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United Directory Services, Inc.
Financial Statements
Year ended December 31, 1998
Contents
Report of Ernst & Young LLP, Independent Auditors......1
Audited Financial Statements
Balance Sheet .........................................2
Statement of Operations ...............................3
Statement of Shareholders' Equity .....................4
Statement of Cash Flows ...............................5
Notes to Financial Statements .........................6
5
Report of Ernst & Young LLP, Independent Auditors
The Partners
United Directory Services, Inc.
We have audited the accompanying balance sheet of United Directory
Services, Inc., (the "Company") as of December 31, 1998, and the
related statements of operations, shareholders' equity and cash flows
for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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 the Company
at December 31, 1998, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
San Diego, California
January 29, 1999
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United Directory Services, Inc.
Balance Sheet
December 31, 1998
Assets
Current assets:
Cash and cash equivalents $ 627,054
Accounts receivable,
less allowance for doubtful
accounts of $1,137,631 1,054,298
Deferred directory costs 1,678,183
Other current assets 1,522
----------
Total current assets 3,361,057
----------
Property and equipment, net 54,456
Other assets 1,835
----------
Total assets $3,417,348
==========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 4,865
Salaries, commissions, and
benefits payable 29,548
Customer deposits 1,671,845
Other accrued liabilities 7,429
----------
Total current liabilities 1,713,687
----------
Shareholders' equity:
Common stock, $1 par value,
100,000 shares authorized,
1,000 shares issued and
outstanding at December 31, 1998 11,000
Retained earnings 1,692,661
----------
Total shareholders' equity 1,703,661
----------
Total liabilities and
shareholders' equity $3,417,348
==========
See accompanying notes.
7
United Directory Services, Inc.
Statement of Operations
Year ended December 31, 1998
Net revenues $5,755,778
Cost of revenues 2,271,503
---------
Gross profit 3,484,275
---------
Operating expenses:
Sales and marketing 2,636,257
General and administrative 646,794
---------
Total operating expenses 3,283,051
---------
Income from operations 201,224
Other expense 43,562
---------
Net income 157,662
=========
See accompanying notes.
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United Directory Services, Inc.
Statement of Shareholders' Equity
Year ended December 31, 1998
Common stock Total
--------------- Retained Shareholders'
Shares Amount Earnings Equity
------ ------- ---------- ----------
Balance at December 31, 1997 1,000 $11,000 $1,534,999 $1,545,999
Net income - - 157,662 157,662
----- ------- ---------- ----------
Balance at December 31, 1998 1,000 $11,000 $1,692,661 $1,703,661
See accompanying notes.
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United Directory Services, Inc.
Statement of Cash Flows
Year ended December 31, 1998
Operating activities
Net income $157,662
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 16,795
Changes in operating assets and liabilities:
Accounts receivable (23,938)
Deferred expenses (500,730)
Accounts payable 2,565
Deferred revenue 647,969
Accrued salaries, commissions, and benefits 14,961
Other accrued liabilities 7,429
---------
Net cash provided by operating activities 322,713
Investing activities
Purchase of property and equipment (14,881)
---------
Net cash used by investing activities (14,881)
---------
Net increase in cash and cash equivalents 307,832
Cash and cash equivalents at the beginning of the year 319,222
---------
Cash and cash equivalents at the end of year $ 627,054
=========
See accompanying notes.
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1. Summary of Significant Accounting Policies
Organization, Business Activities and Basis of Presentation
United Directory Services, Inc. (the "Company") was incorporated in
1989, and publishes and distributes fourteen local yellow page
directories throughout Texas.
The accompanying financial statements have been prepared for the
purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in a Form 8-K of TransWestern
Publishing Company LLC.
Revenue Recognition, Deferred Directory Cost and Customer Deposits
Revenues from the sales 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 sheet.
Expenditures directly related to sales, production, printing and
distribution of directories are capitalized as deferred directory costs
and matched against related revenues upon distribution of the related
directories.
Concentration of Credit Risk
The Company is subject to a concentration of credit risk as revenues
are within fourteen major market areas in Texas. In addition, credit
losses have represented a cost of doing business due to the nature of
the customer base (predominately small businesses) and the use of
extended credit terms.
The Company establishes a bad debt reserve based on the historical
experience in each market area. Actual write-offs are recorded against
the allowance when management determines that an account is
uncollectible. In general, management determines an account to be
uncollectible if a company has entered bankruptcy, discontinued its
operations, or fails to renew an advertisement in the following year's
directory.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and short-term
investments with a maturity of three months or less on the date of
acquisition.
1. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment is carried at cost, less depreciation, which is
provided based on the straight-line method over the estimated useful
lives of the assets (generally five years).
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Related Party Transactions
The Company leases its corporate office from a partnership in which the
sole shareholder and certain employees of the Company are partners.
The lease is cancelable upon thirty days written notice by either
party. Rent expense related to the lease amounted to $84,000 for the
year ended December 31, 1998.
Income Taxes
The Company has elected S-Corporation status for federal and state
income tax purposes. Accordingly, the income for the Company is
included in the tax returns of the shareholder and no provision for
federal and state income taxes was made in the accompanying statement
of operations other than the state franchise tax imposed on S-
Corporations by Texas.
Fair Values of Financial Instruments
The Company believes that the carrying amounts of its financial
instruments approximate their fair market values due to their short-
term nature.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions about the future that affect the amounts reported in
the financial statements and disclosures made in the accompanying notes
to the financial statements. Actual results could differ from those
estimates.
2. Property and Equipment
Property and equipment consist of the following at December 31, 1998:
Computer equipment $ 63,879
Office equipment 77,198
----------
141,077
Less accumulated depreciation (86,621)
----------
$ 54,456
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3. Lease Commitments
The Company leases office facilities in Texas under operating leases
with remaining terms ranging from three to six months. Total rent
expense for the year ended December 31, 1998 was $119,208.
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4. Year 2000 (Unaudited)
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to accept
four-digit entries to distinguish 21st century dates from 20th century
dates. As a result, in approximately one year, computer systems and/or
software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements.
The Company recognizes the need to ensure that its operations will not
be adversely impacted by the Year 2000 issue on a going concern basis.
However, as the Company sold substantially all of its net assets and
operations subsequent to year end (see Note 5), implementation of Year
2000 modifications will be accomplished by TransWestern Publishing
Company LLC.
5. Subsequent Event
On January 5, 1999, substantially all the assets of the Company were
purchased by TransWestern Publishing Company LLC for cash of
approximately $12.3 million, a $2.0 million promissory note due in 18
months from the purchase date, subject to adjustment based on the
collection of accounts receivable and an additional $2.75 million earn-
out over three years, subject to the performance of a certain directory.