TRANSWESTERN HOLDINGS L.P.
INDEX TO FINANCIAL STATEMENTS
PAGE
NUMBER
------
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of December 31, 1999
and 1998.................................................. F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, April 30, 1998, 1997 and the eight
months ended December 31, 1998............................ F-4
Consolidated Statements of Changes in Member Deficit for
the years ended December 31, 1999, April 30, 1998 and 1997
and the eight months ended December 31, 1998 ............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, April 30, 1998, 1997 and the eight
months ended December 31, 1998............................ F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Partners
TransWestern Holdings L.P.
We have audited the accompanying consolidated balance sheets of
TransWestern Holdings L.P. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in member deficit, and cash
flows for the year ended December 31, 1999, the eight months ended December 31,
1998 and for each of the two 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of TransWestern
Holdings L.P. at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for the year ended December 31, 1999, the
eight months ended December 31, 1998 and for each of the two years in the
period ended April 30, 1998, in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
San Diego, California
February 15, 1999
F-2
TRANSWESTERN HOLDINGS L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 1,167 $ 14,067
Trade receivable, (less allowance for
doubtful accounts of $10,394 and $9,608
at December 31, 1999 and 1998, respectively)... 36,188 20,931
Deferred directory costs....................... 10,037 8,935
Other current assets........................... 1,198 625
--------- ---------
Total current assets...................... 48,590 44,558
Property, equipment and leasehold
improvements, net................................. 3,423 2,977
Acquired intangibles, net........................... 85,879 34,486
Other assets, primarily debt issuance costs, net.... 9,454 9,746
--------- ---------
Total assets.............................. $ 147,346 $ 91,767
========= =========
LIABILITIES AND PARTNERSHIP DEFICIT
Current liabilities:
Accounts payable.................................. $ 8,323 $ 4,241
Salaries and benefits payable..................... 5,735 3,980
Accrued acquisition costs......................... 4,915 450
Accrued interest.................................. 2,131 1,470
Other accrued liabilities......................... 1,011 1,068
Customer deposits................................. 16,313 16,139
Current portion, long-term debt................... 1,741 2,207
--------- ---------
Total current liabilities................. 40,169 29,555
Long-term debt:
Senior Credit Facility............................ 64,422 66,165
Revolving Loan Facility........................... 40,100 --
Series D 9 5/8% Senior Subordinated Notes......... 141,583 141,784
Series B 11 7/8% Senior Discount Notes, net....... 41,588 37,060
Other notes payable............................... 4,910 2,000
--------- ---------
Total non-current liabilities............. 292,603 247,009
Partnership deficit:
General Partner................................... (3,150) (3,141)
Limited Partner................................... (182,276) (181,656)
--------- ---------
Total partnership deficit. ......................... (185,426) (184,797)
--------- ---------
Total liabilities and partnership deficit...... $ 147,346 $ 91,767
========= =========
See accompanying notes.
F-3
TRANSWESTERN HOLDINGS L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEARS ENDED EIGHT MONTHS ENDED
----------------------------------- ------------------------
DECEMBER 31, APRIL 30, APRIL 30, DECEMBER 31, DECEMBER 31,
--------- ---------------------- ----------- -----------
1999 1998 1997 1998 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
Net revenues................. $ 146,399 $ 100,143 $ 91,414 $ 61,071 $ 52,326
Cost of revenues............. 26,345 20,233 19,500 12,694 11,998
--------- --------- --------- --------- ---------
Gross profit................. 120,054 79,910 71,914 48,377 40,328
Operating expenses:
Sales and marketing........ 59,370 40,290 36,640 27,530 22,852
General and
administrative.......... 14,541 9,508 10,422 7,650 6,194
Depreciation and
amortization............ 19,934 7,086 6,399 4,526 4,402
Contribution to Equity
Compensation Plan....... -- 5,543 -- -- 5,543
--------- --------- --------- --------- ---------
Total operating
expenses........ 93,845 62,427 53,461 39,706 38,991
--------- --------- --------- --------- ---------
Income from operations....... 26,209 17,483 18,453 8,671 1,337
Other income, net............ 413 82 48 242 (23)
Interest expense............. (27,440) (15,246) (7,816) (14,511) (7,878)
--------- --------- --------- --------- ---------
(27,027) (15,164) (7,768) (14,269) (7,901)
--------- --------- --------- --------- ---------
Income (loss) before
extraordinary item......... (818) 2,319 10,685 (5,598) (6,564)
Extraordinary loss........... -- (4,791) -- -- (4,791)
--------- --------- --------- --------- ---------
Net income (loss)............ $ (818) $ (2,472) $ 10,685 $ (5,598) $ (11,355)
========= ========= ========= ========= =========
Net income (loss) allocated
to General Partner units $ (14) $ (42) $ 107 $ (95)
========= ========= ========= =========
Net income (loss) allocated
to Limited Partner units $ (804) $ (2,430) $ 10,578 $ (5,503)
========= ========= ========= =========
Net income (loss) per General
Partner unit $ (1.4) $ (4.3) $ 10.9 $ (9.7)
========= ========= ========= =========
Net income (loss) per
Limited Partner unit $ (0.3) $ (1.0) $ 2.6 $ (2.2)
========= ========= ========= =========
See accompanying notes.
