 30, 1994, 1995, 1996 and
the statement of operations data for each of the years ended April 30, 1994 and
1995 have been derived from the audited financial statements of the Company
which do not appear in this Annual Report. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements of
the Company and related Notes thereto included elsewhere in this Annual Report
on Form 10-K
YEARS ENDED APRIL 30,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
STATEMENTS OF OPERATIONS DATA
Net revenues ............................. $ 100,143 $ 91,414 $ 77,731 $ 69,845 $ 62,219
Cost of revenues ......................... 20,233 19,500 18,202 16,956 18,788
--------- --------- --------- --------- ---------
Gross profit ............................. 79,910 71,914 59,529 52,889 43,431
Operating expenses:
Sales and marketing .................... 40,290 36,640 29,919 27,671 26,301
General and administrative ............. 16,588 16,821 14,276 13,279 13,037
Contribution to Equity Compensation Plan 5,543 -- 796 525 --
--------- --------- --------- --------- ---------
Total operating expenses ................. 62,421 53,461 44,991 41,475 39,338
--------- --------- --------- --------- ---------
Income from operations ................... 17,489 18,453 14,538 11,414 4,093
Other income, net ........................ 82 48 375 470 344
Interest expense ......................... (13,387) (7,816) (6,630) (4,345) (2,951)
--------- --------- --------- --------- ---------
Income before extraordinary item ......... 4,184 10,685 8,283 7,539 1,486
Extraordinary loss ....................... $ (4,791) -- $ (1,368) $ (392) --
--------- --------- --------- --------- ---------
Net income (loss) ........................ $ (607) $ 10,685 $ 6,915 $ 7,147 $ 1,486
========= ========= ========= ========= =========
OTHER DATA:
Depreciation and amortization ........... $ 7,086 $ 6,399 $ 4,691 $ 4,593 $ 4,603
Capital expenditures .................... 996 1,034 484 496 769
CASH FLOWS PROVIDED BY (USED FOR):
Operating Activities ............... 15,681 15,302 13,091 14,608 9,853
Investing Activities ............... (9,200) (3,592) (5,713) (2,838) (3,121)
Financing Activities ............... (6,223) (11,776) (6,992) (11,550) (6,075)
EBITDA (b) .............................. 30,200 24,900 20,400 17,002 9,040
EBITDA margin ........................... 30.2% 27.2% 26.2% 24.3% 14.5%
Gross Profit margin ..................... 79.8% 78.7% 76.6% 75.7% 69.8%
Bookings (d) ............................ $ 99,492 $ 86,859 $ 75,709 $ 70,013 $ 64,269
Advance Payments as a % of Net Revenue (e) 46.0% 45.1% 41.0% 36.9% 31.8%
Number of Accounts (f) ................... 97,479 93,157 84,117 77,371 71,832
Average net revenues per account (g) ..... $ 1,027 $ 981 $ 924 $ 903 $ 866
Number of Directories .................... 139 128 118 106 97
Ratio of earnings to fixed charges (h) ... 1.70x 2.29x 2.28x 2.69x 1.44x
BALANCE SHEET DATA (AT END OF PERIOD):
Working Capital .......................... $ 5,443 $ 24 $ 2,088 $ 3,496 $ 12,034
Total Assets ............................. 60,804 48,231 47,423 41,831 43,879
Total Debt ............................... 179,735 78,435 84,410 47,961 25,724
Total Equity (Deficit) (i) ............... (145,912) (50,722) (55,606) (22,721) 4,458
8
10
(a) "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 Financial Statements.
(b) "EBITDA" is defined as income (loss) before extraordinary item plus
interest expense, discretionary contributions to the Company's Equity
Compensation Plan (such contributions represent special distributions to
the Company's Equity Compensation Plan in connection with refinancing
transactions) and depreciation and amortization and is consistent with
the definition of EBITDA in the Indenture relating to the Company's
Series B 9 5/8% Senior Subordinated Notes (the "Senior Subordinated
Indenture") and in the Company's Senior Credit Facility. Contributions
to the Equity Compensation Plan were $796 in fiscal 1996 and $5,543 for
fiscal 1998. EBITDA is not a measure of performance under generally
accepted accounting principles (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.
(c) "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.
(d) "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. In fiscal 1997, net revenues included $4,200 from
acquired directories, while bookings does not reflect this adjustment.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview.
(e) "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.
(f) "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.
(g) "Average net revenues per account" is defined as net revenues divided by
the number of accounts.
(h) Earnings consist of income (loss) before extraordinary item plus
contributions to the Equity Compensation Plan plus fixed charges. Fixed
charges consist of (i) interest, whether expensed or capitalized, (ii)
amortization of debt issuance costs, whether expensed or capitalized,
and (iii) an allocation of one-fourth of the rental expense from
operating leases which management considers is a reasonable
approximation of the interest factor of rental expense.
(i) Member equity (deficit) represents the value of equity contributions to
the Company by its Member, (TransWestern Holdings L.P.), plus net income
of the Company less Member distributions for income taxes and
distributions related to recapitalization transactions completed during
fiscal 1996 and 1998. During fiscal 1996, 1997 and 1998, the Partnership
made tax distributions to unit holders totaling $3,400 and $5,801,
$2,100 respectively. Also, in connection with the November 1995
refinancing of the Partnership, $36 million was distributed to the
limited and general partners of the Partnership. Furthermore, in
connection with the October 1997 refinancing of the Partnership, $174.4
million was distributed to the limited and general partners of the
Partnership.
9
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OVERVIEW (AMOUNTS IN THOUSANDS)
The Partnership was formed in May 1993 to acquire the TransWestern business
from US West. In November, 1997, the Partnership formed and contributed
substantially all of its assets to the Company, the Company assumed or
guaranteed all of the liabilities of the Partnership, and the Partnership
changed its name to TransWestern Holdings L.P. All of the operations that were
previously conducted by the Partnership are now being conducted by the Company.
In October 1997, the Partnership completed the $312,700 Recapitalization.
As a result of the Recapitalization, Thomas H. Lee Equity Fund III, L.P. and its
affiliates will collectively own approximately 59% of the equity of the
Partnership. See "Certain Relationships and Related Transactions -
Recapitalization."
On May 1, 1998, the Board of Directors of TransWestern Communications
Company, Inc. ("TCC"), the general partner of Holdings, the sole member of the
Company, authorized the change of the Company's fiscal year from a fiscal year
ending April 30 to a fiscal year ending December 31.
Revenue Recognition. The Company recognizes 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 affected
by market and competitive conditions and the staffing level required to achieve
the individual directory revenue goals. As a result, the Company's 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 recognized
based on actual distribution dates of individual directories, the Company's
bookings and cash collection activities generally occur at a steady pace
throughout the year. The table below demonstrates that quarterly bookings,
collection of advance payments and total cash receipts vary less than net
revenues or EBITDA:
FISCAL 1996 FISCAL 1997 FISCAL 1998
----------------------------- ----------------------------- -----------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net revenues ............... $20.7 $14.7 $20.9 $21.4 $23.3 $14.7 $23.5 $29.9 $19.2 $19.1 $21.9 $39.9
EBITDA (a) ................. 5.5 2.4 7.0 5.5 5.8 2.6 6.9 9.6 4.0 3.3 6.2 16.7
Bookings (b) ............... 18.1 20.0 17.6 20.0 20.5 23.9 21.4 21.1 22.7 27.3 23.0 26.5
Advance payments ........... 8.0 8.0 8.2 9.6 8.8 10.1 10.4 12.2 11.1 11.8 11.0 12.5
Total cash receipts(c) ..... 17.7 18.0 17.4 19.5 18.5 20.9 20.0 22.6 22.6 24.1 20.4 24.0
(a) "EBITDA" is defined as income (loss) before extraordinary item plus
interest expense, discretionary contributions to the Company's Equity
Compensation Plan (such contributions represent special distributions to
the Company's Equity Compensation Plan in connection with refinancing
transactions) and depreciation and amortization and is consistent with the
definition of EBITDA in the Senior Subordinated Indenture and in the Senior
Credit Facility. EBITDA is not a measure of performance under 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.
(b) "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.
(c) Includes both advance payments and collections of accounts receivable.
10
12
Revenue Growth. A key factor in the Company's revenue growth has been the
increase in the number of titles published. Compared to 1996, the total number
of directories have increased by 21, from 118 to 139, and the Company increased
its total number of accounts from nearly 84,000 to more than 97,000. The growth
in directories was due primarily due acquiring 22 directories that expanded the
Company's presence in northern California, upstate New York, western
Massachusetts, southern Indiana, eastern Ohio, southern Michigan, Kentucky and
Tennessee. Excluding acquired directories, the Company's net revenues grew 7.2%
in fiscal 1996, 6.7% in fiscal 1997 and 7.1% in fiscal 1998 with average revenue
per account increasing from $959 in fiscal 1996 to $1,001 in fiscal 1997 and
$1,027 in fiscal 1998. The Company's overall revenue renewal and account
retention rates have averaged 88% and 76%, respectively, over the last three
years.
Bookings. The length of the measurement periods for revenues and bookings
are the same; however, the measurement period for bookings for each month is the
thirty-day period ending on the twentieth of that month. Consequently, the
measurement period for bookings lags the measurement period for revenue and
other items by 10 days. Growth in bookings, which is closely correlated with the
number of account executives, was 14.5% for the twelve months ended April 30,
1998 versus the same period in 1997. To facilitate future growth, the Company
increased the size of its sales force by approximately 12.5%, increasing the
average number of account executives in fiscal 1997 from 393 to an average of
443 in fiscal 1998. Average bookings per week has grown from approximately $1.7
million for the 12-month period ended April 30, 1997 to $1.9 million for the
12-month period ended April 30, 1998, an increase of approximately 14.6%.
Cost of Revenues. The Company's principal operating costs are production,
paper and printing. Total operating costs represented 20.2% of net revenues in
fiscal 1998. 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 fiscal 1995, the Company's
constant focus on process improvement and increased productivity has enabled it
to minimize additional production and administrative costs while increasing the
number of its directories.
The Company's principal raw material is paper. The Company used
approximately 16.4 million, 17.6 million and 18.2 million pounds of directory
grade paper in fiscal 1996, 1997 and 1998, respectively, resulting in a total
cost of paper during such periods of approximately $6.0 million, $5.8 million
and $5.7 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
the Company in fiscal 1998 were $1.1 million. Distribution is provided by two
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 the Company's sales force. As the Company continues to increase
the number of directories and to expand its total customer base, the number of
account executives required to complete the annual selling cycle grows
accordingly. The Company's ability to complete selling each directory within a
prescribed time frame depends on account executive staffing levels and
productivity. Historically, the Company has experienced a high turnover rate
among its account executives, particularly among new hires, and therefore
continues to invest in recruiting and training account executives to build the
size of its sales force and to continue to grow revenue. However, as a result of
a significantly increased percentage of revenue attributable to new accounts,
revenue per account executive has increased from $220,000 in fiscal 1996 to
$225,000 in fiscal 1998. Revenue per account executive has only slightly
increased because the selling time required to develop a new account typically
exceeds the time required to service a renewal account and new accounts
typically commit to smaller advertising programs than do established renewal
accounts. Although the account renewal rate is typically lower for newer
accounts than for established accounts, as new accounts renew and mature, the
net revenues from such accounts generally increase, while the cost of revenues
for such accounts decreases. Direct sales expense accounted for approximately
20% of net revenues in fiscal 1998, 19% of net revenues in fiscal 1997 and 18%
of net revenues in fiscal 1996.
Cash Flow Management. The Company has instituted several policies to
accelerate customer payments including (i) requiring customers to make minimum
deposits on their annual purchase at the time of contract signing, (ii)
requiring customers with small advertising purchases to pay 100% at the time of
contract signing,
11
13
(iii) offering a cash discount to customers who pay 100% at the time of contract
signing, (iv) providing commission incentives to account executives to collect
higher customer deposits earlier in the sales process, (v) shortening customer
payment terms from 12 months to eight months or less, and (vi) requiring new
customers to begin payments immediately after contract signing rather than
waiting for the directory to be distributed. As a result of these initiatives
which began in fiscal 1994, advance payments received prior to directory
publication as a percentage of net revenues has increased from 41.0% in fiscal
1996 to 46.0% in fiscal 1998.
Although the Company generally collects an advance payment from all
advertisers, credit is extended based upon the size of the advertising program
and customer collection history. While the Company's accounts receivable are not
subject to any concentrated credit risk, credit losses represent a cost of doing
business due to the nature of the Company's customer base, largely local
businesses, and the use of extended credit terms. Generally, for larger and
established accounts, credit may be extended under eight to 12 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 18 to 24 months after a directory
has been published. The estimated provision for bad debt equaled 9.1%, 9.8% and
9.1% of net revenues for fiscal years 1996, 1997 and 1998, respectively. Actual
account write-offs equaled 9.8% in fiscal 1996. As described above, actual
account write-offs for fiscal 1997 and fiscal 1998 have not yet been determined.
Based on current estimates, management believes that the actual write-offs in
fiscal 1997 will be approximately 9.0% of net revenues. Management regularly
reviews actual write-offs of accounts receivable as compared to the reserve
estimates made at the time individual directories are published. During fiscal
1997, the Company's provision for bad debt included approximately $600,000 more
than management expects to write-off with respect to fiscal 1997 directories.
