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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended April 30, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File Number 333-42117
TRANSWESTERN HOLDINGS L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0560667
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
----------------
8344 CLAIREMONT MESA BOULEVARD 92111
SAN DIEGO, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (619) 467-2800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) AND 12 (g) OF THE ACT:
TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED
-------------- ------------------------------------
N/A N/A
Indicate by check mark whether each registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [x] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ] Yes [X] No
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TRANSWESTERN HOLDINGS L.P.
FORM 10-K
TABLE OF CONTENTS
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Page
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PART I
ITEM 1 Business............................................................. 2
ITEM 2 Properties........................................................... 6
ITEM 3 Legal Proceedings.................................................... 7
ITEM 4 Submission of Matters to a Vote of Security Holders.................. 7
PART II
ITEM 5 Market for Holding's Common Equity and Related
Security Holder Matters.............................................. 7
ITEM 6 Selected Consolidated Financial Data................................. 9
ITEM 7 Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations........................ 11
ITEM 7A Quantitative and Qualitative Disclosure about Market Risk............ 12
ITEM 8 Consolidated Financial Statements and Supplementary Data............. 17
ITEM 9 Changes in and Disagreements With Accountants on Accounting
and Consolidated Financial Disclosure................................ 17
PART III
ITEM 10 Directors and Executive Officers of Holdings......................... 18
ITEM 11 Executive Compensation............................................... 20
ITEM 12 Security Ownership of Certain Beneficial Owners and Management....... 23
ITEM 13 Certain Relationships and Related Transactions....................... 24
PART IV
ITEM 14 Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K.................................................. 29
Signatures........................................................... 31
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This Annual Report on Form 10-K contains certain forward-looking statements that
involve risks and uncertainties. The actual future results for TransWestern
Publishing Company LLC ("TransWestern" or the "Company") , the wholly-owned
operating subsidiary of TransWestern Holdings L.P. may differ materially from
those discussed here. Additional information concerning factors that could cause
or contribute to such differences can be found in this Annual Report on Form
10-K, Part II, Item 7 entitled "Management's Discussions and Analysis of
Financial Condition and Results of Operations" and elsewhere throughout this
Annual Report. Unless otherwise specified herein, all market and industry data
relating to independent yellow pages directory publishers are based on
information provided by Cowles/Simba Information, an independent market research
firm, as adjusted to reflect the Company's actual performance and events known
to the Company, including recent acquisitions and dispositions of directories by
certain of the publishers listed therein, and all other market and industry data
have been obtained from the Yellow Pages Publishers Association, an independent
trade association.
PART I
ITEM 1. BUSINESS
The Company is one of the largest independent yellow pages directory
publishers in the United States. The Company has 148 directories which serve
communities in the 13 states of California, Connecticut, Indiana, Kansas,
Kentucky, Louisiana, Massachusetts, Michigan, New York, Ohio, Oklahoma,
Tennessee and Texas. The Company's presence in its markets is well-established;
more than 70% of its directories have been in publication for more than 10
years. The Company's revenues are derived from the sale of advertising to a
diversified base of over 97,000 accounts (a single customer that advertises in
more than one directory is counted as a separate account for each directory in
which it advertises) consisting primarily of small to medium-sized local
businesses. Yellow pages are an important advertising medium for local
businesses due to their low advertising cost, widespread distribution, lasting
presence, and high consumer usage.
TransWestern Publishing Company, L.P. (the "Partnership") was formed in
1993 to acquire the TransWestern Publishing division of US West Marketing
Resources Group, Inc. (the "1993 Acquisition") and in October 1997, the
Partnership completed a $312.7 million recapitalization (the
"Recapitalization"). See "Certain Relationships and Related Transactions --
Recapitalization." In November 1997, the Partnership formed and contributed
substantially all of its assets to the Company, the Company assumed or
guaranteed all of the liabilities of the Partnership (the "Asset Drop-Down"),
and the Partnership changed its name to TransWestern Holdings L.P. ("Holdings").
As a result of the Asset Drop-Down, Holdings' only assets are all of the
Company's membership interests and all of the outstanding capital stock of TWP
Capital Corp. All of the operations that were previously conducted by the
Partnership are now being conducted by the Company.
Since the 1993 Acquisition, the Company has acquired 32 directories in
California, Indiana, Kentucky, Massachusetts, Michigan, Ohio, New York and
Tennessee. On February 2, 1998, the Company acquired eight directories from Mast
Advertising and Publishing, Inc. ("Mast") for approximately $9.0 million. The
purchase price consisted of (i) approximately $7.7 million of cash, (ii) a
$265,000 promissory note due in one year from the Company to Mast (subject to
adjustment based on the actual bad debt experience of the acquired directories)
and (iii) certain assumed liabilities of approximately $1.0 million. The cash
portion of the purchase price is subject to further adjustment based on the
actual net costs of the acquired directories. Six of the acquired directories
are located in northern Ohio and southern Michigan and serve the Toledo and
Columbus areas, and two of the acquired directories are contiguous with the
Nashville Market. The Company retained 2 area sales managers and 22 account
executives associated with the acquired directories. The eight directories
generated approximately $4.7 million of net revenue in 1997.