F-4
TRANSWESTERN HOLDINGS L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS DEFICIT
YEARS ENDED DECEMBER 31, 1999, APRIL 30, 1998,
AND 1997 AND EIGHT MONTHS ENDED DECEMBER 31, 1998
(IN THOUSANDS)
GENERAL LIMITED
PARTNER PARTNERS TOTAL
--------- --------- ---------
Balance at April 30, 1997 ... (516) (50,206) (50,722)
Net (loss) ................ (42) (2,430) (2,472)
Contributions from partners 1,458 84,298 85,756
Equity transaction costs .. (66) (3,792) (3,858)
Distributions to partners . (3,877) (203,854) (207,731)
--------- --------- ---------
Balance at April 30, 1998 ... (3,043) (175,984) (179,027)
Net (loss) ................ (95) (5,503) (5,598)
Repurchase of Partner's Units (9) (441) (450)
Contributions from Partners 6 272 278
--------- --------- ---------
Balance at December 31, 1998 (3,141) (181,656) (184,797)
Net (loss) ................ (14) (804) (818)
Contributions from Partners 5 184 189
Balance at December 31, 1999 (3,150) (182,276) (185,426)
========= ========= =========
See accompanying notes.
F-5
TRANSWESTERN HOLDINGS L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
EIGHT MONTHS
YEARS ENDED ENDED
--------------------------------- --------------
DECEMBER 31, APRIL 30, APRIL 30, DECEMBER 31,
--------- --------------------- --------------
1999 1998 1997 1998
--------- --------- --------- --------------
OPERATING ACTIVITIES
Net income (loss)................................... $ (818) $ (2,472) $ 10,685 $ (5,598)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Extraordinary item-non cash....................... -- 4,791 -- --
Depreciation and amortization..................... 19,934 7,086 6,399 4,526
Amortization of deferred debt issuance costs...... 1,439 1,000 703 945
Amortization of Senior Note discount.............. 4,326 1,803 -- 2,757
Provision for doubtful accounts................... 12,749 9,094 8,920 5,895
Changes in operating assets & liabilities, net of
effects of purchased directories:
Trade receivables............................... (14,204) (4,754) (4,142) 5,249
Write-off of doubtful accounts.................. (13,067) (7,672) (7,287) (6,276)
Recoveries of doubtful accounts................. 858 485 679 432
Deferred directory costs........................ 411 186 (302) (1,546)
Other current assets............................ (992) (433) 247 145
Accounts payable................................ 4,069 471 710 (411)
Accrued liabilities............................. (3,011) 1,358 (1,136) (2,676)
Accrued interest................................ 661 4,772 69 (3,370)
Customer deposits............................... (1,999) (34) (243) 4,402
--------- --------- ------- --------
Net cash provided by operating activities........... 10,356 15,681 15,302 4,474
INVESTING ACTIVITIES
Purchase of property, equipment and leasehold
improvements...................................... (1,521) (996) (1,034) (824)
Payment for purchase of directories................. (56,660) (8,204) (2,558) (21,332)
--------- --------- ------- --------
Net cash used for investing activities.............. (58,181) (9,200) (3,592) (22,156)
FINANCING ACTIVITIES
Borrowings under long-term debt agreements:
Senior Term Loan.................................. -- 85,000 -- --
Revolving Credit Facility......................... 71,700 37,039 24,000 40,300
Increase in other assets, primarily debt issuance
costs, net...................................... (1,656) (14,190) -- --
9 5/8% Senior Subordinated Notes.................. -- 100,000 -- 41,800
Senior Subordinated Facility...................... -- 75,000 -- --
Series B 11 7/8% Senior Discount Notes............ -- 32,500 -- --
Repayments of long-term debt:
Revolving Credit Facility......................... (31,600) (47,108) (21,975) (40,300)
Senior Subordinated Facility...................... -- (75,000) -- --
External Debt..................................... (1,965) -- -- --
Senior Term Loan.................................. (1,743) (73,631) (8,000) (11,563)
Equity transaction costs............................ -- (3,858) -- --
Contributions from member........................... 189 85,756 -- --
Distributions to member............................. -- (207,731) (5,801) --
--------- --------- ------- --------
Net cash (used for) provided by financing
activities........................................ 34,925 (6,223) (11,776) 30,237