This addition was made to offset lower realized collections with respect to the
fiscal 1995 directories.
RESULTS OF OPERATIONS
The following table summarizes the Company's results of operations as a
percentage of revenue for the periods indicated:
YEAR ENDED APRIL 30,
--------------------------
1998 1997 1996
------ ------ ------
Net revenues ............. 100.0% 100.0% 100.0%
Cost of revenues ......... 20.2 21.3 23.4
------ ------ ------
Gross profit ............. 79.8 78.7 76.6
Sales and marketing ...... 40.2 40.1 38.5
General and administrative 22.1 18.4 19.4
------ ------ ------
Income from operations ... 17.5% 20.2% 18.7%
====== ====== ======
EBITDA (a): .............. 30.2% 27.2% 26.2%
(a) "EBITDA" is defined as income (loss) before extraordinary item plus
interest expense, discretionary contributions to the Company's Equity
Compensation Plan (such contributions represent special distributions
to the Company's Equity Compensation Plan in connection with
refinancing transactions) and depreciation and amortization and is
consistent with the definition of EBITDA in the Senior Subordinated
Indenture and in the Senior Credit Facility. EBITDA is not a measure
of performance under 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.
12
14
YEAR ENDED APRIL 30, 1998 COMPARED TO YEAR ENDED APRIL 30, 1997
Net revenues increased $8.7 million, or 9.5%, from $91.4 million in fiscal
1997 to $100.1 million in fiscal 1998. The Company published 139 directories in
fiscal 1997 as compared to 128 in fiscal 1997. The net revenue growth was due to
(i) growth in the same 123 directories of $6.0 million, (ii) $0.7 million of
revenue from five new directories and (iii) $5.7 million of revenue from 11
directories that moved into the period partially offset by $3.7 million of net
revenues associated with five directories that published in fiscal 1997 but not
in fiscal 1998.
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 123 directories
published in both periods was 6.8%. In addition, the average revenue per account
was 6.4% higher in the same books in fiscal 1998 than in fiscal 1997.
Cost of revenues increased $0.7 million, or 3.8%, from $19.5 million in
fiscal 1997 to $20.2 million in fiscal 1998. The increase was the result of (i)
$0.3 million of costs associated with 5 new directories published in fiscal
1998, (ii) $1.5 million of costs associated with 11 books that published in
fiscal 1998, but not in fiscal 1997 and (iii) $137,000 of additional production
and distribution overhead costs, offset by (a) $0.5 million of lower costs for
the same 123 directories published in both fiscal years and (b) $0.7 million of
costs associated with 5 directories published during fiscal 1997, but not in
fiscal 1998. For the same 123 directories that were published in both fiscal
years, cost of revenues as a percentage of net revenues decreased from 21.3% in
fiscal 1997 to 19.7% in fiscal 1998, primarily due to a decrease in printing and
production costs and license fees.
As a result of the above factors, gross profit increased $8.0 million, or
11.1%, from $71.9 million in fiscal 1997 to $79.9 million in fiscal 1998. Gross
margin increased from 78.7% in fiscal 1997 to 79.8% in fiscal 1998 as a result
of reduced printing and production costs and license fees and increased sales on
a same directory basis.
Selling and marketing expense increased $3.7 million, or 10.0%, from $36.6
million in fiscal 1997 to $40.3 million in fiscal 1998. The increase was
attributable to (i) $0.3 million of costs associated with 5 new directories,
(ii) $1.9 million of additional sales costs on the same 123 directories, (iii)
$1.4 million of costs associated with 11 books that published in fiscal 1998 but
not in fiscal 1997, (iv) $468,000 of higher sales management costs and (v) a
$368,000 increase in the provision for bad debt for write-offs due to the change
in the mix of directories published in fiscal 1998 as compared to fiscal 1997.
These increases were partially offset by $0.7 million of reduced selling and
marketing expenses associated with the five directories that published in fiscal
1997 but not in fiscal 1998. Selling and marketing expense as a percentage of
net revenues increased slightly from 40.1% in fiscal 1997 to 40.2% in fiscal
1998.
General and administrative expense increased $5.3 million, or 31.6% from
$16.8 million in fiscal 1997 to $22.1 million in fiscal 1998 as a result of a
contribution to the Equity Compensation Plan of $5.5 million made on October 1,
1997 in connection with the Recapitalization. There were no such contributions
in fiscal 1997. Exclusive of the contribution to the Equity Compensation Plan,
general and administrative expenses decreased $233,000 as a result of general
cost containment measures by the Company. General and administrative expense as
a percentage of net revenues increased from 18.4% in fiscal 1997 to 22.1% in
fiscal 1998.
As a result of the above factors, income from operations decreased $1.0
million, or 5.2%, from $18.5 million in fiscal 1997 to $17.5 million in fiscal
1998. Income from operations as a percentage of net revenues decreased from
20.2% in fiscal 1997 to 17.5% in fiscal 1998.
Interest expense increased $5.6 million, or 71.3%, from $7.8 million in
fiscal 1997 to $13.4 million in fiscal 1998.
Income before extraordinary item decreased $6.5 million, or 60.8%, from
$10.7 million in fiscal 1997 to $4.2 million in fiscal 1998.
13
15
YEAR ENDED APRIL 30, 1997 COMPARED TO YEAR ENDED APRIL 30, 1996
Net revenues increased $13.7 million, or 17.6%, from $77.7 million in
fiscal 1996 to $91.4 million in fiscal 1997. The Company published 128
directories in fiscal 1997 as compared to 118 directories in fiscal 1996. The
net revenue growth was due to (i) $9.5 million from 21 new directories published
in fiscal 1997, (ii) an increase in net revenues of $5.6 million in the same 106
directories published in both periods, and (iii) $2.0 million from the second
publication of a directory during fiscal 1997, offset by $3.4 million of net
revenues associated with 12 directories published in fiscal 1996 but not in
fiscal 1997.
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 106 directories
published in both periods was 7.8%. In addition, the average revenue per account
was 4.8% higher in fiscal 1997 than in fiscal 1996.
Cost of revenues increased $1.3 million, or 7.1%, from $18.2 million in
fiscal 1996 to $19.5 million in fiscal 1997. The increase was the result of (i)
$2.7 million of costs associated with 21 new directories published in fiscal
1997 and (ii) $0.5 million of additional production and distribution overhead
costs, offset by (a) $1.0 million of lower costs for the same 106 directories
published in both fiscal years and (b) $0.9 million of costs associated with 12
directories published during fiscal 1996, but not in fiscal 1997. For the same
106 directories that were published in both fiscal years, cost of revenues as a
percentage of net revenues improved from 23.4% in fiscal 1996 to 21.3% in fiscal
1997, primarily due to a decrease in printing and production costs and license
fees.
As a result of the above factors, gross profit increased $12.4 million, or
20.8%, from $59.5 million in fiscal 1996 to $71.9 million in fiscal 1997. Gross
margin increased from 76.6% in fiscal 1996 to 78.7% in fiscal 1997 as a result
of reduced printing and production costs and license fees and increased sales on
a same directory basis.
Selling and marketing expense increased $6.7 million, or 22.5%, from $29.9
million in fiscal 1996 to $36.6 million in fiscal 1997. The majority of the
increase was attributable to increased sales staffing for new and acquired
directories, the establishment of a permanent sales office in the Nashville,
Tennessee market and an increase in the provision for bad debt for write-offs
expected on fiscal 1995 directories. Selling and marketing expense as a
percentage of net revenues increased from 38.5% in fiscal 1996 to 40.1% in
fiscal 1997.
General and administrative expense increased $1.7 million, or 11.6%, from
$15.1 million in fiscal 1996 to $16.8 million in fiscal 1997, primarily as a
result of increased depreciation and amortization. General and administrative
expense as a percentage of net revenues decreased from 19.4% in fiscal 1996 to
18.4% in fiscal 1997.
As a result of the above factors, income from operations increased $3.9
million, or 26.9%, from $14.5 million in fiscal 1996 to $18.5 million in fiscal
1997. Income from operations as a percentage of net revenues increased from
18.7% in fiscal 1996 to 20.2% in fiscal 1997.
Interest expense increased $1.2 million, or 17.9%, from $6.6 million in
fiscal 1996 to $7.8 million in fiscal 1997.
Income before extraordinary item increased $2.4 million, or 29.0%, from
$8.3 million in fiscal 1996 to $10.7 million in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures were $0.5 million, $1.0 million and $1.0 million in
fiscal 1996, 1997 and 1998, respectively. Capital spending is used largely for
computer hardware and software upgrades for the maintenance of its production
and operating systems. As of the end of fiscal 1998 the Company did not have any
material commitments for capital expenditures.
14
16
Through its focus on increasing customer advance payments and the
acceleration of cash receipts, the Company has been able to reduce working
capital requirements despite strong revenue growth. Net accounts receivable,
which represents the largest component of working capital, increased to $26.1
million in fiscal 1998 compared to $23.3 million in fiscal 1997 and $21.4
million in fiscal 1996. Advance payments as a percentage of net revenues
increased from 41.0% in fiscal 1996 to 45.1% in fiscal 1997 and 45.9 % in fiscal
1998. Working capital improved in fiscal 1998 as compared to fiscal 1997 by $5.4
million primarily due to the reduction in the current maturity of debt due to
the Recapitalization. A related, but opposite, effect was seen in fiscal 1997 as
working capital decreased due to increased current debt related to the
refinancing completed in fiscal 1996.
Net cash provided by operating activities was approximately $13.1 million,
$15.3 million and $15.7 million in fiscal 1996, 1997 and 1998, respectively. The
increase from 1996 to 1997 primarily related to the $3.8 million increase in net
income and increased non-cash charges for depreciation, amortization and
provision for bad debt along with an approximate $1.0 million reduction in
write-offs of doubtful accounts to an amount which is in line with normal levels
associated with the growth in revenue. The $0.4 million increase in operating
cash flows from 1997 to 1998 resulted from a combination of favorable and
unfavorable factors. The $(6.5) million decrease in net income (net of $4.8
million in extraordinary items related to the Recapitalization) was offset by
several factors. The favorable items include $4.8 million in accrued interest
due to the Recapitalization which caused substantial changes in the amount and
timing of interest payments, the $2.5 million increase in accrued liabilities
primarily related to timing of the equity trust payments and the $0.9 million
increase in non-cash charges for depreciation and amortization of deferred debt
issuance costs relative to fiscal 1997. Unfavorable factors were the $(0.6)
million increase in write-offs net of recovered revenue, $(0.7) million
increased use from other current assets, primarily a note receivable resulting
from acquisitions and $(0.4) million from increased net receivables associated
with higher sales. All remaining working capital accounts represented a net $0.5
million increase in sources of cash.
Net cash used for investing activities was approximately $(5.7) million,
$(3.6) million and $(9.2) million in fiscal 1996, 1997 and 1998, respectively.
The decrease from 1996 to 1997 was caused by reduced amounts paid in connection
with directory asset purchases compared to fiscal 1996 and refinancing costs in
1996 which did not recur in 1997. The increase in fiscal 1998 was due primarily
as a result of increased acquisition related payments relative to 1997.
Net cash provided (used) for financing activities was approximately $(7.0)
million, $(11.8) million and $(6.2) million in fiscal 1996, 1997 and 1998,
respectively. The increased use from 1996 to 1997 was caused by a decrease in
the net proceeds of long term debt as fiscal 1997 did not include any
refinancing activity. The decrease in funds used in fiscal 1998 relates directly
to the Recapitalization.
In connection with the Recapitalization, the Company incurred significant
debt. As of April 30, 1998 the Company had total outstanding indebtedness of
$179.7 million, including $100 million of Series B 9 5/8% Senior Subordinated
Notes due 2007, (the "Notes") and $79.7 million of outstanding borrowings under
the Senior Credit Facility, which ranks senior to the Notes. The Company has
$40.0 million of additional borrowing availability under the Senior Credit
Facility, none of which was outstanding at April 30, 1998. The Company made its
first scheduled interest payment on the Senior Subordinated Notes on May 15,
1998.
The Company's principal sources of funds are cash flows from operating
activities and $40.0 million of available funds under the Revolving Credit
Facility. Based upon the successful implementation of management's business and
operating strategy, the Company believes that these funds will provide it with
sufficient liquidity and capital resources to meet current and future financial
obligations, including the payment of principal and interest on the Notes, as
well as to provide funds for the Company's working capital, capital expenditures
and other needs. The Company's future operating performance will be subject to
future economic conditions and to financial, businesses and other factors, many
of which are beyond the Company's control. There can be no assurance that such
sources of funds will be adequate and that the Company will not require
additional capital from borrowings or securities offerings to satisfy such
requirements. In addition, the Company may require additional capital to fund
future acquisitions and there can be no assurance that such capital will be
available.
