EXHIBIT 99.1
CONSOLIDATED FINANCIAL STATEMENTS
TransWestern Holdings LP
Years ended December 31, 2004, 2003 and 2002
with Report of Independent Auditors
TransWestern Holdings LP
Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
CONTENTS
Report of Independent Auditors.........................................1
Consolidated Financial Statements
Consolidated Balance Sheets............................................2
Consolidated Statements of Income......................................3
Consolidated Statements of Changes in Partners' Deficit................4
Consolidated Statements of Cash Flows..................................5
Notes to Consolidated Financial Statements.............................6
Report of Independent Auditors
To the Partners
TransWestern Holdings LP
We have audited the accompanying consolidated balance sheets of TransWestern
Holdings LP as of December 31, 2004, 2003 and 2002, and the related consolidated
statements of income, changes in partners' deficit, and cash flows for each of
the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. We were not engaged to perform an audit of the
Company's internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TransWestern
Holdings LP at December 31, 2004, 2003 and 2002, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States.
Ernst & Young LLP
San Diego, California
March 2, 2005
1
TransWestern Holdings LP
Consolidated Balance Sheets
(in thousands)
DECEMBER 31,
2004 2003 2002
---------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,878 $ 2,015 $ 17,408
Trade receivables, (less allowance for doubtful accounts of
$13,295 and $6,878 and $13,194 at December 31, 2004 and
2003, respectively) 57,401 55,494 72,371
Deferred directory costs 58,156 58,509 48,632
Other current assets 3,009 2,553 2,838
Deferred tax asset 2,490 - 330
---------------------------------------------------
Total current assets 122,934 118,571 141,579
Property, equipment and leasehold improvements, net 4,538 4,964 5,444
Goodwill, net 133,532 151,516 149,174
Acquired intangibles, net 24,057 48,111 85,948
Debt issuance costs, net 11,129 8,661 11,317
Deferred tax asset 23,287 8,753 8,295
---------------------------------------------------
Total assets $ 319,477 $ 340,576 $ 401,757
===================================================
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Accounts payable $ 18,245 $ 18,099 $ 17,134
Salaries and benefits payable 15,281 10,985 10,034
Accrued interest 2,059 3,094 4,089
Deferred tax liability - 130 -
Other accrued liabilities 2,762 2,667 4,283
Customer deposits 70,623 68,407 55,506
Deferred revenue 4,575 2,486 461
Current portion, long-term debt 2,250 7,169 6,343
---------------------------------------------------
Total current liabilities 115,795 113,037 97,850
Long-term debt:
Series F 9 5/8% Senior Subordinated Notes - 215,511 215,643
Senior credit facility Term A Loan - 20,288 26,057
Senior credit facility Term B Loan - 150,243 195,000
Senior Discount Notes - - 28,916
1st Lien Term Loan 474,100 - -
2nd Lien Term Loan 221,125 - -
Other long-term liabilities - 100 200
---------------------------------------------------
Total non-current liabilities 695,225 386,142 465,816
---------------------------------------------------
Total liabilities 811,020 499,179 563,666
Commitment and contingencies (Notes 7 and 9)
Partners' deficit
General partner (9,073) (4,161) (4,221)
Limited partners (482,447) (153,930) (157,093)
Notes receivable from partners (23) (512) (595)
---------------------------------------------------
Total partners' deficit (491,543) (158,603) (161,909)
---------------------------------------------------
Total liabilities and partners' deficit $ 319,477 $ 340,576 $ 401,757
===================================================
See accompanying notes.
2
TransWestern Holdings LP
Consolidated Statements of Income
(in thousands)
YEARS ENDED DECEMBER 31,
2004 2003 2002
------------------------------------------------------
Net revenues $ 358,039 $ 307,043 $ 323,806
Cost of revenues 61,067 53,750 58,067
------------------------------------------------------
Gross profit 296,972 253,293 265,739
Operating expenses:
Sales and marketing 169,944 150,480 145,979
General and administrative 28,583 23,739 25,153
Depreciation and amortization 25,892 39,455 41,315
Loss on extinguishment of debt 15,499 2,048 2,063
------------------------------------------------------
Total operating expenses 239,918 215,722 214,510
------------------------------------------------------
Income from operations 57,054 37,571 51,229
Other income, net 805 860 1,234
Interest expense (31,235) (32,476) (40,230)
------------------------------------------------------
(30,430) (31,616) (38,996)
------------------------------------------------------
Income before taxes 26,624 5,955 12,233
Income tax benefit (provision) (2,375) (1,682) 2,950
------------------------------------------------------
Net income $ 24,249 $ 4,273 $ 15,183
======================================================
See accompanying notes.
3
TransWestern Holdings LP
Consolidated Statements of Changes in Partners' Deficit
For the three years ended December 31, 2004
(in thousands)
NOTES RECEIVABLE
GENERAL PARTNER LIMITED PARTNERS FROM PARTNERS TOTAL
--------------------------------------------------------------------------------
Balance at December 31, 2001 $ (4,434) $ (170,470) $ (698) $ (175,602)
Net income 213 14,970 - 15,183
Distributions to Partners - (1,593) - (1,593)
Payments on Notes Receivable from Partners - - 103 103
--------------------------------------------------------------------------------
Balance at December 31, 2002 (4,221) (157,093) (595) (161,909)
Net income 60 4,213 - 4,273
Distributions to Partners - (1,050) - (1,050)
Payments on Notes Receivable from Partners - - 83 83
--------------------------------------------------------------------------------
Balance at December 31, 2003 (4,161) (153,930) (512) (158,603)
Net income 339 23,910 - 24,249
Distributions to Partners (5,251) (352,427) - (357,678)
Payments on Notes Receivable from Partners - - 489 489
--------------------------------------------------------------------------------
Balance at December 31, 2004 $ (9,073) $ (482,447) $ (23) $ (491,543)
================================================================================
See accompanying notes.