On July 16, 1998, the Company acquired all of the outstanding capital stock
of Target Directories of Michigan, Inc. ("Target") for $5.2 million plus the
book value of Target's assets as of the closing date. The cash portion of the
purchase price was funded with borrowings under the revolving credit facility
and is subject to further adjustment based on the actual net costs of the
acquired directories. Target publishes two directories in Michigan adjacent to
the Company's Monroe, MI directory. The Company retained one sales manager and
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approximately 13 account executives associated with the acquired directories.
The two directories generate approximately $2.1 million of net revenue in 1997.
INDUSTRY OVERVIEW
The United States yellow pages directory industry generated revenues of
approximately $11.4 billion in 1997, with circulation of approximately 350
million directories. Yellow pages directories are published by both telephone
utilities and, in many markets, independent directory publishers, such as the
Company, which are not affiliated with the telephone service provider. More than
250 independent directory publishers circulated over 100 million directories and
generated an estimated $722 million in revenues during 1997. Between 1992 and
1997, while industry-wide yellow pages advertising revenues grew at a compound
annual rate of 4.2%, advertising revenues of independent directories grew at a
compound annual rate of approximately 6.4%. Concurrent with the overall
expansion of the yellow pages advertising market, independent directory
publishers have steadily increased their market share from 5.7% in 1992 to 6.4%
in 1997. This has occurred because the diverse needs of both consumers and
advertisers are often not satisfied by a single utility directory.
Yellow pages directories accounted for approximately 6.1% of total
advertising spending in 1997 and compete with all other forms of media
advertising, including television, radio, newspapers and direct mail. In
general, media advertising may be divided into three categories: (i) market
development or image advertising (e.g., television, radio and newspapers), (ii)
direct response sales promotion (e.g., direct mail), and (iii) point of purchase
or directional advertising (e.g., classified directories). Yellow pages
directories are primarily directional advertising because they are used either
at home or in the workplace when consumers are contemplating a purchase or in
need of a service.
The independent publisher segment of the yellow pages industry is highly
fragmented and growing. There are approximately 250 independent yellow pages
publishers in the United States and the five largest independent publishers
accounted for 67% of 1997 revenues in the independent publisher segment.
Successful independent publishers effectively compete with telephone utilities
by differentiating their product based on geographical market segmentation,
pricing strategy and enhanced product features. To maximize both advertiser
value and consumer usage, independent directory publishers target their
directory coverage areas based on consumer shopping patterns. In contrast, most
directories published by telephone utilities coincide with their telephone
service territories, which may incorporate multiple local markets or only
portions of a single market. Also, independent publishers generally offer yellow
pages advertisements at a significant discount to the price that competing
telephone utilities usually charge. As a result, independent yellow pages
directories allow local advertisers to better target their desired market and
are often more useful for consumers.
Independent yellow pages publishers generally compete in suburban and rural
markets more than major urban markets, where the high distribution quantities
for each edition create a barrier to entry. In most markets, independent
directory publishers compete with the telephone utility and with one or more
independent yellow pages publishers. In markets where two or more directory
publishers compete, advertisers frequently purchase advertisements in multiple
directories.
MARKETS SERVED
The Company publishes 148 yellow pages directories serving distinct
communities in 13 states, including California, Connecticut, Indiana, Kansas,
Kentucky, Louisiana, Massachusetts, Michigan, New York, Ohio, Oklahoma,
Tennessee and Texas. The Company's directories are generally well-established in
their local communities and are clustered in contiguous geographic areas to
create a strong local market presence and to achieve selling efficiencies.
The Company's net revenues are not materially concentrated in any single
directory, industry, geographic region or customer. In fiscal 1998, the Company
served approximately 97,000 active accounts with its top 1,000 accounts
representing less than 17% of net revenues and no single directory accounting
for more than 5% of net revenues. Approximately 95% of the Company's net
revenues are derived from local accounts with the remaining 5% coming from
national companies advertising locally. The Company's high level of
diversification
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reduces exposure to adverse regional economic conditions and provides additional
stability in operating results. During fiscal 1998, the Company published 139
directories with a total circulation of approximately 7.6 million copies. The
Company's geographic diversity is evidenced in the table below:
<TABLE>
<CAPTION>
NUMBER OF DIRECTORIES NET REVENUES
----------------------------------------- --------------------------------------------------
REGION F'93 F'94 F'95 F'96 F'97 F'98 F'93 F'94 F'95 F'96 F'97 F'98
------ ----------------------------------------- --------------------------------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Northeast 34 37 39 42 45 46 $23.9 $26.2 $29.2 $33.1 $38.0 $ 39.1
Central 25 26 28 35 42 50 9.9 11.2 12.5 14.8 19.7 23.5
Southwest 16 19 22 23 23 24 13.1 16.0 18.2 19.7 22.0 24.8
West 15 15 17 18 18 19 8.0 8.8 9.9 10.1 11.7 12.7
-- -- --- --- --- --- ----- ----- ----- ----- ----- -------
Total 90 97 106 118 128 139 $54.9 $62.2 $69.8 $77.7 $91.4 $ 100.1
== == === === === === ===== ===== ===== ===== ===== =======
</TABLE>
PRODUCTS
The Company's yellow pages directories are designed to meet the
informational needs of consumers and the advertising needs of local businesses.