15
17
YEAR 2000 COMPLIANCE
In fiscal 1998 the Company commenced for all of its computer systems, a
year 2000 date conversion project to address all necessary code changes, testing
and implementation. Project completion is planned for the middle of 1999 at an
estimated total cost of approximately $500,000. The Company expects its year
2000 date conversion project to be completed on a timely basis, however there
can be no assurance in this regard. If the Company's conversion project is
unsuccessful or is not completed on a timely basis, it could have a material
adverse effect on the Company. The Company's date conversion project includes
reviewing the systems of certain of its suppliers with which it interacts. There
can be no assurance that the systems of other companies on which the Company's
systems interact will be timely converted and any such failure to convert by
such companies could have a material adverse effect on the Company's systems.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10K 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 the Company's management as well as on assumptions made by and
information currently available to the Company at the time such statements were
made. When used in this Annual Report on Form 10K, the words "anticipate,"
"believe," "estimate," "expect," "intends" and similar expressions, as they
relate to the 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 the Company's
results include, but are not limited to, (i) the Company's high level of
indebtedness; (ii) the restrictions imposed by the terms of the Company's
indebtedness; (iii) the turnover rate amongst the Company's account executives;
(iv) the variation in the Company's quarterly results; (v) risks related to the
fact that a large portion of the Company's sales are to small, local businesses;
(vi) the Company's dependence on certain key personnel; (vii) risks related to
the acquisition and start-up of directories; (viii) risks related to substantial
competition in the Company's markets; (ix) risks related to changing technology
and new product developments; (x) the effect of fluctuations in paper costs and
(xi) the sensitivity of the Company's business to general economic conditions.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
N/A
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the Index on Page F-1 of the Financial Report included
herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
16
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information (ages as of June 30,
1998) with respect to the persons who are members of the Board of Directors (the
"Board") of TCC or executive officers of Holdings TransWestern.
TCC controls the policies and operations of Holdings and TransWestern.
NAME AGE POSITION AND OFFICES
- ---- --- --------------------
Laurence H. Bloch ............ 44 Chairman of the Board, Secretary and Director
Ricardo Puente ............... 45 President, Chief Executive Officer and Director
Joan M. Fiorito .............. 44 Vice President, Chief Financial Officer and Assistant
Secretary
Marybeth Brennan ............. 42 Vice President - Operations
Joseph L. Wazny .............. 52 Vice President - Information Services
Michael Bynum ................ 42 Executive Vice President - Sales
Richard Mellert .............. 53 Executive Vice President - Sales
Ita Shea-Oglesby ............. 40 Executive Vice President - Sales
C. Hunter Boll ............... 42 Director
Terrence M. Mullen ........... 31 Director
Christopher J. Perry ......... 43 Director
Scott A. Schoen .............. 39 Director
Marcus D. Wedner ............. 35 Director
Laurence H. Bloch is Chairman and Secretary of TransWestern and Holdings
and has been a Director of TCC since 1993. Prior to the Recapitalization, Mr.
Bloch served as Vice Chairman and Chief Financial Officer of the Company. Before
joining the Company, Mr. Bloch was Senior Vice President and Chief Financial
Officer of Lanxide Corporation, a materials technology company. Mr. Bloch was a
Vice President, then Managing Director of Smith Barney from 1985 to 1990, prior
to which he was Vice President, Corporate Finance with Thomson McKinnon
Securities, Inc. Mr. Bloch received a BA from the University of Rochester and an
MBA from Wharton Business School. Mr. Bloch also serves as a Director of The
Petersen Companies, Inc.
Ricardo Puente has been President of TransWestern and Holdings and a
Director of TCC since 1993 and became Chief Executive Officer as of the
Recapitalization. Previously, he held the positions of Vice President of Sales
and Controller of the TransWestern business which he joined in 1988. Before
joining US West, Mr. Puente held various financial positions with the Pillsbury
Company for nine years. After receiving his MS in Accounting from the University
of Miami, Mr. Puente was a senior auditor with Touche Ross & Co. Mr. Puente
earned a BS in Accounting from Florida State University.
Joan M. Fiorito is the Vice President, Chief Financial Officer and
Assistant Secretary of TransWestern and Holdings and prior to the
Recapitalization was Vice President and Controller. Ms. Fiorito joined the
TransWestern business in 1989 as Manager, Financial Planning & Analysis and
subsequently was promoted to Controller. Prior to joining the TransWestern
business, Ms. Fiorito was Controller of Coastal Office Products. Ms. Fiorito
received a BS in Management from Dominican College and an MBA in Finance from
Fordham University.
Marybeth Brennan has been the Company's Vice President of Operations since
its formation in 1993. Ms. Brennan joined the TransWestern business in 1987 as
Production Manager, prior to which Ms. Brennan was Director of Publications for
Maynard-Thomas Publishing. Ms. Brennan received a BA in English from Stonehill
College.
Joseph L. Wazny has been the Vice President, Management Information Systems
of the Company since its formation in 1993. Before joining the Company, Mr.
Wazny was Director of Systems Development and Director, Information Systems with
R.H. Donnelley Corp. Mr. Wazny graduated with a degree in Business
Administration and Computer Sciences from Roosevelt University.
17
19
Michael Bynum was promoted to Executive Vice President of the Company
effective May 1, 1998. His responsibilities include the management of the
Oklahoma/Kansas Region, North Texas Region, Tennessee Region, and
Ohio/Kentucky/Indiana/Michigan Region. Since 1993, Mr. Bynum was Regional Vice
President overseeing the Oklahoma/Kansas/Tennessee Region. Mr. Bynum joined the
TransWestern business in 1985 as a sales associate and holds a BA in Management
from Cameron University.
Richard Mellert was promoted to Executive Vice President of the Company
effective May 1, 1998. His responsibilities include the management of the
Upstate New York Region, Midstate New York Region, and Downstate New York
Region. Since 1993, Mr. Mellert was Regional Vice President overseeing the
Upstate New York Region. Mr. Mellert joined the TransWestern business in 1980.
Mr. Mellert was promoted to District Sales Manager in 1991. Mr. Mellert holds an
AA degree from Dutchess Community College.
Ita Shea-Oglesby was promoted to Executive Vice President of the Company
effective May 1, 1998. Her responsibilities include the management of the South
Texas, Louisiana Region and the Northern and Southern California Regions. Since
1993, Ms. Shea-Oglesby was Regional Vice President overseeing the South Texas,
Louisiana Region and the Northern California Region. Ms. Shea-Oglesby joined the
TransWestern business in 1983 and previously held the positions of Area Sales
Manager, Sales Trainer and District Sales Manager. Ms. Shea-Oglesby earned a BA
from Louisiana State University.
C. Hunter Boll became a Director of TCC upon the consummation of the
Recapitalization. Mr. Boll is a Managing Director of Thomas H. Lee Company where
he has been employed since 1986. Mr. Boll is also a Trustee of THL Equity Trust
III, the General Partner of THL Equity Advisors Limited Partnership III, which
is the General Partner of Thomas H. Lee Equity Fund III, L.P. Mr. Boll also
serves as a Director of Big V Supermarkets, Inc., New York Restaurant Group,
Inc., Cott Corporation and Freedom Securities Corporation. Mr. Boll holds an MBA
from Stanford University and a BA from Middlebury College.
Terrence M. Mullen became a Director of TCC upon consummation of the
Recapitalization. Mr. Mullen is currently an Associate of the Thomas H. Lee
Company. Mr. Mullen worked at the Thomas H. Lee Company from 1992 to 1994 and
rejoined in 1996. From 1990 to 1992, Mr. Mullen worked in the Corporate Finance
Department of Morgan Stanley & Co., Incorporated. Mr. Mullen also serves as a
Director of Cinnabon Corporation and Rayovac Corporation. Mr. Mullen received a
BBA in Finance and Economics from the University of Notre Dame and an MBA from
the Harvard Graduate School of Business Administration.
Christopher J. Perry has been a Director of TCC since 1994. Mr. Perry is
currently Managing Director and President of Continental Illinois Venture
Corporation, a position he has held since 1994, and is also a Managing Partner
of CIVC Partners III. Mr. Perry has been at Bank of America or, prior to its
merger with Bank of America, Continental Bank, since 1985. Prior positions with
Bank of America or Continental Bank include Managing Director and head of the
Mezzanine Investments Group and Managing Director and head of the Chicago
Structured Finance Group. Prior to joining Continental Bank, Mr. Perry was in
the Corporate Finance Department of Northern Trust. In addition to being a
Director of TCC, Mr. Perry is a Director of Duo-Tang, Inc., The Brickman Group,
Ltd and RAM Reinsurance Company, Ltd. Mr. Perry received a BS from the
University of Illinois and an MBA from Pepperdine University and is a certified
public accountant.
Scott A. Schoen became a Direct of TCC upon consummation of the
Recapitalization. Mr. Schoen is a Managing Director of the Thomas H. Lee company
where he has been employed since 1986. Mr. Schoen is also a Trustee of THL
Equity Trust III, the General Partner of THL Equity Advisors Limited Partnership
III, which is the General Partner of Thomas H. Lee Equity Fund III L.P. Mr.
Schoen also serves as Vice President of Thomas H. Lee Advisors I and Thomas H.
Lee Advisors II. Mr. Schoen is a Director of Affordable Residential Communities
LLC, Rayovac Corporation and Syratech Corporation. Mr. Schoen received a BA in
History from Yale University, a JD from Harvard Law School and an MBA from the
Harvard Graduate School of Business Administration. Mr. Schoen is a member of
the New York Bar.
Marcus D. Wedner has been a Director of TCC since its formation in 1993.
Mr. Wedner is currently Managing Director of Continental Illinois Venture
Corporation, a position he has held since 1992, and is also a Managing Partner
of CIVC Partners III. Mr. Wedner joined Continental Illinois Venture Corporation
in 1988.
18
20
Previously, Mr. Wedner held marketing and sales management positions at Pacific
Telesis Group and as an associate with Goldman, Sachs & Co. In addition to being
a Director of TCC, Mr. Wedner is a Director of Teletouch Communications,
Advanced Quick Circuits, L.P., Grapevine Communications, Inc. and Precision Tube
Technology, Inc. Mr. Wedner holds a BA from the University of California at Los
Angeles and received an MBA from the Harvard Graduate School of Business
Administration.
At present, all Directors are elected and serve until a successor is duly
elected and qualified or until his or her earlier death, resignation or removal.
All members of the Board of Directors set forth herein were elected pursuant to
an investors agreement that was entered into in connection with the
Recapitalization. See "Certain Relationships and Related Transactions --
Investors Agreement." There are no family relationships between any of the
Directors of TCC or executive officers of the Company. Executive officers of the
Company are elected by and serve at the discretion of the Board of Directors of
TCC.
ITEM 11. EXECUTIVE COMPENSATION
The compensation of executive officers of TransWestern is determined by the
Board of TCC. The following Summary Compensation Table includes individual
compensation information for the former Chairman and Chief Executive Officer,
the current President and Chief Executive Officer and each of the three other
most highly compensated executive officers of the Company in fiscal 1997 and
1998 (collectively, the "Named Executive Officers") for services rendered in all
capacities to the Company during fiscal 1997 and 1998. There were no stock
options exercised during the Company's last fiscal year nor were there any
options outstanding at the end of the Company's last fiscal year.
19
21
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
----------------------------------
FISCAL OTHER ANNUAL LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(a) PAYMENTS(b) COMPENSATION(c)
- --------------------------- ---- ------ ----- --------------- ----------- ---------------
James D. Dunning, Jr. (d) ...................... 1998 $119,629 $119,629 $ - $ - $318,672
Former Chairman and Chief Executive Officer 1997 277,709 277,709 - - 13,310
Laurence H. Bloch (e) .......................... 1998 222,167 56,497 - - 90,946
Chairman of the Board and Secretary 1997 222,167 222,167 - - 4,798
Ricardo Puente ................................. 1998 199,519 191,369 - - 134,734
President, Chief Executive Officer (f) 1997 199,519 171,822 - - 11,380
Marybeth Brennan ............................... 1998 132,698 130,460 - 50,797 28,922
Vice President - Operations 1997 132,698 120,030 - 9,322 13,805
Joan M. Fiorito (g) ............................ 1998 119,461 118,394 - 50,743 29,686
Vice President, Chief Financial Officer and 1997 119,460 105,649 - 9,232 14,449
Assistant Secretary
(a) None of the prerequisites and other benefits paid to each named executive
officer exceeded the lesser of $50,000 or 10% of the annual salary and
bonus received by each Named Executive Officer.
(b) Represents distributions made pursuant to the Company's Equity Compensation
Plan. See "Equity Compensation Arrangements."
(c) All Other Compensation for fiscal year 1998 includes: (1) payments for
long-term disability insurance premiums: Bloch ($990), Puente ($1,013),
Brennan ($674) and Fiorito ($606); (2) payments for life insurance
premiums: Bloch ($3,150) and Puente ($6,530); (3) payments of $2,150 for
tax preparation for each of the Named Executive Officers other than Mr.
Dunning; (4) contributions of $3,887 to the 401(k) Profit Sharing Plan on
behalf of each of the Named Executive Officers (other than Mr. Dunning, for
whom the contribution was $2,501); and (5) management fees paid in
connection with the Recapitalization: Dunning ($38,642), Bloch ($38,769),
Puente ($121,154), Brennan ($22,212) and Fiorito ($22,212). In addition,
the amount for Mr. Dunning includes severance pay of $277,709.
(d) Mr. Dunning resigned as Chairman of the Board and Chief Executive Officer
upon consummation of the Recapitalization
(e) Mr. Bloch served as Vice Chairman until consummation of the
Recapitalization, at which time he became Chairman and Secretary.
(f) Mr. Puente served as President until consummation of the Recapitalization,
at which time he became President and Chief Executive Officer.
(g) Ms. Fiorito served as Vice President-Controller until consummation of the
Recapitalization, at which time she became Vice President, Chief Financial
Officer and Assistant Secretary.