4
TransWestern Holdings LP
Consolidated Statements of Cash Flows
(in thousands)
YEARS ENDED DECEMBER 31,
2004 2003 2002
-----------------------------------------------
OPERATING ACTIVITIES
Net income $ 24,249 $ 4,273 $ 15,183
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 25,892 39,455 41,211
Amortization of deferred debt issuance costs 1,243 2,193 2,348
Amortization of Senior Discount Notes - - 5,531
Loss on extinguishment of debt 15,499 2,048 2,063
Provision for doubtful accounts 34,555 34,070 36,688
Loss on disposal of fixed assets 90 - 606
Change in net deferred tax asset 820 (127) (6,470)
Changes in operating assets and liabilities, net of effects of purchased
directories:
Trade receivables (13,793) 19,677 (2,009)
Write-off of doubtful accounts (28,139) (41,865) (42,109)
Recoveries of doubtful accounts 5,470 5,144 2,393
Deferred directory costs 353 (9,878) (3,953)
Other current assets (456) 284 (310)
Accounts payable 1,238 2,091 (158)
Accrued liabilities 3,210 (1,759) (4,513)
Accrued interest (1,035) (995) 61
Customer deposits 2,216 12,901 10,539
Deferred revenue 2,088 2,026 (238)
Equity trust distribution payable 1 - (2,902)
-----------------------------------------------
Net cash provided by operating activities 73,501 69,538 53,961
INVESTING ACTIVITIES
Purchase of property, equipment and leasehold improvements (1,504) (1,519) (1,427)
Cash paid for the acquisition of directories - (2,111) (24,046)
-----------------------------------------------
Net cash used in investing activities (1,504) (3,630) (25,473)
FINANCING ACTIVITIES
Net borrowings under long-term debt agreements:
Senior Term Loan 750,000 - -
Revolving Credit Facility 18,000 54,450 -
Repayments of long-term debt:
Senior Term Loan (230,225) (49,700) (5,200)
Revolving Credit Facility (18,000) (54,450) -
Senior Subordinated Notes (215,000) - -
Repayment of debt acquired - - (413)
Redemption of Senior Discount Notes - (28,916) (29,000)
Cash paid for deferred financing costs (12,499) - (168)
Cash premium paid associated with early extinguishment of debt (7,221) (1,717) (1,722)
Payment of Notes Receivables from partners 489 83 103
Partnership distributions (357,678) (1,051) (1,593)
-----------------------------------------------
Net cash used in financing activities (72,134) (81,301) (37,993)
-----------------------------------------------
Net decrease in cash and cash equivalents (137) (15,393) (9,505)
Cash and cash equivalents at beginning of year 2,015 17,408 26,913
-----------------------------------------------
Cash and cash equivalents at end of year $ 1,878 $ 2,015 $ 17,408
===============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 30,515 $ 31,147 $ 32,248
===============================================
Cash paid for taxes $ 1,990 $ 1,558 $ 1,188
===============================================
See accompanying notes.
5
TransWestern Holdings LP
Notes to Consolidated Financial Statements
December 31, 2004
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, BUSINESS ACTIVITIES AND BASIS OF PRESENTATION
TransWestern Publishing Company, L.P. (the "Partnership", "Holdings" or the
"Company") 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. TransWestern publishes and distributes
local yellow page directories in twenty-five states and operates in one
reportable segment.
TransWestern Communications Company, Inc. ("TCC"), the general partner of
Holdings, holds approximately 1.4% of Holdings' outstanding partnership units.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Holdings and its
wholly owned subsidiaries, TransWestern and TWP Capital Corp. All significant
intercompany transactions have been eliminated.
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.
REVENUE RECOGNITION, DEFERRED DIRECTORY COSTS AND CUSTOMER DEPOSITS
Revenues from the sale of advertising placed in each directory are recognized
when the Company's obligations are complete which occurs upon the completion of
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 until the directory's revenue is recognized.
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. Costs associated with salesperson
compensation are included in sales and marketing expenses. Costs associated with
production, printing, and distribution are included in cost of revenues. The
6
TransWestern Holdings LP
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION, DEFERRED DIRECTORY COSTS AND CUSTOMER DEPOSITS (CONTINUED)
Company published and recognized revenues for 318, 296, and 293 directories
during the years ended December 31, 2004, 2003 and 2002, respectively.
Net revenues from the sale of internet directory services are included in net
revenues and are recorded over the estimated service period of 12 months. The
revenues are calculated based on the fair value of the internet directory
service as a percentage of the total directory advertising contract. Internet
directory service revenues were less than 5% for all periods presented.
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 of up to 12 months. Although
the Company collects an advance payment from most advertisers, credit is
extended based upon the size of the advertising program and customer collection
history.
A provision for doubtful accounts based on historical experience is recorded at
the time revenue is recognized for individual directories and is included in
sales and marketing expenses. In addition, management reviews the adequacy of
the provision for doubtful accounts on a periodic basis as additional collection
history becomes available. The estimated provision for doubtful accounts as a
percentage of net revenues equaled 9.7%, 11.1% and 12.0% in the years ended
December 31, 2004, 2003 and 2002, 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, is significantly past due, or
fails to renew for the following year's directory. Recoveries of previously
written-off amounts are recorded as other income at the point in time they are
recovered.
7
TransWestern Holdings LP
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating the
fair value disclosures:
Cash Equivalents and 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 receivables 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 approximated its carrying value
at December 31, 2004 based upon an assumed weighted average interest rate
of 5.3%.
The Company had a financial letter of credit outstanding totaling $1.4
million as of December 31, 2004, that guarantees the Company's payment of
certain self-insured liabilities. The Company has never had a drawing on a
letter of credit instrument, nor is any anticipated; therefore, the fair
value of these instruments is estimated to be zero.
Accounts Payable and Accrued Liabilities
The carrying amounts approximate fair values because of short maturities of
these instruments.
LONG-LIVED AND INTANGIBLE 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.
8
TransWestern Holdings LP
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED AND INTANGIBLE ASSETS (CONTINUED)
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 goodwill and customer lists with initial
carrying values, which, in the opinion of management, are equal to fair market
value on the date of acquisition. Acquired non-goodwill intangibles are being
amortized over three to five years.