Each directory consists of (i) a yellow pages section containing display
advertisements and a listing of businesses by various headings, (ii) a white
pages section listing the names, addresses, and phone numbers of residences and
businesses in the area served, (iii) a community information section providing
reference information about general community services such as listings for
government offices, schools and hospitals, and (iv) a map of the geographic area
covered by the directory.
Advertising space is sold throughout the directory including in-column and
display advertising space in the yellow pages, bold listings and business card
listings in the white pages, banner advertising in the community pages, and
image advertisements on the front, back, inside, and outside covers. The Company
is also currently in the process of upgrading its production capacity to include
options such as full color advertisements which generate significantly higher
advertising rates. This diversity of product offerings enables the Company to
create customized advertising programs that are responsive to specific customer
needs and financial resources.
The Company's directories are an efficient source of information for
consumers. With over 2,000 headings in its directories and an expansive list of
businesses by heading in each local market, the Company's directories are both
comprehensive and conveniently organized. The Company's management believes that
the completeness and accuracy of the data in a directory is essential to
consumer acceptance.
Although the Company remains primarily focused on its printed directories,
it has recently initiated an Internet directory service. The Company has entered
into a strategic alliance with InfoSpace Inc. to offer electronic directory
services in each of its local markets. Under this strategic alliance, Infospace
Inc. is responsible for the technical aspects of the alliance and the Company is
providing local content and selling advertisement space in this electronic
directory. This arrangement enables the Company to avoid technical risks which
it is not presently staffed to manage and permits the Company to participate in
any opportunities that develop through the Internet. Management believes that
the Company's experience, reputation and account relationships within its local
markets will help it successfully market this service. The Company began to test
market its Internet product in March of 1998 in Houston, TX and Nashville, TN.
Although the growing use of the Internet has not had an appreciable impact on
the Company to date, management has not yet determined how, if at all, the
Internet will impact its performance, prospects or operations. The Company cross
promotes its Internet service and its printed directories. The Company's web
site is at http://www.transwesternpub.com.
SALES AND MARKETING
Yellow pages marketing is a direct sales business which requires both
servicing existing accounts and developing new customers. Repeat customers
comprise the Company's core account base and a number of these customers have
advertised in the Company's directories for many years. On average, since fiscal
1993, accounts representing 88% of the prior year's net revenues for each
directory have renewed their advertising program in the current edition of each
directory. Management believes that this high revenue renewal rate reflects the
importance of the Company's directories to its local accounts for whom yellow
pages directory advertising is a
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principal form of advertising. In addition, yellow pages advertising often
comprises an integral part of the local advertising strategy for larger national
companies operating at the local level. Advertisers have a strong incentive to
increase the size of their advertisement and to renew their advertising programs
because advertisements are placed within each heading of a directory based first
on size then on seniority. Generally, larger advertisements are more effective
than smaller advertisements and advertisements placed near the beginning of a
heading generate more responses than similarly sized advertisements placed
further back in the heading.
The Company also builds on its account base by generating new business
leads from multiple sources including a comprehensive compilation of data about
individual company advertising expenditures in competitive yellow page
directories. The Company has developed a proprietary database of high potential
customers based on each individual customer's yellow page advertising
expenditures and focuses its sales resources on those potential customers. In
support of this strategy, the Company has expanded its sales force from 223
employees at the end of fiscal 1993 to 443 employees as of April 30, 1998,
representing an increase of approximately 100%. Management has observed a direct
correlation between adding new sales force employees and revenue growth.
The Company employs three executive vice presidents and 53 regional,
district and area sales managers who, together, are responsible for supervising
the activities of the account executives. The Company's 443 account executives
generate virtually all of the Company's revenues and are responsible for
servicing existing advertising accounts and developing new accounts within their
assigned service areas.
The Company has well-established practices and procedures to manage the
productivity and effectiveness of its sales force. All new account executives
complete a formal two-week training program and receive continuous on-the-job
training through the regional sales management structure. Each account executive
has a specified account assignment consisting of both new business leads and
renewal accounts and is accountable for daily, weekly and monthly sales and
advance payment goals. Account executives are compensated in the form of base
salary, commissions and car allowance. Approximately 50% of total account
executive compensation is in the form of commissions, such that sales force
compensation is largely tied to sales performance and account collection. As of
April 30, 1998, the Company employed approximately 680 people, 530 of whom were
engaged in sales and sales support functions.
The sales cycle of a directory varies based on the size of the revenue base
and can extend from a few weeks to as long as six months. Once the canvass of
customers for a directory is completed, the directory is "closed" and the
advertisements are assembled into directories in the production cycle.