COMPENSATION OF DIRECTORS
The Company is a limited liability company and Holdings is a limited
partnership, both of which are controlled by TCC. The Directors of TCC are not
be paid for their services, although Directors are reimbursed for out-of-pocket
expenses incurred in connection with attending Board meetings.
EQUITY COMPENSATION ARRANGEMENTS
Holdings' Class B Units are designed to encourage performance by providing
the members of management the opportunity to participate in the equity growth of
TransWestern. There are 10,000 Class B Units authorized, 8,500 of which were
issued to the Management Investors and 1,500 of which were issued to the Equity
Compensation Plan discussed below. See "Certain Relationships and Related
Transactions."
20
22
In fiscal 1994, the Company established the TransWestern Publishing
Company, L.P. Equity Compensation Plan (the "Equity Compensation Plan") to
provide approximately 60 of the Company's managers (other than Messrs. Dunning,
Bloch and Puente) the opportunity to participate in the equity growth of the
Company without having direct ownership of the Company's securities. In
connection with the Recapitalization, the Company reserved $5.5 million for
distributions to participants in the Equity Compensation Plan, one half of which
was distributed in October 1997, and one half of which will be distributed in
October 1998 to participants employed by the Company at the time the
distribution is made. Special distributions made pursuant to the Equity
Compensation Plan were recorded as an expense in the Company's financial
statements when declared by the Board of Directors. Employees participating in
the Equity Compensation Plan were eligible to receive a ratable per unit share
of cash distributions made pursuant to the Equity Compensation Plan, if and
when, declared. In fiscal 1997, distributions totaling $2.6 million were paid
and at April 30, 1998, there was $2.9 million of undistributed proceeds under
the Equity Compensation Plan.
As a result of the Recapitalization, the existing Equity Compensation Plan
was terminated. However, the Company adopted a new Equity Compensation Plan
which functions similarly to the old plan. As of April 30,1998, no assets had
been contributed to the new plan.
EMPLOYMENT AGREEMENTS
Messrs. Bloch and Puente have each entered into an Employment Agreement
(each, an "Employment Agreement") with the Company. The Employment Agreements
provide for the employment of Mr. Bloch as the Chairman of the Board of
Directors of TCC and Chairman of the Partnership and Mr. Puente as the President
and Chief Executive Officer of the Partnership and TCC until October 1, 2002
unless terminated earlier as provided in the respective Employment Agreement.
The Employment Agreements of Messrs. Bloch and Puente provide for (i) an annual
base salary of $222,167and $235,500, respectively (subject to annual increases
based on the consumer price index) and (ii) annual bonuses based on the
achievement of certain EBITDA (as defined in each Employment Agreement) targets
of up to 100% of their base salary. Each executive's employment may be
terminated by the Company at any time with cause or without cause. If such
executive is terminated by the Company with cause or resigns other than for good
reason, the executive will be entitled to his base salary and fringe benefits
until the date of termination, but will not be entitled to any unpaid bonus.
Messrs. Bloch and Puente will be entitled to their base salary and fringe
benefits and any accrued bonus for a period of 12 months following their
termination in the event such executive is terminated without cause or resigns
with good reason. The Employment Agreements also provide each executive with
customary fringe benefits and vacation periods. "Cause" is defined in the
Employment Agreements to mean (i) the commission of a felony or a crime
involving moral turpitude or the commission of any other act or omission
involving dishonesty, disloyalty or fraud, (ii) conduct tending to bring the
Company or any of its subsidiaries into substantial public disgrace or
disrepute, (iii) the substantial and repeated failure to perform duties as
reasonably directed by TCC or the Company, (iv) gross negligence or willful
misconduct with respect to the Company or any subsidiary, or (v) any other
material breach of the Employment Agreement or Company policy established by the
Board, which breach, if curable, is not cured within 15 days after written
notice thereof to the executive. "Good Reason" is defined to mean the
occurrence, without such executive's consent, of (i) a reduction by the Company
of the executive's annual base salary by more than 20%, (ii) any reduction in
the executive's annual base salary (in effect immediately prior to such
reduction) if in the fiscal year prior to such reduction the EBITDA for such
prior fiscal year was equal to or greater than 80% of the target EBITDA for such
prior year, (iii) any willful action by the Company that is intentionally
inconsistent with the terms of the Employment Agreement or the executive's
Executive Agreement (as defined herein), or (iv) any material reduction in the
powers, duties or responsibilities which the executive was entitled to exercise
as of the date of the Employment Agreement. Messrs. Bloch and Puente have also
entered into Executive Agreements with the Company pursuant to which they
purchased Class B Units of the Partnership. See "Certain Relationships and
Related Transactions - Executive Agreements."
401 (k) AND PROFIT SHARING PLAN
The Company has a 401 (k) and profit-sharing retirement plan (the "Profit
Sharing Plan") for the benefit of substantially all of its employees, which was
qualified for tax exempt status by the Internal Revenue Service.
21
23
Employees can make contributions to the plan up to the maximum amount allowed by
federal tax code regulations. The Company may match the employee contributions,
up to 83% of the first 6% of annual earnings per participant. The Company may
also make annual discretionary profit sharing contributions. The Company's
contributions to the Profit Sharing Plan for the years ended April 30, 1996,
1997, and 1998 were approximately $0.8 million, $0.8 million, and $1.1 million
respectively. On May 12, 1998, the Company elected to change its fiscal year
from April 30 to December 31 as reported on Form 8-K. As a result, the Company
also amended the plan year of the TransWestern Publishing 401 (k) and Profit
Sharing Plan from April 30 to December 31.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of TransWestern's membership interests are owned by Holdings. The
following table sets forth certain information regarding the beneficial
ownership of the equity securities of Holdings by: (i) each of the Directors of
TCC and the executive officers of TransWestern; (ii) all Directors of TCC and
executive officers of TransWestern as a group and (iii) each owner of more than
5% of any class of equity securities of the Partnership ("5% Owners"). Unless
otherwise noted, the address for each executive officer of TransWestern and the
Directors of TCC is c/o TransWestern, 8344 Clairemont Mesa Boulevard, San Diego,
California 92111.
CLASS A
COMMON PERCENT PREFERRED PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER UNITS(a) OF CLASS UNITS OF CLASS
- ------------------------------------ -------- -------- ---------- ---------
DIRECTORS AND EXECUTIVE OFFICERS:
Laurence H. Bloch (b) ................................. 19,209 1.51 % 9,974 1.51%
Ricardo Puente (c) .................................... 28,813 2.27 14,961 2.27
Joan M. Fiorito (d) ................................... 5,282 * 2,743 *
Marybeth Brennan (d) .................................. 5,282 * 2,743 *
Joseph L. Wazny (d) ................................... 5,282 * 2,743 *
C. Hunter Boll (e) .................................... 715,193 56.29 371,351 56.29
Terrence M. Mullen (e) ................................ 712,231 56.06 369,813 56.06
Christopher J. Perry (f) .............................. 288,134 22.68 149,608 22.68
Scott A. Schoen (e) ................................... 715,193 56.29 371,351 56.29
Marcus D. Wedner (f) .................................. 288,134 22.68 149,608 22.68
All Directors and executive officers as a group
(10 persons) ...................................... 1,070,551 84.27 555,862 84.27
5% OWNERS:
Thomas H. Lee Equity Fund III, L.P. (g) ............... 712,034 56.05 369,710 56.05
Thomas H. Lee Foreign Fund III, L.P.(h) ............... 712,034 56.05 369,710 56.05
THL-CCI Limited Partnership (i) ....................... 712,034 56.05 369,710 56.05
Continental Illinois Venture Corporation (j) .......... 288,134 22.68 149,608 22.68
CIVC Partners III (k) ................................. 288,134 22.68 149,608 22.68
- --------
* Represents less than one percent.
22
24
(a) Holders of Class A Units are entitled to share in any distribution on a pro
rata basis, but only if the holders of the Preferred Units have received a
certain preference amount set forth in Holdings Third Amended and restated
Agreement of Limited Partnership, as amended. The Partnership also issued
Class B Units to the Management Investors. The Class B Units will be
entitled to share in any such distributions only if the holders of the
Preferred Units and Class A Units have achieved an internal rate of return
on their total investment of 12%. The percentage of such distributions that
the Class B Units will be entitled to receive will range from 10% to 20%,
based on the internal rate of return achieved by the holders of the
Preferred and Class A Units. All Common Units listed in the table represent
Class A Units unless otherwise noted.
(b) Does not include 800 Class B Units which are subject to vesting in equal
installments over a five year period.
(c) Does not include 2,500 Class B Units which are subject to vesting in equal
installments over a five year period.
(d) Does not include 352 Class B Units which are subject to vesting in equal
installments over a five year period.
(e) Includes 712,034 Class A Units and 369,710 Preferred Units beneficially
owned by Thomas H. Lee Equity Fund III, L.P. Such persons disclaim
beneficial ownership of all such interests. Such person's address is c/o
Thomas H. Lee Company, 75 State Street, Suite 2600, Boston, Massachusetts
02109.
(f) Includes 244,914 Class A Units and 127,167 Preferred Units owned by
Continental Illinois Venture Corporation 43,220 Class A Units and 22,441
Preferred Units owned by CIVC Partners III. Such persons disclaim
beneficial ownership of all such interests. Such person's address is c/o
Continental Illinois Venture Corporation, 231 South LaSalle Street,
Chicago, Illinois 60697.
(g) Includes 39,259 Class A Units and 20,385 Preferred Units owned by Thomas H.
Lee Foreign Fund III, L.P. and 38,305 Class A Units and 19,889 Preferred
Units owned by THL-CCI Limited Partnership. Such person disclaims
beneficial ownership of all such interests. Such person's address is c/o
Thomas H. Lee Company, 75 State Street, Suite 2600, Boston, Massachusetts
02109.
(h) Includes 634,470 Class A Units and 329,437 Preferred Units owned by Thomas
H. Lee Equity Fund III, L.P. and 38,305 Class A Units and 19,889 Preferred
Units owned by THL-CCI Limited Partnership. Such person disclaims
beneficial ownership of all such interests. Such person's address is c/o
Thomas H. Lee Company, 75 State Street, Suite 2600, Boston, Massachusetts
02109.
(i) Includes 634,470 Class A Units and 329,437 Preferred Units owned by Thomas
H. Lee Equity Fund III, L.P. and 39,259 Class A Units and 20,385 Preferred
Units owned by Thomas H. Lee Foreign Fund III, L.P. Such person disclaims
beneficial ownership of all such interests. Such person's address is c/o
Thomas H. Lee Company, 75 State Street, Suite 2600, Boston, Massachusetts
02109.
(j) Includes 43,220 Class A Units and 22,441 Preferred Units owned by CIVC
Partners III. Such person disclaims beneficial ownership of such interests.
Such person's address is c/o Continental Illinois Venture Corporation, 231
South LaSalle Street, Chicago, Illinois 60697.
(k) Includes 244,914 Class A Units and 127,167 Preferred Units owned by
Continental Illinois Venture Corporation. Such person disclaims beneficial
ownership of all such interests. Such person's address is c/o Continental
Illinois Venture Corporation, 231 South LaSalle Street, Chicago, IL 60697.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RECAPITALIZATION
The Partnership completed the Recapitalization in October 1997. In the
Recapitalization, new investors led by Thomas H. Lee Equity Fund III, L.P.
("THL") and its affiliates (together, the "THL Parties"), along with other
investors, the Partnership's existing limited partners (the "Existing Limited
Partners"), and the Company's 25 most senior managers (the "Management
Investors"), invested new and continuing capital of $130.0 million in the
Partnership and TCC (the "Equity Investment"). The proceeds from the Equity
Investment, together with borrowings of approximately $107.7 million under the
Senior Credit Facility and $75.0 million under a senior subordinated financing
facility (which was subsequently repaid with a portion of the net proceeds from
the Notes), were used (i) for $224.5 million of Recapitalization consideration,
including the redemption of a portion of the limited partnership interests from
the Existing Limited Partners, (ii) to repay $75.6 million under the
23
25
Partnership's then existing credit facilities, (iii) to pay $10.6 million of
fees and expenses and (iv) for $2.0 million for general corporate purposes,
including working capital.
The Recapitalization Agreement contained customary provisions for such
agreements, including representations and warranties with respect to the
condition and operations of the business, covenants with respect to the conduct
of the business prior to the Recapitalization closing date and various closing
conditions, including the continued accuracy of representations and warranties.
The representations and warranties made by Holdings and the Existing Limited
Partners do not survive the Recapitalization closing date; except that no party
is prevented from bringing a claim or action against any other person for any
fraud or intentional tort committed directly by such person.
Pursuant to the Recapitalization Agreement, each Existing Limited Partner
that reinvested in Holdings has agreed that for a period ending on the later of
the second anniversary of the Recapitalization closing date and the one year
anniversary of the termination of such reinvesting Manager's employment with the
Company not to own, control, participate or engage in any yellow pages directory
publishing directory business or any business competing for the same customers
as the businesses of the Company as such businesses exist or are in process
during such period in any markets (or markets contiguous thereto) in which the
Company engages or plans to engage during such period.