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 non-goodwill intangibles is evaluated for
impairment through comparison of the undiscounted cash flows derived from the
publication of directories.
In accordance with Statements of Financial Accounting Standards ("SFAS") No.
141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets,
goodwill is subject to annual impairment tests. No impairment was recorded for
the years ended December 31, 2004, 2003 and 2002.
A summary of changes in the Company's goodwill for the year ended December 31,
2004 is as follows (in thousands):
Goodwill, net
---------------------
Balance at December 31, 2001 $ 143,880
Acquisitions and adjustments 5,294
---------------------
Balance at December 31, 2002 $ 149,174
Acquisition and Adjustments (1) 2,342
---------------------
Balance at December 31, 2003 151,516
Adjustments (2) (17,984)
---------------------
Balance at December 31, 2004 $ 133,532
=====================
(1) Adjustments primarily relate to the Company's completion of the preliminary
purchase price allocations for acquisitions.
(2) Adjustments primarily relate to the Company's reversal of the valuation
allowance against the deferred tax assets related to the WorldPages
acquisition.
9
TransWestern Holdings LP
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED AND INTANGIBLE ASSETS (CONTINUED)
During the year ended December 31, 2002 the Company completed its purchase price
allocation associated with the acquisition of WorldPages. Included in the final
allocation of the purchase price during June 2002 was an accrual for $3.0
million associated with a pending lawsuit. During January 2003 the Company
settled the pending lawsuit for approximately $1.5 million. The remaining $1.5
million was reversed to general and administrative expenses during the fourth
quarter of 2002 based on the subsequent event.
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
In accordance with SFAS No. 109, Accounting for Income Taxes, a deferred tax
asset or liability is determined based on the difference between the financial
statement and tax basis of assets and liabilities as measured by the enacted tax
rates which will be in effect when these differences reverse. The Company
provides a valuation allowance against net deferred tax assets unless, based
upon the available evidence, it is more likely than not that the deferred tax
assets will be realized.
ADVERTISING EXPENSE
Advertising expenditures are charged to expense as incurred. The Company
expensed $0.6 million, $0.7 million and $0.6 million for the years ended
December 31, 2004, 2003 and 2002, respectively.
10
TransWestern Holdings LP
Notes to Consolidated Financial Statements
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.
Significant estimates include the Company's provision for doubtful accounts and
the carrying value of acquired intangibles. Actual results could differ from
those estimates.
2. DIRECTORY ACQUISITIONS
For the year ended December 31, 2003 the Company acquired the following
directories:
TelFax, Inc. On February 6, 2003, the Company purchased certain tangible and
intangible assets of Telfax, Inc. for a total of $2.0 million. The Company
acquired two directories in Oregon and one directory in Washington.
The purchase price for the acquisition above has been allocated to the tangible
and intangible assets acquired with excess allocated to goodwill based on their
respective fair values at the date of acquisition, as identified follows (in
thousands):
Goodwill $ 785
Customer list 870
Non-compete 200
Other current and non-current net assets 150
-----------------
Total consideration $ 2,005
=================
Total consideration paid in the purchase acquisitions is
as follows (in thousands):
Cash paid for acquisition $ 1,950
Merger fees incurred 55
-----------------
Total consideration $ 2,005
=================
11
TransWestern Holdings LP
Notes to Consolidated Financial Statements
2. DIRECTORY ACQUISITIONS (CONTINUED)
For the year ended December 31, 2002 the Company acquired the following
directories:
Brazos Valley Telephone Directory Company. On February 26, 2002, the Company
purchased certain tangible and intangible assets of Brazos Valley Telephone
Directory Company for a total of $0.5 million. The Company acquired one
directory in the Mansfield/Kennedale area of Texas.
Phone Directories Company, Inc. On March 22, 2002, the Company purchased certain
tangible and intangible assets of Phone Directories Company, Inc. for a total of
$0.8 million. The Company acquired four directories in the Tucson, Arizona area.
Arnold Advertising, Inc. On April 11, 2002, the Company purchased the
outstanding common stock of Arnold Advertising, Inc. for a total of $8.1
million. The Company acquired three directories in the north Los Angeles,
California area.
Western Directory, Inc. On May 1, 2002, the Company purchased certain tangible
and intangible assets of Western Directory, Inc. for a total of $3.1 million.
The Company acquired three directories in northern Oregon. Subsequently, the
Company combined two of the directories into one.
Pennco Publishing, Inc. On June 5, 2002, the Company purchased certain tangible
and intangible assets of Pennco Publishing, Inc. for a total of $2.5 million.
The Company acquired two directories in northwest Oregon.
West Vista Advertising, Inc. On August 15, 2002, the Company purchased certain
tangible and intangible assets of West Vista Advertising, Inc. for a total of
$9.2 million. The Company acquired seven directories located in Oregon, Arizona,
Utah, and Nevada.
The purchase prices for the acquisitions above have been allocated to the
tangible and intangible assets acquired based on their respective fair values at
the date of acquisition, as follows (in thousands):
Goodwill $ 6,642
Customer list 12,492
Non-compete 3,075
Other current and non-current net assets 2,626
-----------------
Total consideration $ 24,835
=================
12
TransWestern Holdings LP
Notes to Consolidated Financial Statements
2. DIRECTORY ACQUISITIONS (CONTINUED)
Total consideration paid in the purchase acquisitions is as
follows (in thousands):
Cash paid for acquisition $ 24,046
Merger fees incurred 789
-----------------
Total consideration $ 24,835
=================
Assuming that the acquisitions referred to above had occurred on January 1,
2002, unaudited pro forma results of operations would have been as follows (in
thousands):
YEARS ENDED DECEMBER 31,
2004 2003 2002
------------------------------------------------------
Net revenue $ 358,039 $ 307,567 $ 333,075
Net income 24,249 4,499 17,233
These results give effect to pro forma adjustment for the amortization of
acquired intangibles and for the additional interest expense on the debt
incurred to fund the acquisitions.