PRODUCTION AND DISTRIBUTION
The Company develops a production planning guide for each directory, which
is a comprehensive planning tool setting forth production specifications and the
cost structure for that directory. Each production planning guide is
incorporated into the Company's annual production schedule and serves as the
foundation for the Company's annual budgeting process. Although the Company
views its directories as annual publications, the actual interval between
publications may vary from 11 to 13 months. New directory starts can be
incorporated into the production schedule without significant disruption because
directory production is staggered throughout the year. As of April 30, 1998, the
Company had a production staff of approximately 90 full-time employees.
The production process includes post-sales, national sales order
processing, advertisement design and manufacturing, white pages licensing and
production, yellow pages production, community pages production and pagination.
Production operations are primarily managed in-house to minimize costs and to
assure a high level of accuracy.
After the in-house production process is complete, the directories are then
sent to outside vendors to be printed. The Company does not print any of its
directories but instead contracts with a limited number of printers to print and
bind its directories. The Company contracts with two outside vendors to
distribute its directories to each business and residence in its markets.
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RAW MATERIALS
The Company's principal raw material is paper. The Company used
approximately 16.4, 17.6 and 18.2 million pounds of directory grade paper in its
fiscal years ended April 30, 1996, 1997 and 1998, respectively, resulting in a
total cost of paper during such periods of approximately of $6.0 million, $5.8
million and $5.7 million, respectively. The Company does not purchase paper
directly from the paper mills; instead, the Company's printers purchase the
paper on behalf of the Company at prices negotiated by the Company.
COMPETITION
The yellow pages directory advertising business is highly competitive.
There are over 250 independent publishers operating in competition with the
regional Bell operating companies and other telephone utilities. In most
markets, the Company competes not only with the local utilities, but also with
one or more independent yellow pages publishers. Other media in competition with
yellow pages for local business and professional advertising include newspapers,
radio, television, billboards and direct mail.
INTELLECTUAL PROPERTY
The Company has registered one trademark and one service mark used in its
business. In addition, each of the Company's publications is protected under
Federal copyright laws. Telephone utilities are required to license directory
listings of names and telephone numbers that the Company then licenses for a set
fee per name for use in its white pages listings. Total licensing fees paid by
the Company were $1.1 million in fiscal 1998. In addition, the Company believes
that the phrase "yellow pages" and the walking fingers logo are in the public
domain in the United States. Otherwise, the Company believes that it owns or
licenses the intellectual property rights necessary to conduct its business.
EMPLOYEES
As of April 30, 1998, the Company employed approximately 680 full-time
employees, none of whom are members of a union. The Company believes that it has
good relations with its employees.
ITEM 2. PROPERTIES
The Company houses its corporate, administrative and production staff at
its headquarters located at 8344 Clairemont Mesa Boulevard, San Diego,
California. Information relating to the Company's corporate headquarters and
other regional sales offices is set forth in the following table:
<TABLE>
<CAPTION>
SQUARE TERM DESCRIPTION
LOCATION ADDRESS FOOTAGE EXPIRATION OF USE
-------- ------- ------- ---------- -----------
<S> <C> <C> <C> <C>
San Diego, CA.......... 8344 Clairemont Mesa Boulevard 35,824 10/31/03 Corporate/Office/
Sales/Production
Houston, TX............ 11243 Fuqua 9,600 3/31/01 Sales Office
Elmsford, NY........... 150 Clearbrook Road 8,775 12/31/00 Sales Office
Albany, NY............. 501 New Karner Road, Suite 1 7,565 3/31/99 Sales Office
Bedford, TX............ 4001 Airport Fwy., Suite 230 5,697 7/31/00 Sales Office
Louisville, KY......... 2300 Envoy Circle, #2301 5,600 3/31/02 Sales Office
Highland, NY........... 7-9 Cummings Lane 5,000 4/30/99 Sales Office
Stamford, CT........... 333 Ludlow Street 4,895 8/31/02 Sales Office
Nashville, TN.......... 2525 Perimeter Drive, Suite 105 3,637 5/31/01 Sales Office
Oklahoma City, OK...... 4901 W. Reno, Suite 800 2,931 6/30/02 Sales Office
</TABLE>
The Company leases 29 other sales offices for more remote sales areas and
periodically leases small facilities for temporary storage of directories.
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ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various litigation matters incidental to the
conduct of its business. Management does not believe that the outcome of any of
the matters in which it is currently involved will have a material adverse
effect on the financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for Holdings' partnership
units, and it is not expected that such a market will develop in the future.
As of June 30, 1998, Holdings had outstanding an aggregate of 1,270,456
Class A Common Units ("Class A Units"), 10,000 Class B Common Units ("Class B
Units") and 659,660 Class E Common Units ("Class E Units").
Distributions on Holdings' partnership units are governed by Holdings'
Third Amended and Restated Partnership Agreement, as amended. The payments of
distributions by Holdings is restricted by the indenture relating to its Series
B 11 7/8% Senior Discount Notes due 2008 (the "Discount Notes"). In addition,
the ability of Holdings' subsidiaries to distribute funds to Holdings for the
payments of distributions is limited by the terms of certain of such
subsidiaries' indebtedness. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources."