--------- --------- ------- --------
Net increase (decrease) in cash..................... (12,900) 258 (66) 12,555
Cash at beginning of period......................... 14,067 1,254 1,320 1,512
--------- --------- ------- --------
Cash at end of period............................... $ 1,167 $ 1,512 $ 1,254 $ 14,067
========= ========= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................ $ 21,020 $ 7,724 $ 7,131 $ 14,271
========= ========= ======= ========
See accompanying notes.
F-6
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(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, TCC held
approximately 1.7% of Holdings outstanding partnership units.
TransWestern publishes and distributes local yellow page directories in
fourteen states.
Principles of Consolidation
The consolidated financial statements include the accounts of Holdings
and its wholly owned subsidiaries, TransWestern and Capital. All significant
intercompany transactions have been eliminated.
F-7
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(ALL DOLLARS IN THOUSANDS)
Cash and cash equivalents
Holdings considers all highly liquid investments with an original
maturity of three months or less at the date of acquisition to be cash
equivalents. Holdings 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 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
128, 139, and 191 directories during the years ended April 30, 1997, 1998, and
December 31, 1999 respectively, and 84 during the eight months ended December
31, 1998.
Fiscal Year End
Effective May 1, 1998 as reported on Form 8-K dated May 12, 1998, Holdings
elected to change its fiscal year from April 30 to December 31.
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 9.1%, 9.1%, and 8.7% in the years ended April 30, 1997, 1998 and
December 31, 1999, respectively and 9.7% for the eight months ended December
31, 1998. 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.
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 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 approximates its carrying value at December
31, 1999.
F-8
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(ALL DOLLARS IN THOUSANDS)
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 market value on
the date of acquisition. Acquired intangibles are being amortized over five
years.
In accordance with Statement of Financial Accounting Standard No. 121,
Holdings 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 undiscounted 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.
Investment
The Company records its investment in Eversave at cost and reviews it
quarterly for impairment.
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 of loss of the Partnership is included in the income
tax returns of the Partnership's partners.
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.
Reclassifications
Certain amounts in the prior year financial statements have been
reclassified to conform to current year presentation.
F-9
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(ALL DOLLARS IN THOUSANDS)
New Accounting Standards
The Company expects to adopt SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, effective January 1, 2001. SFAS No. 133
will require the Company to recognize all derivatives on the balance sheet at
fair value. The Company does not anticipate that the adoption of the SFAS No.
133 will have a significant effect on its results of operations or financial
position.
2. DIRECTORY ACQUISITIONS
For the year ended December 31, 1999 the Company acquired the following
directories, which were accounted for by the purchase method of accounting:
United. On January 5, 1999, the Company purchased fourteen directories
from United Directory Services, Inc. (United) for approximately $17.0
million. The purchase price consisted of $12.3 million in cash, a promissory
note for $2.0 million, due in eighteen months, subject to adjustment based upon
the actual collections of accounts receivable outstanding as of the closing
during such period, and contingent payments paid over a period of three years
not to exceed an additional $2.7 million based upon the contribution margin of
a prototype directory acquired in Austin, Texas. The acquired directories serve
the greater Ft. Worth, San Antonio and Austin, Texas areas.