3. FINANCIAL STATEMENT DETAILS
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS (in thousands):
DECEMBER 31,
2004 2003 2002
------------------------------------------------------
Computer and office equipment $ 12,138 $ 14,991 $ 14,033
Furniture and fixtures 3,279 3,520 3,323
Leasehold improvements 732 861 802
------------------------------------------------------
16,149 19,372 18,158
Less accumulated depreciation and amortization (11,611) (14,408) (12,714)
------------------------------------------------------
$ 4,538 $ 4,964 $ 5,444
======================================================
Depreciation expense for the years ended December 31, 2004, 2003 and 2002 was
$1.8 million, $2.0 million and $2.2 million, respectively.
13
TransWestern Holdings LP
Notes to Consolidated Financial Statements
3. FINANCIAL STATEMENT DETAILS (CONTINUED)
ACQUIRED INTANGIBLES (in thousands):
USEFUL LIFE DECEMBER 31,
(MONTHS) 2004 2003 2002
----------------------------------------------------------------------
Customer base 60 $ 221,594 $ 221,594 $ 222,174
Licensing agreements 72 1,224 1,224 1,224
Non-competes 12-16 5,896 5,896 5,696
------------------------------------------------------
228,714 228,714 229,094
Less accumulated amortization (204,657) (180,603) (143,146)
------------------------------------------------------
Acquired intangibles, net $ 24,057 $ 48,111 $ 85,948
======================================================
Amortization expense for acquired intangibles for the years ended December 31,
2004, 2003, and 2002 was $24.1 million, $37.5 million, and $39.0 million,
respectively.
DEBT ISSUANCE COSTS (in thousands):
DECEMBER 31,
2004 2003 2002
------------------------------------------------------
Debt issuance costs $ 12,499 $ 17,200 $ 18,449
Less accumulated amortization of debt issuance costs (1,370) (8,539) (7,132)
------------------------------------------------------
Debt issuance costs, net $ 11,129 $ 8,661 $ 11,317
======================================================
14
TransWestern Holdings LP
Notes to Consolidated Financial Statements
4. FINANCING ARRANGEMENTS
Principal balances under the Company's long-term financing arrangements consist
of the following (in thousands):
DECEMBER 31,
2004 2003 2002
------------------------------------------------------
Series F 9 5/8% Senior Subordinated Notes, including $ - $ 215,511 $ 215,643
unamortized net premium of $510 and $643 at
December 31, 2003 and 2002, respectively
Senior Credit Facility:
Term A Loan - 25,900 30,400
Term B Loan - 151,800 197,000
Senior Discount Notes - - 28,916
1st Lien Term Loan 474,100 - -
2nd Lien Term Loan 223,375 - -
------------------------------------------------------
697,475 393,211 471,959
Current portion of long-term debt 2,250 7,169 6,343
------------------------------------------------------
Long-term debt, net of current portion $ 695,225 $ 386,042 $ 465,616
======================================================
FIRST AND SECOND LIEN DEBT AGREEMENTS
On February 25, 2004 the Company entered into a new $665.0 million Credit and
Guaranty Agreement with Goldman Sachs Credit Partners, L.P. and Wachovia Capital
Markets, LLC, among others, (the "Credit Agreement"). The Credit Agreement was
comprised of a $465.0 million First Lien Term Loan and Revolving Credit Facility
("1st Lien", "Term B", "Swing Line", "Revolving Line", "Revolving Loan") and a
$200.0 million Second Priority Senior Secured Credit Facility ("2nd Lien"). The
purpose of the new facilities was to payoff the remaining principal and accrued
interest on the Company's existing credit facility, retire the then outstanding
$215.0 million in 11.625 % Senior Subordinated Notes and fund a partial return
of capital to the Partners (the "Refinancing"). Sources of funds at closing were
$400.0 million drawn on the Term B facility and $200.0 million on the 2nd Lien.
No funds were advanced on the Revolving Credit Facility. Proceeds were used to
pay $173.2 million in accrued interest and principal on the outstanding term
debt, $197.4 million in principal, accrued interest and call & premium fees on
the Senior Subordinated Notes redeemed at closing ($185.7 million principal
amount tendered), $205.0 million gross partial return of capital to the Partners
and $9.3 million in transaction fees and expenses.
15
TransWestern Holdings LP
Notes to Consolidated Financial Statements
4. FINANCING ARRANGEMENTS (CONTINUED)
FIRST AND SECOND LIEN DEBT AGREEMENTS (CONTINUED)
Subsequent to closing, on March 31, 2004, the Company redeemed the remaining
$29.3 million in Senior Subordinated Debt along with paying $2.0 million in
accrued interest and call premium and $0.5 million in additional transaction
related expenses.
On August 24, 2004 the Company, Goldman Sachs Credit Partners, L.P. and Wachovia
Capital Markets, LLC, among others, amended the Credit Agreement (the "First
Amendment") to include $150.0 million in incremental credit availability,
consisting of $125.0 million in a New 1st Lien Term Loan and $25.0 million in a
New 2nd Lien Term Loan. The purpose of the new facilities was to fund an
additional partial return of capital to the Partners. Sources of funds at
closing were $125.0 million drawn on the New 1st Lien Term Loan facility and
$25.0 million on the New 2nd Lien Term Loan facility. Proceeds were used to pay
approximately $2.0 million in transaction fees and expenses and $147.0 million
gross partial return of capital to the Partners.
In connection with the refinancing, the Company incurred a loss of $15.9 million
which was comprised of an early payment premium on the existing debt and to
write-off existing debt issuance costs associated with the debt paid off by the
Company in February 2004.