In connection with the Recapitalization Holdings issued:
(a) An aggregate of 830,787 Class A Units and 830,787 Preferred Units
to the THL Parties (as defined herein), CIBC Merchant Fund (as
defined herein) and CIVC Partners III for an aggregate of
$85,010,708.
(b) An aggregate of 292,937 Class A Units and 292,937 Preferred Units
to Continental Illinois Venture Corporation and First Union
Capital Partners in exchange for an aggregate of 1,325,839 old
Class A Units.
(c) An aggregate of 117,655 Class A Units and 117,655 Preferred Units
to the 14 Management Investors that were investors in the
Partnership prior to the Recapitalization and the former Chairman
and Chief Executive Officer of the Partnership in exchange for an
aggregate of 1,221,212 old Class A and E Units.
(d) An aggregate of 7,203 Class A Units and 7,203 Preferred Units to
the 11 Management Investors that were not investors in the
Partnership prior to the Recapitalization for an aggregate amount
of $737,087.
(e) An aggregate of 8,500 Class B Units to the Management Investors
for an aggregate of $8,500.
The sales and issuances listed above in (a), (d) and (e) were exempt from
registration under the Securities Act of 1933 (the "Securities Act") pursuant to
Section 4(2) thereof, as transactions not involving a public offering. The
issuances of securities listed above in (b) and (c) were exempt from
registration under the Securities Act pursuant to Section 3(a)(9) thereof.
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On November 12, 1997 Holdings, together with its wholly-owned subsidiary
TWP Capital Corp., issued $57,916,000 aggregate principal amount at maturity of
the Discount Notes. The net proceeds to Holdings from such issuance were $31.3
million, after deducting underwriting discounts of approximately $975,000 and
other expenses payable by the Company of approximately $275,000. The Discount
Notes were initially sold by Holdings and TWP Capital Corp. to CIBC Oppenheimer
and First Union Capital Markets Corp., who subsequently placed the Discount
Notes with qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act") and qualified buyers
outside the United States in reliance upon Regulation S under the Securities
Act. The initial sale of the Discount Notes by Holdings and TWP Capital Corp.
was exempt from registration under the Securities Act pursuant to section 4(2)
thereof, as a transaction not involving any public offering.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data and, insofar as
they relate to each of the five fiscal years in the period ended April 30, 1998,
have been derived from the audited financial statements of Holdings. The audited
statements of operations of Holdings for each of the three years in the period
ended April 30, 1998 and the audited balance sheet of Holdings as of April 30,
1998 and 1997 and the notes thereto appear elsewhere in this Annual Report. The
balance sheet data at April 30, 1994, 1995, 1996 and the statement of operations
data for each of the years ended April 30, 1994 and 1995 have been derived from
the audited financial statements of Holdings which do not appear in this Annual
Report. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of Holdings and related
Notes thereto included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Net revenues ..................................... $ 100,143 $ 91,414 $ 77,731 $ 69,845 $ 62,219
Cost of revenues ................................. 20,233 19,500 18,202 16,956 18,788
--------- --------- --------- --------- ---------
Gross profit ..................................... 79,910 71,914 59,529 52,889 43,431
Operating expenses:
Sales and marketing ...................... 40,290 36,640 29,919 27,671 26,301
General and administrative ............... 16,594 16,821 14,276 13,279 13,037
Contribution to Equity Compensation Plan . 5,543 -- 796 525 --
--------- --------- --------- --------- ---------
Total operating expenses ......................... 62,427 53,461 44,991 41,475 39,338
--------- --------- --------- --------- ---------
Income from operations ........................... 17,483 18,453 14,538 11,414 4,093
Other income, net ................................ 82 48 375 470 344
Interest expense ................................. (15,246) (7,816) (6,630) (4,345) (2,951)
--------- --------- --------- --------- ---------
Income before extraordinary item ................. 2,319 10,685 8,283 7,539 1,486
Extraordinary loss ............................... $ (4,791) -- $ (1,368) $ (392) --
--------- --------- --------- --------- ---------
Net income (loss) ................................ $ (2,472) $ 10,685 $ 6,915 $ 7,147 $ 1,486
========= ========= ========= ========= =========
OTHER DATA:
Depreciation and amortization ................... $ 7,086 $ 6,399 $ 4,691 $ 4,593 $ 4,603
Capital expenditures ............................ 996 1,034 484 496 769
CASH FLOWS PROVIDED BY (USED FOR):
Operating Activities ................. 15,681 15,302 13,091 14,608 9,853
Investing Activities ................. (9,200) (3,592) (5,713) (2,838) (3,121)
Financing Activities ................. (6,223) (11,776) (6,992) (11,550) (6,075)
EBITDA (b) ...................................... 30,194 24,900 20,400 17,002 9,040
EBITDA margin ................................... 30.2% 27.2% 26.2% 24.3% 14.5%
Gross Profit margin ............................. 79.8% 78.7% 76.6% 75.7% 69.8%
Bookings (d) .................................... $ 99,492 $ 86,859 $ 75,709 $ 70,013 $ 64,269
Advance Payments as a % of Net Revenue (e) ....... 46.0% 45.1% 41.0% 36.9% 31.8%
Number of Accounts (f) ........................... 97,479 93,157 84,117 77,371 71,832
Average net revenues per account (g) ............. $ 1,027 $ 981 $ 924 $ 903 $ 866
Number of Directories ............................ 139 128 118 106 97
Ratio of earnings to fixed charges (h) ........... 1.50x 2.29x 2.28x 2.69x 1.44x
BALANCE SHEET DATA (AT END OF PERIOD):
Working Capital .................................. $ 5,438 $ 24 $ 2,088 $ 3,496 $ 12,034
Total Assets ..................................... 61,997 48,231 47,423 41,831 43,879
Total Debt ....................................... 214,038 78,435 84,410 47,961 25,724
Total Equity (Deficit) (i) ....................... (179,027) (50,722) (55,606) (22,721) 4,458
</TABLE>
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(a) "Extraordinary item" represents the write-off of unamortized debt
issuance costs related to the repayment of debt prior to maturity. See
Note 4 of the Notes to the Consolidated Financial Statements.