Lambert. On January 8, 1999, the Company purchased eight directories from
Lambert Publishing (Lambert) for approximately $11.0 million. The purchase
price consisted of $9.5 million in cash, a promissory note of $1.0 million, due
in eighteen months, subject to adjustment based upon the actual collections of
accounts receivable outstanding as of the consummation of the acquisition, and
a $0.5 million contingent payment based upon the performance of the subsequent
years directories exceeding a specific revenue forecast. The acquired
directories serve the central Georgia and central eastern Alabama areas.
Southern. On January 15, 1999, the Company purchased seven directories
from Southern Directories Publishing, Inc. (Southern) for approximately $5.2
million in cash. The acquired directories serve the central Georgia area.
Orange Line. On February 15, 1999, the Company purchased four directories
from Call It, Inc. (doing business as, "Orange Line") for approximately $1.3
million in cash. The acquired directories serve the northern Ohio area.
YPTexas. On April 1, 1999, the Company purchased certain tangible and
intangible assets of Yellow Pages of Texas, Inc. (YPTexas) for a total of
approximately $2.2 million in cash. YPTexas publishes one directory near
Fort Worth, Texas.
Golden State. On April 2, 1999, the Company purchased certain tangible and
intangible assets of Golden State Directory, Corp. (Golden State) for a
total of approximately $5.5 million in cash. Golden State published six
directories in northern California.
Pioneer. On August 30, 1999 the Company purchased certain tangible and
intangible assets from Pioneer Telephone Directories Corp. (Pioneer) for $2.4
million in cash. Pioneer published three directories in southeastern Alabama.
Stafford. On August 24, 1999 the Company purchased certain tangible and
intangible assets from Greenville News, Inc. (Stafford) for $2.5 million in
cash. Stafford published two directories in western central Michigan.
F-10
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(ALL DOLLARS IN THOUSANDS)
United Multimedia (American Media). On October 15, 1999 the Company
purchased certain tangible and intangible assets of United Multimedia
(American Media) for a total of $16.0 million. The purchase price consists of
$14.4 million in cash and a note payable of $1.6 million, due in 18 months
subject to adjustment based on actual account receivable collections. We paid a
$0.5 million production fee on January 1, 2000 for completion of certain
in-process directories. American Media published six directories in Southern
California.
Medina. On October 29, 1999 the Company purchased certain tangible and
intangible assets of Great Lakes Telephone Directories (Medina) for
approximately $1.6 million in cash. We also paid $0.3 million for a non-compete
agreement from the prior owners in the region. Medina published one directory
in Northern Ohio.
Superior. On November 12, 1999 the Company purchased certain tangible and
intangible assets of Superior Telephone Directories (Superior) for
approximately $1.1 million in cash. Superior publishes one directory in
Oklahoma.
For the year ended April 30, 1998 and the eight months ended December 31,
1998, the Company acquired the following, which were accounted for by the
purchase method of accounting:
On February 2, 1998, the Company purchased certain tangible and
intangible assets totaling $8.4 million of Mast Advertising and Publishing,
Inc. for cash of $7.7 million and other liabilities totaling $0.7
million.
On July 16, 1998, the Company purchased all of the outstanding common
stock of Target Directories of Michigan, Inc. (Target) for cash of
approximately $5.4 million. In connection with the acquisition, the Company
also assumed certain liabilities of Target totaling approximately $1.6 million.
On November 23, 1998, the Company purchased certain tangible and
intangible assets of M&M Publishing, Inc. for cash of $1.2 million.
On November 30, 1998, the Company purchased certain tangible and
intangible assets of Universal Phone Books, Inc. for cash of $13.9 million, a
seller promissory note of $2.0 million and other liabilities totaling $0.4
million.