James D. Dunning, Jr., the Partnership's and TCC's former Chairman and
Chief Executive Officer, has agreed that for the three-year period commencing on
the Recapitalization closing date not to participate, directly or indirectly, in
any yellow pages directory publishing business in the United States or any
business competing for the same customers as the Company in the geographic areas
in which the Company is engaged in the local or national yellow pages directory
publishing business as of August 27, 1997; provided that Mr. Dunning may
participate in any industry specific yellow pages business or any trade or
industry publications.
In addition, each Existing Limited Partner that reinvested in Holdings has
agreed that for the two-year period commencing on the Recapitalization closing
date not to solicit the employment of or hire any employee of the Company (other
than Laurence Bloch), and further, under the Recapitalization Agreement, during
such two-year period, each Existing Limited Partner that reinvested in Holdings
is subject to a confidentiality agreement with respect to all information
concerning the business of the Company and TCC of which such person has
knowledge and which is not in the public domain.
MANAGEMENT AGREEMENT
Effective upon the Recapitalization, the Company entered into a Management
Agreement with Thomas H. Lee Company ("THL Co.") pursuant to which THL Co.
agreed to provide (i) general executive and management services, (ii)
identification, negotiation and analysis of financial and strategic
alternatives, and (iii) other services agreed upon by the Company and THL Co. On
the Recapitalization closing date, THL Co. and the other equity investors in the
Company each received their pro rata portion of a $5.0 million transaction fee.
In addition, THL and all other equity investors receive a pro rata portion of
the $500,000 annual management fee (the "Management Fee"), plus THL will be
reimbursed for all reasonable out-of-pocket expenses (payable monthly in
arrears). The Management Agreement has an initial term of one year, subject to
automatic one-year extensions, unless the Company or THL Co. provides written
notice of termination no later than 30 days prior to the end of the initial or
any successive period.
INVESTORS AGREEMENT
Pursuant to the Recapitalization, Holdings, TCC, the the THL Parties, CIBC
Argosy Merchant Fund 2, L.L.C. ("CIBC Merchant Fund"), CIVC Partners III ("CIVC
III" and, together with the THL Parties and CIBC Merchant Fund, the "New
Investors") and the reinvesting Existing Limited Partners (together with the New
Investors, the "New Partners") entered into an Investors Agreement (the
"Investors Agreement"). The Investors Agreement requires that each of the
parties thereto vote all of his or its voting securities and take all other
necessary or desirable actions to cause the size of the Board of Directors of
TCC to be established at nine members and to cause the election to the Board of
five representatives designated by THL (the "THL
24
26
Designees"), each of the then current chairman and president of the Partnership
(the "Executive Directors") and two representatives designated by Continental
Illinois Venture Corporation ("CIVC") and CIVC III (together, the "CIVC Parties"
(the "CIVC Designees"), of which one CIVC Designee will at all times serve on
the Board's compensation committee, audit committee and executive committee.
Currently, however, only three of the THL Designees have been appointed to TCC's
Board of Directors. The respective rights of THL and the CIVC Parties to
designate representatives to the Board terminates at such time when such party
owns less than 30% of the Common Units held by such party as of the
Recapitalization closing date. If at any time THL and its permitted transferees
own less partnership interests in Holdings or less equity securities in TCC than
the amount of such partnership interests or such equity securities, as the case
may be, owned by the CIVC Parties and the Management Investors, taken as a
group, then the number of THL Designees will be reduced automatically from five
to three and the number of CIVC Designees will be increased automatically from
two to three. The Investors Agreement provides that certain significant actions
may not be taken without the express approval of the at least one of the CIVC
Designees and at least one of the Executive Directors.
In addition to the foregoing, the Investors Agreement (i) requires the
holders of interests in Holdings and common stock of TCC (other than THL and
CIVC) to obtain the prior written consent of THL prior to transferring any
interests in Holdings or TCC stock (other than interests or securities held by
the Management Investors pursuant to Executive Agreements), (ii) grants in
connection with the sale of interests in Holdings or TCC stock by the Management
Investors certain preemptive rights with respect to such sale first to Holdings,
then to the limited partners, (iii) grants the New Partners certain
participation rights in connection with certain transfers made by THL, (iv)
grants the New Partners certain preemptive rights in connection with certain
issuances, sales or other transfers for consideration of any securities by
Holdings or TCC, (v) requires the holders of shares of TCC's common stock to
consent to a sale of TCC to an independent third party if such sale is approved
by the Board and the holders of a majority of the shares of TCC's common stock,
and (vi) requires the holders of interests in Holdings to consent to the sale of
Holdings in the event TCC and the holders of a majority of Class A Units approve
a sale of Holdings. The foregoing agreements terminate on the earlier of October
1, 2001 and the date on which the Partnership consummates a public offering of
$40 million or more of its equity securities (a "Qualified Public Offering").
The agreements with respect to the participation rights and preemptive rights
described above continue with respect to each security until the earlier of (i)
October 1, 2007, (ii) a Qualified Public Offering, (iii) the transfer in a
public sale of such security, (iv) with respect to equity securities of
Holdings, upon the sale of the Holdings, and (v) with respect to equity
securities of TCC, upon the sale of TCC.
REGISTRATION AGREEMENT
Pursuant to the Recapitalization, Holdings, TCC, and the New Partners
entered into a registration agreement (the "Registration Agreement"). Under the
Registration Agreement, the holders of a majority of registrable securities
owned by the THL Parties and the CIVC Parties have the right at any time,
subject to certain conditions, to require Holdings to register any or all of
their interests in Holdings' under the Securities Act on Form S-1 (a "Long-Form
Registration") on three occasions at Holdings' expense and on Form S-2 or Form
S-3 (a "Short-Form Registration") on three occasions at Holdings' expense.
Holdings is not required, however, to effect any such Long-Form Registration or
Short-Form Registration within six months after the effective date of a prior
demand registration. In addition, all holders of registrable securities are
entitled to request the inclusion of such securities in any registration
statement at Holdings' expense whenever Holdings proposes to register any of its
securities under the Securities Act (other than pursuant to a demand
registration). In connection with such registrations, Holdings has agreed to
indemnify all holders of registrable securities against certain liabilities
including liabilities under the Securities Act. In addition, Holdings has the
one-time right to preempt a demand registration with a piggyback registration.
EXECUTIVE AGREEMENTS
Each Management Investor has entered into an Executive Agreement with
Holdings and TCC (each, an "Executive Agreement"), pursuant to which such
Management Investor purchased Class B Units which are subject to a five-year
vesting period, which vesting schedule accelerates upon a sale of Holdings. The
Class B Units were issued in connection with the Recapitalization to members of
management as incentive units at
25
27
fair market value. Under each Management Investor's Executive Agreement, in the
event that such Management Investor's employment with the Company is terminated
for any reason, Holdings has the option to repurchase all of such Management
Investor's vested Class B Units in accordance with the provisions outlined in
the Partnership Agreement and all other of such Management Investor's interests
in Holdings and TCC at a price per unit derived as specified in the Partnership
Agreement. In addition, in the event of a termination of the Management
Investor's employment by Holdings without "cause" or by such Management Investor
for "good reason" or such Management Investor's death or disability, such
Management Investor may require Holdings or TCC to repurchase his or her vested
Class B Units in accordance with the provisions outlined in the Partnership
Agreement and all other interests of such Management Investor in Holdings and
TCC at a price per unit derived as specified in the Partnership Agreement.
The Partnership completed the Recapitalization in October 1997. In the
Recapitalization, new investors led by Thomas H. Lee Equity Fund III, L.P.
("THL") and its affiliates (together, the "THL Parties"), along with other
investors, the Partnership's existing limited partners (the "Existing Limited
Partners"), and the Company's 25 most senior managers (the "Management
Investors"), invested new and continuing capital of $130.0 million in the
Partnership and TCC (the "Equity Investment"). The proceeds from the Equity
Investment, together with borrowings of approximately $107.7 million under the
Senior Credit Facility and $75.0 million under a senior subordinated financing
facility (which was subsequently repaid with a portion of the net proceeds from
the Notes), were used (i) for $224.5 million of Recapitalization consideration,
including the redemption of a portion of the limited partnership interests from
the Existing Limited Partners, (ii) to repay $75.6 million under the
Partnership's then existing credit facilities, (iii) to pay $10.6 million of
fees and expenses and (iv) for $2.0 million for general corporate purposes,
including working capital.
BENEFITS OF THE RECAPITALIZATION TO CERTAIN EXISTING SECURITY OWNERS AND
MANAGEMENT INVESTORS
Pursuant to the Recapitalization, Holdings redeemed a portion of the
limited partnership interests held by Existing Limited Partners and the New
Investors purchased a portion of TCC's common stock from the Existing Limited
Partners. In the Recapitalization, the Company's Named Executive Officers
received approximately $50 million and exchanged their remaining limited
partnership interests, valued at approximately $7 million in the
Recapitalization, for newly issued Preferred and Class A Units. As a group, the
Named Executive Officers continuing with the Company received an aggregate of
approximately $24 million in the Recapitalization and exchanged their remaining
limited partnership interests, valued at approximately $6 million in the
Recapitalization, for newly issued Preferred and Class A Units. All Management
Investors as a group received an aggregate of approximately $38 million in the
Recapitalization and exchanged their remaining limited partnership interests,
valued at approximately $1.1 million in the Recapitalization, for newly issued
Preferred and Class A Units. CIVC and its affiliates, including Christopher J.
Perry and Marcus D. Wedner, received an aggregate of approximately $70 million
in the Recapitalization and exchanged their remaining limited partnership
interests, valued at approximately $25 million in the Recapitalization, for
newly issued Preferred and Class A Units. In addition, CIVC III, an affiliate of
CIVC, contributed $4.4 million at the closing of the Recapitalization in
exchange for newly issued Preferred and Class A Units and paid approximately
$78,000 to certain of the Existing Limited Partners to purchase TCC common
stock.
PAYMENTS ON TCC NOTE
Since the 1993 Acquisition, TCC loaned to the Company all amounts
distributed to TCC in connection with the periodic and special distributions
made by the Company to its partners (the "TCC Loans"). As of September 1, 1997,
the aggregate amount of principal and interest due under the TCC Loans was
$833,419. Shortly before the consummation of the Recapitalization, the Company
repaid in full the outstanding balance of all TCC Loans.
TCC used the proceeds received from the TCC Loans to (i) pay $500,000 to
First Union Capital Markets Corp. for certain advisory services rendered in
advance of the Recapitalization, (ii) pay $100,000 to Kirkland & Ellis, counsel
to the Company, for certain services rendered in advance of the
Recapitalization, (iii) pay $143,419 for miscellaneous expenses and (iv) pay a
dividend immediately prior to the Recapitalization to TCC's stockholders of
$90,000 in the aggregate.
26
28
REDEMPTION OF PREFERRED UNITS
Holdings used $31.3 million of the proceeds from its sale of $57.4 million
aggregate principal amount at maturity of Series B 11 7/8% Senior Discount Notes
due 2008 to redeem a portion of the Equity Investment. Holdings' limited
partners received the following amounts as a result of the redemption of
approximately one half of the Preferred Units: THL Parties $18.6 million; Named
Executive Officers $1.7 million; Named Executive Officers continuing with the
Company $1.5 million; Management Investors $2.9 million; CIVC $6.1 million; CIVC
III $1.1 million; First Union Capital Partners Inc. $1.2 million; CIBC Merchant
Fund $1.2 million.
27
29
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Index to Financial Statements
The financial statements required by this item are submitted in a separate
section beginning on page F-1 of this Annual Report on Form 10-K.
PAGE
NUMBER
------
Report of Ernst & Young LLP, Independent Auditors ....................... F-2
Balance Sheets at April 30, 1998 and 1997 ............................... F-3
Statements of Operations for Each of the Three Years in
the Period Ended April 30, 1998 ....................................... F-4
Statements of Changes in Partners' Deficit of Each of the Three Years in
the Period Ended April 30, 1998 ....................................... F-5
Statements of Cash Flows for Each of the Three Years in the
Period Ended April 30, 1998 ........................................... F-6
Notes to Financial Statements ........................................... F-7
(a) (2) Index to Financial Statement Schedules
All schedules have been omitted since they are either not required, not
applicable or because the information required is included in the financial
statements or the notes thereto.