Reductions of Commitments; Prepayments. The Term B 1st Lien and 2nd Lien is
required to be prepaid and commitments under the Revolving Credit Facility are
required to be permanently reduced in the event of the following: (1) net asset
sale proceeds and net insurance condemnation proceeds exceeding $2.5 million
except as for certain approved proposed reinvestment proceeds, (2) up to 50% of
net cash proceeds from issuance of equity securities, subject to a 25% maximum
in proscribed cases depending upon leverage ratios and where proceeds are to be
used in permitted acquisitions not to exceed $25 million, (3) 100% of net cash
proceeds from issuance of equity securities not covered under item (2), (4) 50%
of consolidated excess cash flow for each fiscal year as defined to pay down the
facilities, subject to a certain 25% maximum payment depending upon leverage
ratios, and (5) prepayments from time to time to the Swing and Revolving Line
necessary to keep the total utilization of the revolving line commitments within
the total Revolving Loan Commitment then in effect. The Company may make
voluntary prepayments in minimum principal amounts of $0.5 million or a whole
multiple of $0.1 million in excess thereof in the case of term loans. In the
case of Revolving Loans, the Company may make voluntary prepayments in minimum
principal amounts of $0.1 million or a whole multiple of $0.05 million in excess
thereof. And in the case of Swing Loans, the Company may make voluntary
prepayments in minimum principal amounts of $0.1 million or a whole multiple of
$0.1 million in excess thereof. All prepayments are to be applied as specified
16
TransWestern Holdings LP
Notes to Consolidated Financial Statements
4. FINANCING ARRANGEMENTS (CONTINUED)
FIRST AND SECOND LIEN DEBT AGREEMENTS (CONTINUED)
by the Company. If no application is specified, the default is to (a) the Swing
Line, (b) the Revolving Credit Line, (c) the next twelve months of scheduled
Term Loan installments and (d) Pro Rata to the remaining scheduled Term Loans.
Covenants. The First and Second Lien Debt agreements contain 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 the 2nd Lien subordinated debt. The Company must also make
certain customary indemnifications of the Lenders and their agents and is
required to comply with financial covenants with respect to: (a) a minimum
interest coverage ratio and (b) a maximum leverage ratio (all as defined in the
First and Second Lien Debt Agreements). The debt agreements also contain certain
customary affirmative covenants. As of December 31, 2004, the Company was in
compliance with all covenants specified in the First and Second Lien Debt
Agreements.
Events of Default. Events of default under the First and Second Lien Debt
Agreements 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.
17
TransWestern Holdings LP
Notes to Consolidated Financial Statements
4. FINANCING ARRANGEMENTS (CONTINUED)
FIRST AND SECOND LIEN DEBT AGREEMENTS (CONTINUED)
Annual minimum principal payments for the Company's total debt at December 31,
2004 are (in thousands):
2005 $ 2,250,000
2006 2,250,000
2007 2,250,000
2008 2,250,000
2009 2,250,000
Thereafter 686,225,000
----------------------
$ 697,475,000
======================
The First and Second Lien Term Loans mature on February 25, 2011 and 2012,
respectively.
Interest. At the Company's option, the interest rates per annum applicable to
the Revolving Credit Facility and the 1st and 2nd Liens will be a fluctuating
rate of interest measured by reference to (i) London Interbank offered rates
("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 depends upon the leverage
ratio and ranges from 1.25% to 2.25% for LIBOR based borrowings and 0.0% to
1.00% for ABR based borrowings. The applicable margin for Swing Line Loans is
1.00%. The applicable borrowing margin for the First Lien Term B Loan depends
upon the Leverage Ratio and is 2.0% to 2.5% for LIBOR based borrowings and 0.75%
to 1.0% for ABR based borrowings. The applicable borrowing margin for the Second
Lien Term Loan is 4.50% for LIBOR based borrowings and 3.25% for ABR based
borrowings.
At December 31, 2004 the Company had a total of $474.1 million outstanding under
the First Lien Term B Loan, consisting of $115.0 million outstanding under a 12
month LIBOR (4.5625% at December 31, 2004), $200.0 million outstanding under a
12 month LIBOR (3.9375% at December 31, 2004), $120.0 million outstanding under
a six month LIBOR (4.4375% at December 31, 2004), $38.0 million outstanding
under a one month LIBOR (4.6875% at December 31, 2004) and $1.1 million
outstanding under the average base rate of 6.25%. Also at December 31, 2004 the
Company had a total of $223.375 million outstanding under the Second Lien Term
Loan, consisting of $25.0 million outstanding under a 12 month LIBOR (6.8% at
18
TransWestern Holdings LP
Notes to Consolidated Financial Statements
4. FINANCING ARRANGEMENTS (CONTINUED)
FIRST AND SECOND LIEN DEBT AGREEMENTS (CONTINUED)
December 31, 2004), $197.0 million outstanding under a six month LIBOR (6.67% at
December 31, 2004) and $1.375 million outstanding under the average base rate of
6.7075%.
At December 31, 2004 the Company had $63.6 million available for future
borrowings under the First Lien Term Loan and revolving credit facility and $0
available for future borrowing under the 2nd Lien.
Security; Guaranty. The Revolving Credit Facility and the 1st and 2nd Liens 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 1st and 2nd Liens.
SERIES F 9 5/8% SENIOR SUBORDINATED NOTES DUE 2007
On May 23, 2001 the Company placed $75.0 million of Series E 9 5/8% Senior
Subordinated Notes due 2007 in contemplation of acquiring WorldPages. The
Company simultaneously entered into a registration rights agreement with the
initial purchasers in this private offering to exchange the Series D and E
Senior Subordinated Notes for Series F Senior Subordinated Notes. The exchange
offer was completed in December 2001. The $215.6 million outstanding aggregate
amount of Series F 9 5/8% Senior Subordinated Notes (the "Notes") at December
31, 2003 consisted of $215.0 million of Series F 9 5/8% Senior Subordinated
Notes issued in December 2001 and approximately $0.6 million of unamortized
premium and discount. All outstanding principal, accrued interest and call &
premium fees were paid in full in connection with the Refinancing during 2004.
19
TransWestern Holdings LP
Notes to Consolidated Financial Statements
4. FINANCING ARRANGEMENTS (CONTINUED)
SENIOR CREDIT FACILITY
On June 28, 2001 the Company entered into a Senior Credit Facility with CIBC,
First Union, and Fleet National Bank and other lenders pursuant to which the
Company borrowed $35.0 million under a Tranche A Term Loan, and $200.0 million
under a Tranche Term B Loan. The Company has the additional right to borrow up
to $65.0 million under a revolving credit facility. At the mutual discretion of
the Company and the Administrative Agent, the Company could have made up to two
requests at any time through June 28, 2003, to increase the then effective
aggregate principal amount of either or both of the Term Loans or the revolving
credit facility up to an aggregate amount of $35.0 million. All outstanding
principal and accrued interest were paid in full in connection with the
Refinancing during 2004.