The acquisitions have been accounted for under the purchase method and
accordingly the purchase prices have been allocated to the tangible and
intangible assets acquired based on their respective fair values at the date of
acquisition as follows for the year ended December 31, 1999:
Customer List $ 68,043
Deferred directory costs 2,198
Other current and non-current assets 2,869
Assuming that the acquisitions referred to above had occurred on May 1,
1998 unaudited pro forma results of operations would have been as follows:
Year ended Eight months ended
December 31, December 31,
1999 1998
-------------- ------------------
Revenues................................ $ 154,552 $ 142,748
Net Income (Loss)....................... (3,344) (18,013)
F-11
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(ALL DOLLARS IN THOUSANDS)
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
December 31,
1999 1998
-------- --------
Computer and office equipment.................... $ 7,342 $ 6,122
Furniture and fixtures........................... 1,789 1,636
Leasehold improvements........................... 430 310
------- -------
9,561 8,068
Less accumulated depreciation and amortization... (6,138) (5,091)
------- -------
$ 3,423 $ 2,977
======= =======
ACQUIRED INTANGIBLES
December 31,
1999 1998
-------- --------
Customer Base.................................. $128,074 $ 60,031
Non compete and licensing agreements........... 2,160 --
Less accumulated amortization.................. (44,355) (25,545)
-------- --------
Acquired intangibles, net $ 85,879 $ 34,486
======== ========
OTHER ASSETS
December 31,
1999 1998
-------- --------
Debt issuance costs.............................. $ 11,994 $ 11,367
Less accumulated amortization of
debt issuance costs............................ (3,040) (1,621)
-------- --------
Debt issuance costs, net....................... 8,954 9,746
Investment in Eversave, carried at cost.......... 500 --
-------- --------
Other assets, net $ 9,454 $ 9,746
======== ========
F-12
TRANSWESTERN HOLDINGS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(ALL DOLLARS IN THOUSANDS)
4. FINANCING ARRANGEMENTS
Principal balances under the Company's long-term financing arrangements
consist of the following:
DECEMBER 31,
1999 1998
-------- --------
Series D 9 5/8% Senior Subordinated Notes,
including unamortized premium of $1,583 and
$1,784 at December 31, 1999 and 1998,
respectively.................................. $141,583 $141,784
Series B 11 7/8% Senior Discount Notes ......... 41,588 37,060
Senior Credit Facility:
Senior term loan.............................. 66,163 67,906
Revolving loan................................ 40,100 --
Acquisition Debt................................ 4,910 2,000
--------- --------
294,344 248,750
Current portion of long-term debt............... 1,741 1,741
--------- --------
Long-term debt net of current portion........... $292,603 $247,009
======== ========
Fees. In connection with the Recapitalization, Holdings incurred loan fees
of $17.3 million; $3.3 million for the Senior Credit Facility, $3.4 million for
the Senior Subordinated Facility, $1.25 million for the Senior Discount Notes
(as defined), and $9.3 million for transaction costs. Of the $17.3 million,
$12.7 million was capitalized as debt issuance costs related to debt incurred in
connection with 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 D 9 5/8% SENIOR SUBORDINATED NOTES DUE 2007
Maturity, Interest and Principal. The $141.6 million outstanding aggregate
amount of Senior Subordinated Notes (the "Notes") consists of $140 million of
Series D 9 5/8% Senior Subordinated Notes issued in April 1999 and $1.6 million
of unamortized premium. The Notes will mature on November 15, 2007 and bear
interest at a rate of 9 5/8% per annum. Interest is payable semiannually in
arrears on each May 15 and November 15, 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 Notes.
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.
F-13
TRANSWESTERN HOLDINGS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(ALL DOLLARS IN THOUSANDS)
4. FINANCING ARRANGEMENTS (CONTINUED)
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).
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 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 December 31, 1999, the Company was in compliance with covenants specified
in the Senior Subordinated Indenture.
F-14
TRANSWESTERN HOLDINGS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(ALL DOLLARS IN THOUSANDS)
4. FINANCING ARRANGEMENTS (CONTINUED)
Guarantee. Target Directories of Michigan, Inc. ("Target"), which is
wholly-owned by the Company, fully and unconditionally guaranteed the Notes on
an unsecured senior subordinated basis. Target is the Company's only
consolidated operating subsidiary and it has no debt senior to the Notes.
Separate full financial statements and other disclosures concerning Target have
not been presented because, in the opinion of management, such information is
not deemed material or meaningful. At December 31, 1999, and for the twelve
months then ended, Target had total assets of $5,337, net assets of $4,514, net
revenues of $2,704 and net loss of ($717). The indenture governing the Notes
provides certain restrictions on the ability of Target to make distributions to
the Company.