(a) (3) Index to Exhibits
The following exhibits are filed as part of, or incorporated by reference into,
this report;
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Contribution and Assumption Agreement, dated November 6, 1997, by and
among Holdings and TransWestern. (1)
2.2 Assignment and Assumption Agreement, dated November 6, 1997, by and
among Holdings and TransWestern. (1)
2.3 Bill of Sale, dated November 6, 1997 by and among Holdings and
TransWestern. (1)
2.4 Asset Purchase Agreement with Mast Advertising and Publishing. (2)
2.5 Asset Purchase Agreement with Target Directories of Michigan, Inc.
3.6 Certificate of Formation of TransWestern. (1)
3.7 Limited Liability Company Agreement of TransWestern Publishing Company
LLC. (Incorporated by reference to exhibit number 3.4 to the Company's
Registration Statement on Form S-4 (Registration No. 333-42085))
4.8 Indenture, dated as of November 12, 1997, by and between the Company
and Wilmington Trust Company, as Trustee. (1)
4.9 Form of Series B 9 5/8% Senior Subordinated Notes due 2007. (1)
4.10 Securities Purchase Agreement, dated as of November 6, 1997, by and
among the Company, Holdings, TCC and the Initial Purchasers of the
Notes. (1)
4.11 Registration Rights Agreement, dated as of November 12, 1997, by and
among the Company and the Initial Purchasers of the Notes. (1)
28
30
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.1 Employment Agreement, dated as of October 1, 1997, by and between
Laurence H. Bloch and TransWestern. (1)
10.2 Employment Agreement, dated as of October 1, 1997, by and between
Ricardo Puente and TransWestern. (1)
10.3 Assumption Agreement and Amended and Restated Credit Agreement, dated
as of November 6, 1997, among the Company, the lenders listed therein
and Canadian Imperial bank of Commerce, as administrative agent, and
First Union National Bank, as documentation agent. (1)
10.4 Form of Equity Compensation Plan. (1)
10.5 Form of Executive Agreement between Holdings (formerly known as
TransWestern Publishing Company, L.P.), TCC and each Management
Investor. (1)
10.6 Securities Purchase Agreement, dated as of November 6, 1997, by and
among the Discount Note Issuers, TransWestern, TCC and the Initial
Purchasers of the Discount Notes. (1)
10.7 Indenture, dated as of November 12, 1997 by and between the Discount
Note Issuers and Wilmington Trust Company, as Trustee. (1)
10.8 Registration Rights Agreement, dated as of November 12, 1997 by and
among the Discount Note Issuers and the Initial Purchasers of the
Discount Notes. (1)
10.9 Management Agreement, dated as of October 1, 1997, by and between
Holdings (formerly know as TransWestern Publishing Company, L.P.) and
Thomas H. Lee Company. (1)
10.10 Investors Agreement, dated as of October 1, 1997, by and between
Holdings (formerly known as TransWestern Publishing Company, L.P.), TCC
and the limited partners of Holdings. (1)
12.1 Statement regarding computation of ratio of earnings to fixed charges.
21.1 Subsidiaries of TransWestern.
27.1 Financial Data Schedule.
- ----------
(1) Incorporated herein by reference to the same numbered exhibit to the
Company's Registration Statement on Form S-4 (Registration No.
333-42085)
(2) Incorporated herein by reference to exhibit number 2.1 to the Company's
Quarterly Report of Form 10-Q (file No. 333-42085) filed on March 17,
1998.
The Company agrees to furnish supplementally to the Commission a copy
of any omitted schedule or exhibit to such agreement upon request by the
Commission.
(b) On May 12, 1998, the Company filed a report on Form 8-K reporting
pursuant to Item 8 thereof that on May 1, 1998, the Board of
Directors of TCC authorized the change of the Company's fiscal year
from a fiscal year ending April 30 to a fiscal year ending December
31.
29
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRANSWESTERN PUBLISHING COMPANY LLC
(Registrant)
BY: /s/ JOAN M. FIORITO
-------------------------------------------------
Name: Joan M. Fiorito
Title: Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: July 24, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOAN M. FIORITO Vice President, July 24, 1998
- ------------------------------------------- Chief Executive Officer
Joan M. Fiorito (Principal Executive Officer)
/s/ LAURENCE H. BLOCH Chairman, Secretary July 24, 1998
- ------------------------------------------- (Principal Executive Officer)
Laurence H. Bloch
/s/ RICARDO PUENTE Chief Executive Officer July 24, 1998
- ------------------------------------------- President
Ricardo Puente (Principal Executive Officer)
/s/ CHRIS J. PERRY Director July 24, 1998
- -------------------------------------------
Christopher J. Perry
/s/ MARCUS D. WEDNER Director July 24, 1998
- -------------------------------------------
Marcus D. Wedner
/s/ C. HUNTER BOLL Director July 24, 1998
- -------------------------------------------
C. Hunter Boll
/s/ SCOTT A. SCHOEN Director July 24, 1998
- -------------------------------------------
Scott A. Schoen
/s/ TERRENCE M. MULLEN Director July 24, 1998
- -------------------------------------------
Terrence M. Mullen
30
32
TRANSWESTERN PUBLISHING COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
PAGE
NUMBER
------
Report of Ernst & Young LLP, Independent Auditors F-2
Balance Sheets at April 30, 1998 and 1997 F-3
Statements of Operations for Each of the Three Years in
the Period Ended April 30, 1998 F-4
Statements of Changes in Members' Deficit of Each of
the Three Years in the Period Ended April 30, 1998 F-5
Statements of Cash Flows for Each of the Three Years in the
Period Ended April 30, 1998 F-6
Notes to Financial Statements F-7
F-1
33
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Member
TransWestern Publishing Company LLC
We have audited the accompanying balance sheets of TransWestern Publishing
Company LLC as of April 30, 1998 and 1997 and the related statements of
operations, changes in member deficit and cash flows for each of the three years
in the period ended April 30, 1998. 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 generally accepted auditing
standards. 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 financial position of TransWestern Publishing Company
LLC at April 30, 1998 and 1997 and the results of its operations and its cash
flows for each of the three years in the period ended April 30, 1998, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
June 10, 1998
F-2
34
TRANSWESTERN PUBLISHING COMPANY LLC
BALANCE SHEETS
(IN THOUSANDS)
APRIL 30,
---------------------------
1998 1997
--------- ---------
ASSETS
Current assets:
Cash $ 1,512 $ 1,254
Trade receivable, (less allowance for doubtful
accounts of $9,532 in 1998 and $7,626 in 1997) 26,127 23,279
Deferred directory costs 6,226 6,412
Other current assets 950 518
--------- ---------
Total current assets 34,815 31,463
Property, equipment and leasehold improvements, net 2,694 2,840
Acquired intangibles, net 14,326 12,093
Other assets, primarily debt issuance costs, net 8,969 1,835
========= =========
Total assets $ 60,804 $ 48,231
========= =========
LIABILITIES AND MEMBER DEFICIT
Current liabilities:
Accounts payable $ 4,373 $ 3,901
Salaries and benefits payable 3,075 4,112
Accrued acquisition costs 504 986
Accrued Equity Compensation Plan contribution 2,900 -
Accrued interest 4,841 69
Other accrued liabilities 1,124 448
Amount due general partner - 805
Customer deposits 10,164 10,197
Current portion, long-term debt 2,391 10,921
--------- ---------
Total current liabilities 29,372 31,439
Long-term debt:
Senior Credit Facility 77,344 67,514
Series B 9 5/8% Senior Subordinated Notes 100,000 -
Member deficit (145,912) (50,722)
========= =========
Total liabilities and member deficit $ 60,804 $ 48,231
========= =========
See accompanying notes.
F-3
35
TRANSWESTERN PUBLISHING COMPANY LLC
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEARS ENDED APRIL 30,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Net revenues $ 100,143 $ 91,414 $ 77,731
Cost of revenues 20,233 19,500 18,202
--------- --------- ---------
Gross profit 79,910 71,914 59,529
Operating expenses:
Sales and marketing 40,290 36,640 29,919
General and administrative 16,588 16,821 14,276
Contribution to Equity Compensation Plan 5,543 -- 796
--------- --------- ---------
Total operating expenses 62,421 53,461 44,991
--------- --------- ---------
Income from operations 17,489 18,453 14,538
Other income, net 82 48 375
Interest expense (13,387) (7,816) (6,630)
--------- --------- ---------
(13,305) (7,768) (6,255)
--------- --------- ---------
Income before extraordinary item 4,184 10,685 8,283
Extraordinary loss $ (4,791) -- $ (1,368)
--------- --------- ---------
Net income (loss) $ (607) $ 10,685 $ 6,915
========= ========= =========
Net income (loss) per Member unit $ (607) $ 10,685 $ 6,915
========= ========= =========
See accompanying notes.
F-4
36
TRANSWESTERN PUBLISHING COMPANY LLC
STATEMENTS OF CHANGES IN MEMBER DEFICIT
YEARS ENDED APRIL 30, 1998, 1997, AND 1996
(IN THOUSANDS)
Balance at April 30, 1995 ................................ $ (22,721)
Net income ............................................ 6,915
Distributions to member ............................... (39,800)
---------
Balance at April 30, 1996 ................................ (55,606)
Net income ............................................ 10,685
Distributions to member ............................... (5,801)
---------
Balance at April 30, 1997 ................................ (50,722)
Net (loss) ............................................ (607)
Contributions from member ............................. 85,756
Equity transaction costs .............................. (3,858)
Distributions to member ............................... (176,481)
=========
Balance at April 30, 1998 ................................ $(145,912)
=========
See accompanying notes.
F-5
37
TRANSWESTERN PUBLISHING COMPANY LLC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED APRIL 30,
-----------------------------------
1998 1997 1996
--------- --------- ---------
OPERATING ACTIVITIES
Net income (loss) $ (607) $ 10,685 $ 6,915
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item-non cash 4,791 -- 1,368
Depreciation and amortization 7,086 6,399 4,691
Amortization of deferred debt issuance costs 943 703 804
Provision for doubtful accounts 9,094 8,920 7,069
Changes in operating assets & liabilities, net
of effects of purchased directories:
Trade receivables (4,754) (4,142) (684)
Write-off of doubtful accounts (7,672) (7,287) (8,231)
Recoveries of doubtful accounts 485 679 660
Deferred directory costs 186 (302) 97
Other current assets (433) 247 (158)
Accounts payable 472 710 (96)
Accrued liabilities 1,352 (1,136) 1,038
Accrued interest 4,772 69 (1,054)
Customer deposits (34) (243) 672
--------- --------- ---------
Net cash provided by operating activities 15,681 15,302 13,091
INVESTING ACTIVITIES
Purchase of property, equipment and leasehold
improvements (996) (1,034) (484)
Payment for purchase of directories (8,204) (2,558) (5,229)
--------- --------- ---------
Net cash used for investing activities (9,200) (3,592) (5,713)
FINANCING ACTIVITIES
Borrowings under long-term debt agreements:
Senior Term Loan 85,000 -- 80,000
Revolving Credit Facility 37,039 24,000 23,846
Increase in other assets, primarily debt issuance costs, net (12,940) -- (2,631)
9 5/8% Senior Subordinated Notes 100,000 -- --
Senior Subordinated Facility 75,000 -- --
Repayments of long-term debt:
Revolving Credit Facility (47,108) (21,975) (16,546)
Senior Subordinated Facility (75,000) -- (4,461)
Senior Term Loan (73,631) (8,000) (47,400)
Equity transaction costs (3,858) -- --
Contributions from member 85,756 -- --
Distributions to member (176,481) (5,801) (39,800)
--------- --------- ---------
Net cash used for financing activities (6,223) (11,776) (6,992)
--------- --------- ---------
Net increase (decrease) in cash 258 (66) 386
Cash at beginning of year 1,254 1,320 934
--------- --------- ---------
Cash at end of year $ 1,512 $ 1,254 $ 1,320
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 7,724 $ 7,131 $ 7,223
========= ========= =========
See accompanying notes.
F-6
38
TRANSWESTERN PUBLISHING COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998
(ALL DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization, Business Activities and Basis of Presentation
TransWestern Publishing Company, L.P. (the "Partnership") was formed in
1993 to acquire the business of TransWestern Publishing from US West Marketing
Resources Group, Inc. TransWestern Publishing was a division of US West prior to
May 1993.
In October 1997, the Partnership completed certain recapitalization
transactions involving $312,709 (the "Recapitalization"). In the
Recapitalization, New Investors (as defined) including Thomas H. Lee Equity Fund
III, 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 $130,009 in the Partnership and TransWestern
Communications Company, Inc. (the general partner of the Partnership). The
proceeds of the equity investment together with approximately $182,700 of senior
and senior subordinated debt financing were used (i) for $224,500 of
consideration paid to redeem a portion of the limited partnership interests from
existing limited partners, (ii) to repay $75,600 outstanding under credit
facilities in existence since 1995, (iii) to pay $10,600 of costs and fees and
expenses associated with the Recapitalization and (iv) for $2,000 for general
corporate purposes, including working capital.
The Recapitalization was financed with (i) the $130,009 equity investment,
(ii) borrowings of $107,700 under a $125,000 (maximum) variable interest rate
Senior Credit Facility and (iii) borrowings of $75,000 under a Senior
Subordinated Facility. The assets and liabilities of the Company are stated at
historical cost and were not revalued to fair market value at the date of the
Recapitalization. As a result of the Recapitalization, Thomas H. Lee Equity Fund
III, L.P. and its affiliates collectively own approximately 59% of the equity of
the Partnership.
In November 1997, TransWestern Publishing Company, L.P. changed its name
to TransWestern Holdings L.P. ("Holdings") and formed and contributed
substantially all of its assets to TransWestern Publishing Company LLC
("TransWestern" or the "Company"). TransWestern assumed or guaranteed all of the
liabilities of the Partnership. As a result, Holdings' only assets consist of
TransWestern's Member Units (as defined) and all of Capital's (as defined)
capital stock. All of the operations that were previously conducted by the
Partnership are now being conducted by TransWestern. Holdings has formed TWP
Capital Corp. ("Capital") as a wholly-owned subsidiary and the Company has
formed TWP Capital Corp. II ("Capital II") as a wholly-owned subsidiary. Neither
Capital nor Capital II has any significant assets or operations.
The membership interests of TransWestern consists of a single class of
authorized common units ("the Member Units"). Holdings is the sole initial
member of TransWestern and accordingly, holds all 1,000 of the issued and
outstanding Member Units.