(b) "EBITDA" is defined as income (loss) before extraordinary item plus
interest expense, discretionary contributions to the Company's Equity
Compensation Plan (such contributions represent special distributions
to the Company's Equity Compensation Plan in connection with
refinancing transactions) and depreciation and amortization and is
consistent with the definition of EBITDA in the Indenture relating to
the Company's Series B 9 5/8% Senior Subordinated Notes (the "Senior
Subordinated Indenture") and in the Company's Senior Credit Facility.
Contributions to the Equity Compensation Plan were $796 in fiscal 1996
and $5,543 for fiscal 1998. EBITDA is not a measure of performance
under generally accepted accounting principles (GAAP). EBITDA should
not be considered in isolation or as a substitute for net income, cash
flows from operating activities and other income or cash flow statement
data prepared in accordance with GAAP, or as a measure of profitability
or liquidity. However, management has included EBITDA because it may be
used by certain investors to analyze and compare companies on the basis
of operating performance, leverage and liquidity and to determine a
company's ability to service debt. The Company's definition of EBITDA
may not be comparable to that of other companies.
(c) "EBITDA margin" is defined as EBITDA as a percentage of net revenues.
Management believes that EBITDA margin provides a valuable indication
of the Company's ability to generate cash flows available for debt
service.
(d) "Bookings" is defined as the daily advertising orders received from
accounts during a given period and generally occur at a steady pace
throughout the year. In fiscal 1997, net revenues included $4,200 from
acquired directories, while bookings does not reflect this adjustment.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview.
(e) "Advance payments as a percentage of net revenues" is defined as, for a
given period, all cash deposits received on advertising orders prior to
revenue recognition as a percentage of net revenues recognized upon
directory distribution.
(f) "Number of accounts" is defined as the. total number of advertising
accounts for all directories published during a given period. Customers
are counted as multiple accounts if advertising in more than one
directory.
(g) "Average net revenues per account" is defined as net revenues divided
by the number of accounts.
(h) Earnings consist of income (loss) before extraordinary item plus
contributions to the Equity Compensation Plan plus fixed charges. Fixed
charges consist of (i) interest, whether expensed or capitalized, (ii)
amortization of debt issuance costs, whether expensed or capitalized,
and (iii) an allocation of one-fourth of the rental expense from
operating leases which management considers is a reasonable
approximation of the interest factor of rental expense.
(i) Partnership equity (deficit) represents the value of equity
contributions to Holding by its partners plus net income of Holdings
less partner, (TransWestern Holdings L.P.), distributions for income
taxes and distributions related to recapitalization transactions
completed during fiscal 1996 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.
10
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OVERVIEW (AMOUNTS IN THOUSANDS)
The Partnership was formed in May 1993 to acquire the TransWestern business
from US West. In November, 1997, the Partnership formed and contributed
substantially all of its assets to the Company, the Company assumed or
guaranteed all of the liabilities of the Partnership, and the Partnership
changed its name to TransWestern Holdings L.P. All of the operations that were
previously conducted by the Partnership are now being conducted by the Company.
In October 1997, the Partnership completed a $312,700 Recapitalization. As
a result of the Recapitalization, Thomas H. Lee Equity Fund III, L.P. and its
affiliates will collectively own approximately 59% of the equity of the
Partnership. See "Certain Relationships and Related Transactions -
Recapitalization."
On May 1, 1998, the Board of Directors of TransWestern Communications
Company, Inc. ("TCC"), the general partner of Holdings, the sole member of the
Company, authorized the change of the Company's fiscal year from a fiscal year
ending April 30 to a fiscal year ending December 31.