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 statement of operations for the year ended
April 30, 1998.
SENIOR CREDIT FACILITY
In October, 1999 the Company entered into its sixth amendment to its
Senior Credit Facility with CIBC and First Union and other lenders (dated as of
November 6, 1997), pursuant to which the Company may now borrow up to $155.0
million consisting of a revolving credit facility of up to $70.0 million (the
"Revolving Credit Facility") and a Senior Term Loan in an aggregate beginning
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 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. Annual minimum principal payments at
December 31, 1999 are:
2000.......................................... 1,741
2001.......................................... 1,741
2002.......................................... 1,741
2003.......................................... 22,635
Thereafter.................................... 38,305
-------
$66,163
=======
F-15
TRANSWESTERN HOLDINGS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(ALL DOLLARS IN THOUSANDS)
4. FINANCING ARRANGEMENTS (CONTINUED)
Revolving Credit Facility. Commitments under the Revolving Credit Facility,
as amended, will be reduced on a quarterly basis commencing on January 1, 2002.
The commitment on the Revolving Credit Facility is reduced by $5.25 million at
the beginning of each calendar quarter in 2002 starting January 1, 2002. As of
January 1, 2003 the commitment is reduced by $12.25 million at the beginning
each calendar Quarter in 2003 and expires at the maturity date of October 1,
2003. As of December 31, 1999 the Company had $40.1 million 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% and at December 31, 1998 the Company had $67.9 million
outstanding on the Senior Term Loan under a one month LIBOR at 7.93563%.
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
the eight month period ended December 31, 1998 and all fiscal years ended
December 31, thereafter, if the Company's total leverage ratio (as defined)
determined as of the last day of the eight month period ended December 31, 1998
and all fiscal years ended December 31, thereafter, 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 thousand or a whole multiple thereof.
F-16
TRANSWESTERN HOLDINGS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(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 December 31, 1999, 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.
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 2008, which were exchanged
for identical notes registered under the Securities Act of 1933, as amended, in
April 1998 (the "Discount Notes"). The Discount Notes are joint and several
obligations of Holding and Capital and 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 and interest is not payable prior to November 15, 2002.
Thereafter, 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 the 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 whole 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.
F-17
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(ALL DOLLARS IN THOUSANDS)
4. FINANCING ARRANGEMENTS (CONTINUED)
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. The
Discount Notes are effectively 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 be redeemable at the option of
Holdings, 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 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:
YEAR PERCENTAGE
---- ----------
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).
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
or by lot or in such other 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 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 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.
F-18
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(ALL DOLLARS IN THOUSANDS)
4. FINANCING ARRANGEMENTS (CONTINUED)
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 date 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 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, 1999, the Company was in compliance with all covenants
specified in the Discount Note.
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 Third Amended and Restated
Agreement of Limited Partnership, (the "Partnership Agreement"), between
Holdings and each of the New Investors. Interests in Holdings are owned 98.3% by
the New Investors and 1.7% by 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 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.
F-19
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(ALL DOLLARS IN THOUSANDS)
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 twelve months ended December 31, 1999, Holdings repurchased 59
General Partnership units, 3,832 Preferred units, 7,502 Class A Common units,
and 383 Class B Common units for $15,035, $219,200, $429,140 and $383,
respectively. The repurchased units were subsequently sold to existing
partners. These contributions from partners consisted of 75 General Partnership
units, 1,858 Preferred units, 9,510 Class A Common Units, and 897 Class B
Common Units for $19,325, $282,062, $552,190, and $897 respectively.
As of December 31, 1999 the partnership's general partner equity consists
of 9,800 authorized, issued and outstanding units with such units representing
a 1.7% interest in the limited partnership. The Partnership's limited partner
equity consists of 1,270,456 authorized, and 659,660 issued and outstanding
Preferred units, 1,270,456 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 are 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. After payment of the
Preference Amount, Partners holding Class A 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 units held by such partners.
Holders of Class B 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 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 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 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.
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 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
F-20
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(ALL DOLLARS IN THOUSANDS)
5. PARTNERSHIP DEFICIT (CONTINUED)
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 (the "Tax
Distributions").