TCC, the general partner of Holdings, held approximately 1.0% of Holdings
outstanding partnership units in the period from formation (1993) through
September 1997. Upon the closing of the Recapitalization (as defined), TCC held
approximately 1.7% of Holdings outstanding partnership units.
TransWestern publishes and distributes local yellow page directories in
thirteen states.
Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less at the date of acquisition to be cash
equivalents. The Company evaluates the financial strength of the institutions at
which significant investments are made and believes the related credit risk is
limited to an acceptable level.
F-7
39
TRANSWESTERN PUBLISHING COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition, Deferred Directory Costs and Customer Deposits
Revenues from the sale of advertising placed in each directory are
recognized upon the distribution of directories in their individual market
areas. Advance payments received for directory advertising are shown as customer
deposits in the accompanying balance sheets. Expenditures directly related to
sales, production, printing and distribution of directories are capitalized as
deferred directory costs and matched against related revenues upon directory
distribution. The Company published and recognized revenue for 118, 128, and 139
directories in fiscal 1996, 1997, and 1998, respectively.
Fiscal Year End
Effective May 1, 1998 as reported on Form 8-K dated May 12, 1998, the
Company elected to change its fiscal year from April 30 to December 31.
Accordingly, the Company will begin reporting interim results on a calendar year
basis beginning June, 30, 1998.
Concentration of Credit Risk
Management believes it is not subject to a concentration of credit risk as
revenues are not significantly concentrated in any single directory, industry,
geographic region, or customer. However credit losses have represented a cost of
doing business due to the nature of the customer base (predominantly small
businesses) and the use of extended credit terms.
A provision for doubtful accounts based on historical experience is
recorded at the time revenue is recognized for individual directories. The
estimated provision for doubtful accounts as a percentage of net revenues
equaled 9.2%, 9.1%, and 9.1% in fiscal 1996, 1997 and 1998, respectively. Actual
write-offs are taken against the allowance when management determines that an
account is uncollectible. In general, management makes this determination when
an account has declared bankruptcy, has gone out of business or fails to renew
for the following year's directory.
F-8
40
TRANSWESTERN PUBLISHING COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments
In accordance with requirements of Statement of Financial Accounting
Standards No. 107, Disclosures about Fair Value of Financial Instruments, the
following methods and assumptions were used by the Company in estimating the
fair value disclosures:
Cash and Short-Term Receivables
The carrying amounts approximate fair values because of short maturities
of these instruments and the reserves for doubtful accounts which in the opinion
of management is adequate to state short-term receiveables at their fair value.
Long-Term Debt
Based on the borrowing rates currently available to the Company for loans
with similar terms and average maturities, management of the Company believes
the fair value of long-term debt approximates its carrying value at April 30,
1998.
Long-Lived Assets
Property, equipment and leasehold improvements are carried at cost, less
depreciation and amortization. Depreciation is computed using the straight-line
method over the assets' estimated useful lives which range from three to seven
years. Leasehold improvements are amortized over the shorter of their estimated
useful lives or the lease period.
Acquired intangibles are carried at cost which represents the excess of
the purchase price over the fair value of net tangible assets acquired in
connection with acquisitions of regional providers of yellow page directories.
Acquired intangibles consist primarily of consumer lists with initial carrying
values, which, in the opinion of management, are equal to fair value on the date
of acquisition. Acquired intangibles are being amortized over five years.
In accordance with Statement of Financial Accounting Standard No. 121, the
Company reviews the carrying value of property, equipment and leasehold
improvements for evidence of impairment through comparison of the undiscounted
cash flows generated from those assets to the related carrying amounts of the
assets. The carrying value of acquired intangibles is evaluated for impairment
through comparison of the undercounted cash flows derived from publication of
acquired directories to the carrying value of the related intangibles.
Debt Issuance Costs
Debt issuance costs are being amortized over the term of the related debt
using the weighted-average declining balance method (which approximates the
interest method) or the straight line method based on the repayment terms of the
related debt. Amortization of debt issuance costs is included in interest
expense in the accompanying statements of operations.
Income Taxes
No provision has been made in the accompanying statements of income for
federal and state income taxes, except for the California minimum franchise tax,
as any taxable income or loss of the Partnership prior to the formation of
TransWestern is included in the income tax returns of the Partnership's
partners.
F-9
41
TRANSWESTERN PUBLISHING COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Standards
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income (SFAS 130), which the Company is
required to adopt for fiscal 1999. This statement will require the Company to
report in the financial statements, in addition to net income comprehensive
income and its components including foreign currency items and unrealized gains
and losses on certain investments in debt and equity securities. Upon adoption
of SFAS 130, the Company is also required to, reclassify financial statements
for earlier periods provided for comparative purposes. Management of the Company
believes the adoption of SFAS 130 will not have a significant impact on the
Company's consolidated financial statement.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
(SFAS 131), which the Company is required to adopt in fiscal 1999 annual
financial statements. This statement establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Under SFAS
131, operating segments are to be determined consistent with the way that
management organizes and evaluates financial information internally for making
operating decisions and assessing performance. Management of the Company
believes the adoption of SFAS 131 will not have a significant impact on the
Company's consolidated financial statement.
2. DIRECTORY ACQUISITIONS
In fiscal 1998 (February 2, 1998), the Company purchased certain tangible
and intangible assets totaling $8,433 of Mast Advertising & Publishing, Inc. for
cash of $7,734 and other liabilities totaling $699. The obligations represent a
Seller Note Payable and potential adjustment of the Note based on actual cash
collection performance of certain directories acquired and certain acquisition
related expenses. The estimated payments due under the agreement have been
accrued April 30, 1998 on the accompanying balance sheet.
In fiscal 1997, the Company purchased certain tangible and intangible
assets totaling $5,119 (including related liabilities totaling $535) of Alliance
Media, Inc. for cash of $2,558 and recorded other obligations totaling $2,026.
The obligations represent the realized contribution margin contingent upon the
operating results (as defined in the purchase agreement) of certain directories
acquired and certain acquisition related expenses. Management believes the
contingent payments due under the 1997 acquisition agreement were reasonably
assured and have been accrued.
F-10
42
TRANSWESTERN PUBLISHING COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
2. DIRECTORY ACQUISITIONS (CONTINUED)
Assuming that the acquisition of Mast Advertising & Publishing, Inc. and
Alliance Media Inc. had occurred on May 1, 1996 and 1997, pro forma results of
operations would have been as follows:
YEARS ENDED APRIL 30,
---------------------
1998 1997
-------- --------
(UNAUDITED)
Revenues............................................. $104,816 $ 95,882
Net Income........................................... 27 10,517
These results give effect to pro forma adjustments for the amortization of
acquired intangibles.
3. FINANCIAL STATEMENT DETAILS
Property, Equipment and Leasehold Improvements
APRIL 30,
---------------------
1998 1997
------- -------
Computer and office equipment ....................... $ 5,148 $ 4,335
Furniture and fixtures .............................. 1,508 1,370
Leasehold improvements .............................. 278 233
------- -------
6,934 5,938
Less accumulated depreciation and amortization ...... (4,240) (3,098)
------- -------
$ 2,694 $ 2,840
======= =======
Acquired Intangibles
APRIL 30,
---------------------
1998 1997
-------- --------
Customer Base ....................................... $ 35,791 $ 27,693
Less accumulated amortization ....................... (21,465) (15,600)
-------- --------
$ 14,326 $ 12,093
======== ========
Other Assets
APRIL 30,
---------------------
1998 1997
------- -------
Debt issuance costs ................................. $ 9,054 $ 2,827
Other ............................................... 729 264
------- -------
9,783 3,091
Less accumulated amortization ....................... (814) (1,256)
------- -------
$ 8,969 $ 1,835
======= =======
F-11
43
TRANSWESTERN PUBLISHING COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
4. FINANCING ARRANGEMENTS
Principal balances under the Company's long-term financing
arrangements consist of the following:
APRIL 30,
---------------------
1998 1997
-------- --------
Series B 9 5/8% Senior Subordinated Notes $100,000 $ --
Senior Credit Facility:
Senior term loan .................. 79,469 68,100
Revolving loan .................... -- 9,400
Other notes payable ..................... 266 935
-------- --------
179,735 78,435
Current portion of long-term debt ....... 2,391 10,921
-------- --------
Long-term debt net of current portion ... $177,344 $ 67,514
======== ========
Fees. In connection with the Recapitalization, the Company incurred loan
fees of $10.6 million, $3.3 million for the Senior Credit Facility, $3.4 million
for the Senior Subordinated Facility, and $3.9 million for transaction costs. Of
the $10.6 million, $6.7 million was capitalized as debt issuance costs related
to the equity raised in the Recapitalization. Debt issuance costs are being
amortized over the term of the related debt using the interest method. The $3.4
million of capitalized loan fees related to the Senior Subordinated Facility,
were subsequently written-off as an extraordinary item (see discussion below).
SERIES B 9 5/8% SENIOR SUBORDINATED NOTES
Maturity, Interest and Principal. The Senior Subordinated Notes (the
"Notes") will mature on November 15, 2007 and bear interest at a rate of 9 5/8%
per annum from the date of original issuance until maturity. Interest is payable
semiannually in arrears on each May 15 and November 15, commencing May 15, 1998,
to holders of record of the Notes at the close of business on the immediately
preceding May 1 and November 1, respectively. The Company will pay interest on
any overdue principal (including post-petition interest in a proceeding under
any Bankruptcy Law), and interest, to the extent lawful, at the rate specified
in the Senior Subordinated Note Agreement. The Notes are general unsecured
obligations of the Company, subordinated in right of payment to all existing and
future senior indebtedness of the Company, pari passu in right of payment to all
senior subordinated indebtedness of the Company and senior in right of payment
to all subordinated indebtedness.
Optional Redemption. The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after November 15, 2002 at the
following redemption prices (expressed as a percentage of principal amount),
together, in each case, with accrued interest to the redemption date, if
redeemed during the twelve-month period beginning on November 15 of each year
listed below:
YEAR PERCENTAGE
---- ----------
2002 ................................ 104.813%
2003 ................................ 103.208%
2004 ................................ 101.604%
2005 and thereafter ................. 100.000%
Notwithstanding the foregoing, the Company, at its option, may redeem in
the aggregate up to 35% of the original principal amount of the Notes at any
time and from time to time prior to November 15, 2000 at a redemption price
equal to 109.625% of the aggregate principal amount so redeemed, together with
accrued interest thereon to the redemption date, out of the net proceeds of one
or more Public Equity Offerings (as defined), provided, however, that at least
$65.0 million of the principal amount of the Notes remains outstanding
immediately after the occurrence of any such redemption and that any such
redemption occurs within 90 days following the closing of any such Public Equity
Offering (as defined).
F-12
44
TRANSWESTERN PUBLISHING COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
4. FINANCING ARRANGEMENTS (CONTINUED)
In the event of redemption of fewer than all of the Notes, Wilmington
Trust Company, (the "Trustee"), shall select, if the Notes are listed on a
national securities exchange, in accordance with the rules of such exchange or,
if the Notes are not so listed, either on a pro rata basis or by lot or in such
other manner as it shall deem fair and equitable the Notes to be redeemed;
provided, that if a partial redemption is made with the proceeds of a Public
Equity Offering, selection of the Notes or portion thereof for redemption will
be made by the Trustee on a pro rata basis, unless such method is prohibited.
The Notes will be redeemable in whole or in part upon not less than 30 nor more
than 60 days' prior written notice, mailed by first class mail to a holder's
last address as it shall appear on the register maintained by the Registrar of
the Notes. On and after any redemption date, interest will cease to accrue on
the Notes or portions thereof called for redemption unless the Company shall
fail to redeem any such Senior Subordinated Note.
Covenants. The Senior Subordinated Indenture Agreement contains covenants
restricting the ability of the Company and its subsidiaries to, among other
things, (i) incur additional indebtedness; (ii) prepay, redeem or repurchase
debt; (iii) make loans and investments; (iv) incur liens and engage in sale
lease-back transactions; (v) transact with affiliates; (vi) engage in mergers,
acquisitions and asset sales; (vii) make optional payments on or modify the
terms of subordinated debt; (viii) restrict preferred and capital stock of
subsidiaries and (ix) declare dividends or redeem or repurchase capital stock.
As of April 30, 1998, the Company was in compliance with covenants specified in
the Senior Subordinated Indenture Agreement.
The Exchange Offer. On April 3, 1998, the Company consummated its exchange
offer to exchange $100 million of the aggregate principal amount outstanding of
the Notes (the "Old Notes") for $100 million of aggregate principal of Series B
9 5/8% Senior Subordinated Notes due 2007 (the "Exchange Notes"). The form and
terms of the Exchange Notes are the same as the form and term of the Old Notes
except that (i) the Exchange Notes bear a Series B designation and (ii) the
Exchange Notes have been registered under the Securities Act of 1933 as amended
and therefore, do not bear legends restricting the transfer thereof. The
Exchange Notes evidence the same debt as the Old Notes (which they replace).