Revenue Recognition. The Company recognizes net revenues from the sale of
advertising placed in each directory when the completed directory is
distributed. Costs directly related to sales, production, printing and
distribution of each directory are capitalized as deferred directory costs and
then matched against related net revenues upon distribution. All other operating
costs are recognized during the period when incurred. As the number of
directories increases, the publication schedule is periodically adjusted to
accommodate new books. In addition, changes in distribution dates are affected
by market and competitive conditions and the staffing level required to achieve
the individual directory revenue goals. As a result, the Company's directories
may be published in a month earlier or later than the previous year which may
move recognition of related revenues from one fiscal quarter or year to another.
Year to year results depend on both timing and performance factors.
Notwithstanding significant monthly fluctuation in net revenues recognized
based on actual distribution dates of individual directories, the Company's
bookings and cash collection activities generally occur at a steady pace
throughout the year. The table below demonstrates that quarterly bookings,
collection of advance payments and total cash receipts vary less than net
revenues or EBITDA:
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997 FISCAL 1998
----------------------------- ----------------------------- ----------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-- -- -- -- -- -- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues ............ $20.7 $14.7 $20.9 $21.4 $23.3 $14.7 $23.5 $29.9 $19.2 $19.1 $21.9 $39.9
EBITDA (a) .............. 5.5 2.4 7.0 5.5 5.8 2.6 6.9 9.6 4.0 3.3 6.2 16.7
Bookings (b) ............ 18.1 20.0 17.6 20.0 20.5 23.9 21.4 21.1 22.7 27.3 23.0 26.5
Advance payments ........ 8.0 8.0 8.2 9.6 8.8 10.1 10.4 12.2 11.1 11.8 11.0 12.5
Total cash receipts(c)... 17.7 18.0 17.4 19.5 18.5 20.9 20.0 22.6 22.6 24.1 20.4 24.0
</TABLE>
(a) "EBITDA" is defined as income (loss) before extraordinary item plus
interest expense, discretionary contributions to the Company's Equity
Compensation Plan (such contributions represent special distributions to
the Company's Equity Compensation Plan in connection with refinancing
transactions) and depreciation and amortization and is consistent with the
definition of EBITDA in the Senior Subordinated Indenture and in the Senior
Credit Facility. EBITDA is not a measure of performance under GAAP. EBITDA
should not be considered in isolation or as a substitute for net income,
cash flows from operating activities and other income or cash flow
statement data prepared in accordance with GAAP, or as a measure of
profitability or liquidity. However, management has included EBITDA because
it may be used by certain investors to analyze and compare companies on the
basis of operating performance, leverage and liquidity and to determine a
company's ability to service debt. The Company's definition of EBITDA may
not be comparable to that of other companies.
(b) "Bookings" is defined as the daily advertising orders received from
accounts during a given period and generally occur at a steady pace
throughout the year.
(c) Includes both advance payments and collections of accounts receivable.
11
<PAGE> 13
Revenue Growth. A key factor in the Company's revenue growth has been the
increase in the number of titles published. Compared to 1996, the total number
of directories have increased by 21, from 118 to 139, and the Company increased
its total number of accounts from nearly 84,000 to more than 97,000. The growth
in directories was due primarily due acquiring 22 directories that expanded the
Company's presence in northern California, upstate New York, western
Massachusetts, southern Indiana, eastern Ohio, southern Michigan, Kentucky and
Tennessee. Excluding acquired directories, the Company's net revenues grew 7.2%
in fiscal 1996, 6.7% in fiscal 1997 and 7.1% in fiscal 1998 with average revenue
per account increasing from $959 in fiscal 1996 to $1,001 in fiscal 1997 and
$1,027 in fiscal 1998. The Company's overall revenue renewal and account
retention rates have averaged 88% and 76%, respectively, over the last three
years.
Bookings. The length of the measurement periods for revenues and bookings
are the same; however, the measurement period for bookings for each month is the
thirty-day period ending on the twentieth of that month. Consequently, the
measurement period for bookings lags the measurement period for revenue and
other items by 10 days. Growth in bookings, which is closely correlated with the
number of account executives, was 14.5% for the twelve months ended April 30,
1998 versus the same period in 1997. To facilitate future growth, the Company
increased the size of its sales force by approximately 12.5%, increasing the
average number of account executives in fiscal 1997 from 393 to an average of
443 in fiscal 1998. Average bookings per week has grown from approximately $1.7
million for the 12-month period ended April 30, 1997 to $1.9 million for the
12-month period ended April 30, 1998, an increase of approximately 14.6%.
Cost of Revenues. The Company's principal operating costs are production,
paper and printing. Total operating costs represented 20.2% of net revenues in
fiscal 1998. At the individual directory level, production, printing,
distribution and licensing costs are largely fixed for an established
circulation, resulting in high marginal profit contribution from incremental
advertising sales into an existing directory. Since fiscal 1995, the Company's
constant focus on process improvement and increased productivity has enabled it
to minimize additional production and administrative costs while increasing the
number of its directories.