SENIOR DISCOUNT NOTES
On November 12, 1997 Holdings and Capital, the Company's parent, issued $32.5
million of initial aggregate principal ($57.9 million principal at maturity) of
their 11 7/8% Senior Discount Notes due 2007 (the "Discount Notes"). The
Discount Notes are joint and several obligations of Holding and Capital are
guaranteed by TransWestern (Holdings Wholly-Owned Subsidiary). The net proceeds
from the sale of the Discount Notes were used to redeem approximately one-half
of the existing Preferred Units of Holdings held by its limited partners on the
date of issuance.
Maturity, Interest and Principal. The Discount Notes will mature on November 15,
2008. Interest on the Discount Notes will accrue at the rate of 11 7/8% per
annum and will be payable semi-annually on each May 15 and November 15,
commencing May 15, 2003, to the holders of record of Discount Notes at the close
of business on May 1 and November 1 immediately preceding such interest payment
date. Interest on the Discount Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from November 15,
2002. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months. Commencing November 15, 2002, interest is payable at the
option of Holdings, in while but not in part, at the rate of 13 3/8% per annum
by the issuance of additional Discount Notes (valued at 100% of the face amount
thereof) in lieu of cash interest; provided, however, that in connection with
any redemption or repurchase of the Discount Notes as permitted or required by
the Discount Note Agreement and upon the acceleration of the Discount Notes, all
accrued interest shall be payable solely in cash. As used herein, the term
"Discount Notes" shall include Discount Notes issued in lieu of cash interest on
the Discount Notes in accordance with the Indenture, unless the context
indicates otherwise.
20
TransWestern Holdings LP
Notes to Consolidated Financial Statements
4. FINANCING ARRANGEMENTS (CONTINUED)
SENIOR DISCOUNT NOTES (CONTINUED)
In connection with the issuance of the Discount Notes, Holdings granted the
initial purchasers certain exchange and registration rights. Based upon the
terms of such agreement, Holdings filed a Registration Statement on Form S-4,
which became effective March 3, 2998, in connection with its offer to exchange
new Discount Notes registered under the Securities Act of 1933, as amended, for
the Old Discount Notes. The Exchange Offer expired on April 3, 1998.
Security; Guaranty. The Discount Notes are limited to $57.9 million aggregate
principal amount at maturity (other than Discount Notes issued in lieu of cash
interest on the Discount Notes in accordance with the Indenture). The Discount
Notes are general senior unsecured obligations of the Holdings, ranking senior
in right of payment to any subordinated indebtedness of the Holdings, ranking
senior in right of payment to any subordinated in right of payment to all
existing and future obligations of the Company's subsidiaries, including
TransWestern. The Discount Notes were issued at a substantial discount to their
aggregate principal amount at maturity with the gross proceeds from the issuance
totaling approximately $32.5 million. Based on the issue price thereof, the
yield to maturity of the Discount Notes is 11 7/8% per annum (computed on a
semi-annual bond equivalent basis and assuming no Discount Notes are issued in
lieu of cash interest thereon).
Optional Redemption. The Discount Notes are to be redeemable at the option of
Holdings, in whole or in part, at any time on or after November 14, 2002 at the
following redemption prices (expressed as a percentage of principal amount at
maturity), together, in each case, with accrued interest, if any, to the
redemption date, if redeemed during the twelve-month period beginning on
November 15 of each year listed below:
2002 105.938%
2003 103.958%
2004 101.979%
2005 and thereafter 100.000%
Notwithstanding the foregoing, Holdings, at its option, may redeem all, but not
less than all, of the aggregate principal amount of the Discount Notes
outstanding at any time prior to November 15, 2002 at a redemption price equal
to 11.1875% of the accreted value thereof, out of the net proceeds of one or
more Public Equity Offerings (as defined); provided, however, that any such
redemption occurs within 90 days following the closing of any such Public Equity
Offering (as defined).
21
TransWestern Holdings LP
Notes to Consolidated Financial Statements
4. FINANCING ARRANGEMENTS (CONTINUED)
SENIOR DISCOUNT NOTES (CONTINUED)
Holdings will be obligated in certain instances to make an offer to repurchase
the Discount Notes at a purchase price equal to (i) 100% of the accreted value
thereof, if the repurchase date is on or prior to November 13, 2002, or (ii)
100% of the principal amount at maturity thereof, together with accrued and
unpaid interest thereon to the purchase date, with the net cash proceeds of
certain asset sales.
In the event of redemption of fewer than all of the Discount Notes, the
Wilmington Trust Company (the "Trustee") shall select, if the Discount Notes are
listed on a national securities exchange, in accordance with the rules of such
exchange or, if the Discount Notes are not so listed, either on a pro rata basis
of by lot or in such a manner as it shall deem fair and equitable the Discount
Notes to be redeemed; provided, that if a partial redemption is made with the
proceeds of a Public Equity Offering, selection of the Discount Notes or portion
thereof for redemption will be made by the Trustee on a pro rata basis, unless
such method is prohibited. The Discount Notes will be redeemable in whole or in
part upon not less than 30 or 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 Discount Notes. On and after any redemption
date, accreted value will cease to accrete or interest will cease to accrue, as
the case maybe, on the Discount Notes or portions thereof called for redemption
unless Holdings shall fail to redeem any such Note.
Change of Control. Upon the occurrence of a Change of Control (as defined), each
holder of the Discount Notes will be entitled to require Holdings to purchase
such holder's Discount Notes at a purchase price equal to (i) 101% of the
accreted value thereof, if the repurchase dates is on or prior to November 15,
2002 or (ii) 101% of the principal amount at maturity thereof, together with
accrued and unpaid interest thereon, if any, to the repurchase date, if such
date is after November 15, 2002.