The Notes will be unconditionally guaranteed, on a senior subordinated
basis, as to payment of principal, premium, if any, and interest, jointly and
severally, by each Restricted Subsidiary which guarantees payment of the Senior
Subordinated Notes pursuant to the covenant described under "Limitation on
Creation of Subsidiaries' (the "Guarantors")
SENIOR SUBORDINATED FACILITY
In connection with the Recapitalization, the Company also entered into the
Senior Subordinated Facility with Canadian Imperial Bank of Commerce ("CIBC")
and First Union National Bank ("First Union"). The Company initially borrowed
$75.0 million under this agreement in October 1997 and capitalized associated
loan fees of $3.4 million. Upon the issuance of the $100 million of Series B 9
5/8% Notes in November 1997, the Company exercised its permitted redemption
rights under this agreement and Prepaid the $75.0 million principal balance
outstanding under the agreement and the agreement was terminated. In connection
with the redemption, the capitalized loan fees of $3.4 million were written off
as an extraordinary expense in the fiscal 1998 statement of operations.
SENIOR CREDIT FACILITY
In connection with the Recapitalization, the Company entered into the
Senior Credit Facility with CIBC and First Union and other lenders, pursuant to
which the Company may borrow up to $125.0 million consisting of a revolving
credit facility of up to $40.0 million (the "Revolving Credit Facility") and a
Senior Term Loan in an aggregate principal amount of $85.0 million (the "Senior
Term Loan"). Principal payments on the Senior Term Loan are due quarterly
through maturity, October 1, 2004. The revolving credit agreement expires on
F-13
45
TRANSWESTERN PUBLISHING COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
4. FINANCING ARRANGEMENTS (CONTINUED)
October 1, 2003. Borrowings under this agreement rank senior to all other
indebtedness of the Company and are secured by all the assets of the Company.
Repayment. Principal outstanding under the Senior Credit Facility is
required to be paid on a quarterly basis commencing, January 1, 1998 are as
follows in fiscal year ended April 30:
1999 ................................... $ 2,125
2000 ................................... 2,125
2001 ................................... 2,125
2002 ................................... 2,125
2003 ................................... 14,875
Thereafter ............................. 56,094
--------
$ 79,469
========
Revolving Credit Facility. Commitments under the Revolving Credit Facility
will be reduced on a quarterly basis commencing on January 1, 2000. The
commitment on the Revolving Credit Facility is reduced by $6.0 million in each
of the fiscal years, 2000, 2001, 2002 and expires in fiscal 2003. As of April
30, 1998, no borrowings were outstanding under the Revolving Credit Facility.
Security; Guaranty. The Revolving Credit Facility and the Senior Term Loan
are secured by a first priority lien on substantially all of the properties and
assets of the Company and its future subsidiaries, including a pledge of all of
the shares of the Company's future subsidiaries, if any. Future subsidiaries of
the Company (if any) will be required to guarantee the Revolving Credit Facility
and the Senior Term Loan.
Interest. At the Company's option, the interest rates per annum applicable
to the Revolving Credit Facility and the Term Loans will be a fluctuating rate
of interest measured by reference to (i) LIBOR plus the applicable borrowing
margin, or (ii) a rate per annum equal to the higher of the published prime rate
of the Agent Bank or the Federal Funds Rate (as defined in the Senior Credit
Facility) as quoted by the Agent Bank plus 1/2 of 1% (the "ABR") plus the
applicable borrowing margin. The applicable borrowing margin for the Revolving
Credit Facility ranges from 1.375% to 2.500% for LIBOR based borrowings and
0.375% to 1.500% for ABR based borrowings. The applicable borrowing margin for
the Term Loan ranges from 1.875% to 2.750% for LIBOR based borrowings and 0.875%
to 1.750% for ABR based borrowings. At April 30, 1998 the Company had $79.5
million outstanding on the Senior Term Loan under a one month LIBOR at 8.40625%.
Prepayments; Reductions of Commitments. The Senior Term Loan is required
to be prepaid and commitments under the Revolving Credit Facility are required
to be permanently reduced with: (i) 100% of the net cash proceeds of asset sales
or other dispositions of property if such proceeds are not used to purchase or
acquire other assets within 180 days of the original asset sale, subject to
limited exceptions, (ii) 50% of excess cash flow (as defined) for a fiscal year
if the Company's total leverage ratio (as defined) determined as of the last day
of such fiscal year equals or exceeds 5.0 to 1, (iii) 100% of excess insurance
proceeds (as defined) and (iv) 100% of the net proceeds (as defined) of
issuances of equity securities or debt obligations of the Company, subject to
limited exceptions, and subject to reduction to 50% of such proceeds if the
Company's total leverage ratio (as defined) is less than 5.0 to 1. Such
mandatory prepayments and reductions will first be applied to the permanent
reduction of the Senior Term Loan and second to the permanent reduction of the
Revolving Credit Facility. Within the Senior Term Loan, prepayments with
proceeds described in clause (I) or (iii) above will be applied pro rata to the
remaining installments of the Senior Term Loan and prepayments with proceeds
described in clause (ii) or (iv) above will be applied to each remaining
installment of the Senior Term Loan in inverse order of maturity. The Company
may make voluntary prepayments in minimum principal amounts of $50,000 or a
whole multiple thereof.
F-14
46
TRANSWESTERN PUBLISHING COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
4. FINANCING ARRANGEMENTS (CONTINUED)
Covenants. The Senior Credit Facility contains covenants restricting the
ability of the Company and its subsidiaries to, among other things, (i) declare
dividends or redeem or repurchase capital stock, (ii) prepay, redeem or
repurchase debt, (iii) incur liens and engage in sale lease-back transactions,
(iv) make loans and investments, (v) incur additional indebtedness, (vi) amend
or otherwise alter debt and other material agreements, (vii) make capital
expenditures, (viii) engage in mergers, acquisitions and asset sales, (ix)
transact with affiliates, (x) alter its line of business, (xi) enter into
guarantees of indebtedness, and (xii) make optional payments on or modify the
terms of subordinated debt. The Company must also make certain customary
indemnifications of the Lenders and their agents is required to comply with
financial covenants with respect to: (a) a minimum interest coverage ratio, (b)
a minimum EBITDA, (c) a maximum leverage ratio, and (d) a minimum fixed charge
coverage ratio (all defined in the Senior Credit Facility Agreement). The Senior
Credit Facility also contains certain customary affirmative covenants. As of
April 30, 1998, the Company was in compliance with all covenants specified in
the Senior Credit Facility.
Events of Default. Events of default under the Senior Credit Facility
include (i) the Company's failure to pay principal or interest when due, (ii)
the Company's material breach of any covenant, representation or warranty
contained in the loan documents, (iii) customary cross-default provisions, (iv)
events of bankruptcy, insolvency or dissolution of the Company, (v) the levy of
certain judgments against the Company, (vi) certain adverse events under ERISA
plans of the Company, (vii) the actual or asserted invalidity of security
documents or guarantees of the Company or its subsidiaries, and (viii) a change
of control of the Company.
DISCOUNT NOTES
On November 12, 1997 Holdings, the Company's parent, issued $32.5 million
of initial aggregate principal ($57.9 million principal at maturity) of Series B
11 7/8% Senior Discount Notes due 2008 (the "Discount Notes"). The Discount
Notes are joint and several obligations of Holdings and Capital and are
guaranteed by the Company.
5. MEMBER DEFICIT
TransWestern is a limited liability company formed under the Delaware
Limited Liability Company Act (as amended from time to time, the "Limited
Liability Act") and is governed by the Limited Liability Company Agreement of
TransWestern Publishing Company LLC (the "LLC Agreement") executed by its
manager, TCC.
The Company's equity interest consists of a single class of authorized
common units (the "Member Units"). Holdings is the sole member of TransWestern
and accordingly holds all of the issued and outstanding Member Units.
Distributions to TransWestern's member are at the sole discretion of the
manager. Terms of the Senior Credit Facility and the Senior Subordinated Note
Indenture generally limit TransWestern's ability to pay cash distributions to
its member other than distributions in amounts equal to the tax liability of the
partners of Holdings resulting from the taxable income of TransWestern (the "Tax
Distributions"). The Tax Distributions will be based on the approximate highest
combined tax rate that applies to any one of Holdings' limited partners.
TCC has the sole right to make decisions regarding the management and
affairs of TransWestern and has all the powers and rights necessary or
appropriate to effectuate and carry out the purposes and business of
TransWestern, including the authority to act for and bind TransWestern.
The LLC Agreement provides that TransWestern's existence shall continue
until such time as the manager determines it is appropriate to dissolve, windup
and terminate TransWestern or, if earlier, upon the occurrence of (i) the entry
of judicial dissolution in accordance with the Limited Liability Act or (ii) the
expulsion, bankruptcy, dissolution or withdrawal of Holdings. In the event of a
termination of TransWestern, after satisfaction of all of TransWestern's debts
and liabilities, all of the assets of TransWestern would be distributed to
Holdings or if
F-15
47
TRANSWESTERN PUBLISHING COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
5. MEMBER DEFICIT (CONTINUED)
TransWestern then has more than one member, pro rata based on the relative
percentage interests in TransWestern of its members.
Prior to the formation of TransWestern, the accumulated deficit of the
Partnership arose from distributions to partners in accordance with the terms of
the Partnership Agreement.
As of April 30, 1997, the Partnership's general partner equity consisted
of 9,800 authorized, issued and outstanding units with such units representing a
1.0% interest in the limited partnership. Also as of April 30, 1997, limited
partner equity of the Partnership consisted of 3,968,236 authorized, issued and
outstanding Class A Common units and 314,290 authorized Class E Incentive units,
of which 299,698 were issued and outstanding.
During fiscal 1996, 1997 and 1998, the Partnership made tax distributions
to unit holders totaling $3,400 and $5,801, $2,100 respectively. Also, in
connection with the November 1995 refinancing of the Partnership, approximately
$36 million was distributed to the limited and general partners of the
Partnership. Furthermore, in connection with the October 1997 refinancing of the
Partnership, approximately $174.4 million was distributed to the limited and
general partners of the Partnership.
6. BENEFIT PLANS
401 (k) and Profit Sharing Plan
Substantially all of the Partnership's employees are covered by a 401(k)
and profit sharing retirement plan. Employees can make contributions to the plan
up to the maximum amount allowed by federal tax code regulations. The
Partnership may match the employee contributions, up to a limitation of 83% of
the first 6% of annual earnings per participant. The Partnership may also make
annual discretionary profit sharing contributions. Contributions to the plan for
the years ended April 30, 1996, 1997 and 1998 were approximately, $761, $761,
and $1.1 million respectively.
As mentioned in Note 1, the Company elected to change its fiscal year from
April 30 to December 31. As a result, the Company also amended the plan year of
the TransWestern Publishing 401 (k) and Profit Sharing Plan from April 30 to
December 31.
Equity Compensation Plan
Prior to formation of TransWestern, the Partnership established the
TransWestern Publishing Company, L.P. Equity Compensation Plan (the "Plan"). The
Plan provides select key full-time employees with deferred compensation benefits
for income tax purposes. Special distributions to the Plan are recorded as
expense in the accompanying statements of income when declared by the Board of
Directors, generally following a significant refinancing transaction.
Distributions to the Plan related to refinancing transactions completed in
fiscal 1996 and fiscal 1998 totaled $796 and $5,543, respectively. Employees
receiving units in the Plan are eligible to receive a ratable per unit share of
cash distributions from the Plan, if and when declared by the Plan
Administrators.
Generally, the Plan Administrators intend to distribute to employee unit
holders all assets contributed to the Plan within three years of the date of
contribution. In fiscal 1997 and 1998, the Plan Administrators paid
distributions totaling $411 and $2.6 million. As of April 30, 1998,
undistributed equity trust proceeds total $2.9 million.
F-16
48
TRANSWESTERN PUBLISHING COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
6. BENEFIT PLANS (CONTINUED)
As a result of the Recapitalization, the existing Equity Compensation Plan
was terminated. The Company adopted a new Equity Compensation Plan which will
function similar to the old plan. As of April 30,1998, no assets had been
contributed to the new plan.
7. LEASE COMMITMENTS
The Company leases office facilities in several cities throughout the
United States under operating leases with remaining terms ranging from one to
six years. Total rent expense in fiscal 1996, 1997, and 1998, was $1,750, $1,866
and $1,745 respectively. Future minimum lease payments, under these leases are
as follows for years ending April 30:
1999....................................... $ 1,547
2000....................................... 1,397
2001....................................... 1,140
2002....................................... 796
2003....................................... 567
Thereafter................................. 243
--------
$ 5,690
========
8. RELATED PARTY TRANSACTIONS
In connection with the Recapitalization, the Company entered into a
Management Agreement with Thomas H. Lee, Co. ("THL Co.") pursuant to which THL
Co. agreed to provide (i) general executive and management services, (ii)
identification, negotiation and analysis of financial and strategic
alternatives, and (iii) other services agreed upon by the Company and THL Co. On
the Recapitalization closing date, THL Co. and the other equity investors in the
Company each received their pro rata portion of a $5.0 million transaction fee.
In addition, THL and all other equity investors will receive a pro rata portion
of the $500,000 annual management fee (the "Management Fee"), plus THL will be
reimbursed for all reasonable out-of-pocket expenses (payable monthly in
arrears). The Management Agreement has an initial term of one year, subject to
automatic one-year extensions, unless the Company or THL Co. provides written
notice of termination no later than 30 days prior to the end of the initial or
any successive period.
9. SUBSEQUENT EVENT
On June 4, 1998 the Company executed a Letter of Intent to purchase all of
the outstanding stock of Target Directories of Michigan, Inc. ("Target") for
cash of approximately $5.2 million. Target publishes two directories in
southeast Michigan.
F-17