Tax Distributions will be based on the approximate highest combined tax rate
that applies to any one of Holdings' partners.
During fiscal 1996, 1997 and 1998, Holdings made distributions to Common
unit holders for income taxes totaling, $3,400 and $5,801, $2,100 respectively.
Holdings also made distributions in connection with recapitalization
transactions completed in fiscal 1996 and fiscal 1998 totaling, $36,400 and
$205,631, respectively. In November 1997, Holdings redeemed approximately
610,800 Preferred units from the net proceeds of the Discount Notes offering
of approximately $31.3 million raised through the issuance of the Series
B 11 7/8% Senior Discount Notes.
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. All outstanding
units were redeemed in the Recapitalization completed in October 1997.
6. BENEFIT PLANS
401(k) and Profit Sharing Plan
Substantially all of Holdings' 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. Holdings may also make
annual discretionary profit sharing contributions. Contributions to the plan
for the years ended December 31, 1997, 1998 and 1999 were approximately, $659,
$797, and $819, 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.
F-21
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(ALL DOLLARS IN THOUSANDS)
Distributions to the Plan related to refinancing transactions completed in
the twelve month periods ending April 30, 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 the twelve month periods ending April 30, 1997 and 1998, the
Plan Administrators paid distributions totaling $411 and $2.6 million. In the
eight months ended December 31, 1998 the plan administrators paid $2.9 million
and as of December 31, 1998, the plan had no undistributed equity.
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.
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 for the years ended April 30, 1997 and 1998 and
December 31, 1999 was $1,866 and $1,745 and $2,386 respectively. Rent expense
for the eight months ended December 31, 1998 was $940. Annual minimum lease
payments due as of December 31, 1999 under these leases are:
2000................................................... $2,325
2001................................................... 1,730
2002................................................... 1,455
2003................................................... 1,001
2004................................................... 294
------
$6,805
======
8. RELATED PARTY TRANSACTIONS
In connection with the Recapitalization, Holdings 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 0.5 million 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.
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TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(ALL DOLLARS IN THOUSANDS)
9. Litigation
From time to time the Company is involved in legal proceedings, claims and
litigation arising in the ordinary course of business. Management believes,
however, that the ultimate outcome of all pending litigation should not have a
material adverse effect on the Company's financial position or liquidity.
10. GEOGRAPHIC INFORMATION
Net revenues are attributed to geographic areas based on the region in
which the directory is published.
YEARS ENDED EIGHT MONTHS
----------------------------------- ENDED
DECEMBER 31, APRIL 30, APRIL 30, DECEMBER 31,
--------- ---------------------- ------------
1999 1998 1997 1998
--------- --------- --------- ---------
NUMBER OF DIRECTORIES
PUBLISHED
Northeast............. 51 46 45 27
Central............... 81 48 41 36
Southwest............. 38 26 24 12
West.................. 21 19 18 9
--------- --------- --------- ---------
Total................. 191 139 128 84
--------- --------- --------- ---------
NET REVENUES
Northeast............. $ 46.8 $ 38.9 $ 38.0 $ 23.1
Central............... 48.0 22.6 19.0 19.5
Southwest............. 33.0 25.9 22.7 13.5
West.................. 18.6 12.7 11.7 5.0
--------- --------- --------- ---------
Total................. $146.4 $100.1 $ 91.4 $ 61.1
--------- --------- --------- ---------
11. SUBSEQUENT EVENTS
Desert Pages. On January 14, 2000 the Company purchased certain tangible
and intangible assets of Desert Pages, Inc. (Desert Pages) for a total of
$8.0 million. The purchase price consists of $7.2 million in cash and a
promissory note of $0.8 million, due in eighteen months, subject to adjustment
based upon the actual collections of accounts receivable outstanding as of the
closing during such period. Desert Pages publishes one directory in Palm
Springs, California.
Direct Media Corp. On February 15, 2000 the Company purchased certain
tangible and intangible assets of Direct Media Corp (Direct Media) for a
total of $3.4 million. Direct Media publishes eight directories serving the
southeastern Georgia and northeastern Florida area. Also included in the
purchase are the rights to a new directory in Georgia to first publish in mid
2000.
F-23