Covenants. The Discount Note Indenture contains covenants for the benefit of the
holders of the Discount Notes that, among other things, restrict the ability of
Holdings and any of its Restricted Subsidiaries (including the Company) to (i)
incur additional indebtedness, (ii) pay dividends and make distributions, (iii)
issue stock of subsidiaries, (iv) make certain investments, (v) repurchase
stock, (vi) enter into transactions with affiliates, (vii) enter into sale
lease-back transactions and (viii) merge or consolidate the Company. Holdings is
also limited in its ability to create liens and transfer or sell assets. These
covenants are subject to a number of important exceptions, including the
22
TransWestern Holdings LP
Notes to Consolidated Financial Statements
4. FINANCING ARRANGEMENTS (CONTINUED)
SENIOR DISCOUNT NOTES (CONTINUED)
allowance of Permitted Tax Distributions as a result of Holdings' status as a
limited partnership (as specified in the Discount Note Agreement). As of
December 31, 2002, the Company was in compliance with all covenants specified in
the Discount Note.
All outstanding principal and accrued interest were paid in full January 2003.
5. PARTNERSHIP DEFICIT
Holdings is a limited partnership formed under the Delaware Revised Uniform
Limited Partnership Act (as amended from time to time, the "Delaware Limited
Partnership Act"). Holdings is governed by its Fourth Amended and Restated
Agreement of Limited Partnership (the "Partnership Agreement"), between Holdings
and each of its partners. Interests in Holdings are owned 98.6% by Holdings'
limited partners and 1.4% by Holdings' general partner, TCC. TCC is a
corporation organized under the Delaware General Corporation Law. The
Partnership Agreement governs the relative rights and duties of its limited
partners and its general partner with respect to Holdings.
TCC controls, directs and exercises full control over all of Holdings activities
and the Partnership Agreement vests all management powers over the business and
affairs of Holdings exclusively in TCC. Holdings' limited partners have no right
of control or management power over the business and affairs of Holdings except
in their various capacities as an officer or director of Holdings or TCC, as the
case may be. Any change affecting the rights and liabilities of any of Holdings'
limited partners requires the consent of such limited partner.
TCC may not withdraw as Holdings' general partner without the consent of the
holders of a majority of the Class A Common units, except that TCC shall be
deemed to have withdrawn as Holdings' general partner upon the effective date of
the transfer of all of its interests in Holdings.
23
TransWestern Holdings LP
Notes to Consolidated Financial Statements
5. PARTNERSHIP DEFICIT (CONTINUED)
The Partnership Agreement, and therefore Holdings' existence will continue in
effect until the earlier to occur of (i) December 31, 2043, (ii) the withdrawal
of TCC if Holdings' limited partners to do not elect a successor general
partner, and (iii) the occurrence of an act that results in TCC ceasing to be
general partner under the Delaware Limited Partnership Act.
During the years ended December 31, 2004, 2003, and 2002 Holdings distributed
$357.7, million, $1.1 million, and $1.6 million to its limited partners.
Included in the 2004 distribution was the repurchase of the outstanding
1,525,596 Preferred units for $119.3 million.
As of December 31, 2004, the Partnership's general partner equity consists of
9,800 authorized, and 9,799 issued and outstanding units with such units
representing a 1.3% interest in the limited partnership. The Partnership's
limited partner equity consists of 1,525,596 authorized, issued and outstanding
Class A Common units and 10,000 authorized, and 10,000 issued and outstanding
Class B Common units. The Preferred units were entitled to a preferred yield of
12.0% per annum, compounded quarterly, and an amount equal to the original
investment in such Preferred units (net of any prior repayments of Preferred
units) plus any accrued and unpaid preferred yield (collectively the "Preference
Amount") on any liquidation or other distribution by the Partnership. The
Preferred units were repurchased and retired on February 25, 2004. After payment
of the Preference Amount, Partners holding Class A Common units are entitled to
share in any remaining proceeds of any liquidation or other distribution by the
Partnership pro rata according to the number of Class A Common units held by
such partners. Holders of Class B Common units will also be entitled to share in
a percentage of any such distributions, but only if the holders of the Preferred
units and the Class A Common units have achieved specified levels of return on
their investment as set forth in the Partnership Agreement.
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 Common units which are subject to a four-year vesting
period, which vesting accelerates upon a sale of Holdings. The Class B Common
units were to members of management as incentive units at 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 Common units and all other of such Management Investor's interests in
Holdings and TCC at a price per unit and under other terms specified in such
Management Investor's Executive Agreement. In addition, in the event of a
termination of a 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
24
TransWestern Holdings LP
Notes to Consolidated Financial Statements
5. PARTNERSHIP DEFICIT (CONTINUED)
repurchase his or her vested Class B Common units and all other interests of
such Management Investor in Holdings and TCC at a price per unit and under other
terms specified in such Management Investor's Executive Agreement. During the
years ended December 31, 2004, 2003, and 2002 the Company sold 264.48, 0 and 0 B
units at a purchase price of $1.00 per unit.
Holdings, TCC, and Holdings' limited partners are subject to a registration
agreement (the "Registration Agreement"). Under the Registration Agreement, the
holders of a majority of registrable securities owned by certain investors 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.
Both the Senior Credit Facility and the Discount Note Indenture generally limit
Holdings' ability to pay cash distributions to its partners other than
distributions in amounts approximately equal to the income tax liability of the
partners of Holdings resulting from the taxable income of Holdings ("Tax
Distributions"). Tax Distributions will be based on the approximate highest
combined tax rate that applies to any one of Holdings' partners.
25
TransWestern Holdings LP
Notes to Consolidated Financial Statements
6. BENEFIT PLANS
401(K) AND PROFIT SHARING PLAN
Substantially all of the Company'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 Company may match
the employee contributions, up to a limitation of 83% of the first 6% of annual
earnings per participant. The Company may also make annual discretionary profit
sharing contributions. Contributions to the plan for the years ended December
31, 2004, 2003 and 2002 were approximately, $1.8 million, $1.6 million and $2.5
million, respectively.
EQUITY COMPENSATION PLANS
In connection with the 1997 recapitalization, the Company established the 1997
TransWestern Holdings, L.P. Equity Compensation Plan (the "97 Plan"). The 97
Plan provides select key full time employees with deferred compensation benefits
for income tax purposes. Special distributions to the 97 Plan are recorded as
expense in the accompanying statements of operations when declared by Holdings'
Board of Directors, generally following a significant refinancing transaction.
In June 2001, the Board of Directors approved a distribution of $5.2 million net
of taxes and benefits.
Employees receiving units in the 97 Plan were eligible to receive a ratable per
unit share of cash distributions from the 97 Plan, when declared by the Plan
Administrators. The Plan Administrators distributed to employee unit holders all
assets contributed to the 97 Plan during the years ended December 31, 2002 and
2001. As of December 31, 2002 and 2001, undistributed equity trust proceeds
totaled zero and $2.9 million, respectively.
In connection with the 2001 recapitalization, the Company established the 2001
TransWestern Holdings, L.P. Equity Compensation Plan (the "2001 Plan"). The 2001
Plan provides select key full-time employees with deferred compensation benefits
for income tax purposes. Special distributions to the 2001 Plan are recorded as
expense in the accompanying statements of operations when and if declared by
Holdings' Board of Directors, generally following a significant refinancing
transaction. The Board of Directors has not declared a distribution of the 2001
Plan to date.
26
TransWestern Holdings LP
Notes to Consolidated Financial Statements
7. LEASE COMMITMENTS
The Company leases office facilities in cities throughout the United States
under operating leases with remaining terms ranging from one to seven years.
Total rent expense for the years ended December 31, 2004, 2003 and 2002 was
approximately $6.3 million, $5.8 million and $5.2 million, respectively. The
Company has minimum rentals to be received under non-cancelable subleases of
$0.4 million as of December 31, 2004. Annual minimum lease payments due as of
December 31, 2004 under these leases are (in thousands):
2005 $ 5,915
2006 5,249
2007 4,650
2008 3,775
2009 2,731
Thereafter 1,224
------------------
$ 23,544
==================
The Company contracts with third parties to print its yellow pages. In January
2005, the Company entered into commitments for minimum payments of $10.8 million
for each of the three years ended December 31, 2007. There are no minimum
commitments for periods ending after December 31, 2007.
8. RELATED PARTY TRANSACTIONS
In connection with the Recapitalization in June 2001, the Partnership entered
into a Management Agreement with Thomas H. Lee Advisors, LP ("THL Co."), an
affiliate of Thomas H. Lee Equity Fund V, L.P., 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 Partnership and THL Co. On the
Recapitalization closing date, THL Co. and the other equity investors in the
Partnership each received their pro rata portion of a $10.0 million transaction
fee. In addition, THL Co. and all other equity investors will receive a pro rata
portion of the $1.0 million annual management fee (the "Management Fee"), plus
THL Co. 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 Partnership or THL Co.
provides written notice of termination no later than 30 days prior to the end of
the initial or any successive period. For the years ended December 31, 2004,
2003 and 2002, the Company recorded general and administrative expenses of $1.0
million, $1.0 million and $1.0 million, respectively, in connection with the
management fee.
27
TransWestern Holdings LP
Notes to Consolidated Financial Statements
9. LITIGATION
The Company and/or its subsidiaries are parties to various litigation matters
incidental to the conduct of their business. Management does not believe that
the outcome of any of these matters will have a material adverse effect on the
Company's financial condition or the results of its operations.
10. INCOME TAXES
The components of the provision (benefit) for income taxes are as follows (in
thousands):
YEARS ENDED DECEMBER 31,
2004 2003 2002
----------------------------------------------------
Current:
Federal $ 286 $ 100 $ (398)
State 1,269 1,579 1,325
----------------------------------------------------
Current tax expense 1,555 1,679 927
Deferred:
Federal 939 175 1,922
State (119) (172) 340
Valuation allowance - - (6,139)
----------------------------------------------------
Deferred tax expense 820 3 (3,877)
----------------------------------------------------
Tax provision (benefit) $ 2,375 $ 1,682 $ (2,950)
====================================================
As required by Statement of Financial Accounting Standards No. 109 ("FAS 109"),
the Company recognizes tax assets on the balance sheet if it is "more likely
than not" that they will be realized on future tax returns. During 2004, the
Company reassessed the remaining valuation allowance of approximately $18.0
million previously established against the net deferred tax assets. Factors
considered included the history of earnings and projected earnings based on
current and future operations. Based on the positive evidence, the Company
concluded that it is more likely than not that the remaining deferred tax assets
would be realized. The reversal of the $18.0 million valuation allowance related
to deferred tax assets assumed at the time of the Company's acquisition of
Worldpages, Inc. during 2001 and was recorded as a reduction to goodwill.
28
TransWestern Holdings LP
Notes to Consolidated Financial Statements
10. INCOME TAXES (CONTINUED)
Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company's
federal net operating loss and credit carryforwards may be limited due to a
cumulative change in ownership of more than 50% within a three-year period. As
of December 31, 2004 we do not believe any changes in ownership would create a
material impact on the financial statements and related footnote disclosures (in
thousands).
DECEMBER 31,
2004 2003 2002
------------------------------------------------------
Deferred tax assets
Accounts receivable $ 1,978 $ 769 $ 1,041
Accrued liabilities 85 87 687
Property, plant and equipment (63) (113) 130
State taxes 95 254 125
Other 376 - -
Intangible assets 6,536 4,975 2,774
Deferred revenue 8,308 7,980 6,304
Operating loss carry forwards 16,438 21,866 23,365
------------------------------------------------------
Total deferred tax assets 33,753 35,818 34,426
Deferred tax liabilities:
Deferred costs (7,976) (9,221) (7,827)
Valuation allowance - (17,974) (17,974)
------------------------------------------------------
Net deferred tax assets $ 25,777 $ 8,623 $ 8,625
======================================================
Net operating loss carry forwards consist of federal net operating losses of
approximately $48,152,000 and state net operating losses of approximately
$1,102,000. The federal net operating losses begin to expire in 2017 through
2021. The state net operating losses begin to expire in 2012 though 2016.
29