The Company's principal raw material is paper. The Company used
approximately 16.4 million, 17.6 million and 18.2 million pounds of directory
grade paper in fiscal 1996, 1997 and 1998, respectively, resulting in a total
cost of paper during such periods of approximately $6.0 million, $5.8 million
and $5.7 million, respectively. White pages listings are licensed from telephone
utilities for a set fee per name and the number of listings correspond directly
to planned circulation and does not fluctuate. Total licensing fees incurred by
the Company in fiscal 1998 were $1.1 million. Distribution is provided by two
third-party vendors at a fixed delivery cost per directory as established by
individual market.
Selling and Marketing Expenses. Direct sales expense correlates closely
with the size of the Company's sales force. As the Company continues to increase
the number of directories and to expand its total customer base, the number of
account executives required to complete the annual selling cycle grows
accordingly. The Company's ability to complete selling each directory within a
prescribed time frame depends on account executive staffing levels and
productivity. Historically, the Company has experienced a high turnover rate
among its account executives, particularly among new hires, and therefore
continues to invest in recruiting and training account executives to build the
size of its sales force and to continue to grow revenue. The number of account
executives has grown from 345 at the end of fiscal 1996 to 443 at the end of
fiscal 1998. However, as a result of a significantly increased percentage of
revenue attributable to new accounts, revenue per account executive has
increased from $220,000 in fiscal 1996 to $225,000 in fiscal 1998. Revenue per
account executive has only slightly increased because the selling time required
to develop a new account typically exceeds the time required to service a
renewal account and new accounts typically commit to smaller advertising
programs than do established renewal accounts. Although the account renewal rate
is typically lower for newer accounts than for established accounts, as new
accounts renew and mature, the net revenues from such accounts generally
increase, while the cost of revenues for such accounts decreases. Direct sales
expense accounted for approximately 20% of net revenues in fiscal 1998, 19% of
net revenues in fiscal 1997 and 18% of net revenues in fiscal 1996.
12
<PAGE> 14
Cash Flow Management. The Company has instituted several policies to
accelerate customer payments including (i) requiring customers to make minimum
deposits on their annual purchase at the time of contract signing, (ii)
requiring customers with small advertising purchases to pay 100% at the time of
contract signing, (iii) offering a cash discount to customers who pay 100% at
the time of contract signing, (iv) providing commission incentives to account
executives to collect higher customer deposits earlier in the sales process, (v)
shortening customer payment terms from 12 months to eight months or less, and
(vi) requiring new customers to begin payments immediately after contract
signing rather than waiting for the directory to be distributed. As a result of
these initiatives which began in fiscal 1994, advance payments received prior to
directory publication as a percentage of net revenues has increased from 41.0%
in fiscal 1996 to 46.0% in fiscal 1998.
Although the Company generally collects an advance payment from all
advertisers, credit is extended based upon the size of the advertising program
and customer collection history. While the Company's accounts receivable are not
subject to any concentrated credit risk, credit losses represent a cost of doing
business due to the nature of the Company's customer base, largely local
businesses, and the use of extended credit terms. Generally, for larger and
established accounts, credit may be extended under eight to 12 month installment
payment terms. In addition, customers are given credits for the current year
when errors occur in their advertisements. A reserve for bad debt and errors is
established when revenue is recognized for individual directories. The estimated
bad debt expense is determined on a market by market basis taking into account
prior years' collection history. Actual write-offs are taken against the reserve
when management determines that an account is uncollectible, which typically
will be determined after completion of the next annual selling cycle. Therefore,
actual account write-offs may not occur until 18 to 24 months after a directory
has been published. The estimated provision for bad debt equaled 9.1%, 9.8% and
9.1% of net revenues for fiscal years 1996, 1997 and 1998, respectively. Actual
account write-offs equaled 9.8% in fiscal 1996. As described above, actual
account write-offs for fiscal 1997 and fiscal 1998 have not yet been determined.
Based on current estimates, management believes that the actual write-offs in
fiscal 1997 will be approximately 9.0% of net revenues. Management regularly
reviews actual write-offs of accounts receivable as compared to the reserve
estimates made at the time individual directories are published. During fiscal
1997, the Company's provision for bad debt included approximately $600,000 more
than management expects to write-off with respect to fiscal 1997 directories.
This addition was made to offset lower realized collections with respect to the
fiscal 1995 directories.
RESULTS OF OPERATIONS
The following table summarizes the Company's results of operations as a
percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net revenues ............. 100.0% 100.0% 100.0%
Cost of revenues ......... 20.2 21.3 23.4
----- ----- -----
Gross profit ............. 79.8 78.7 76.6
Sales and marketing ...... 40.2 40.1 38.5
General and administrative 22.1 18.4 19.4
----- ----- -----
Income from operations ... 17.5% 20.2% 18.7%
===== ===== =====
EBITDA (a): .............. 30.2% 27.2% 26.2%
</TABLE>
(a) "EBITDA" is defined as income (loss) before extraordinary item plus
interest expense, discretionary contributions to the Company's Equity
Compensation Plan (such contributions represent special distributions to
the Company's Equity Compensation Plan in connection with refinancing
transactions) and depreciation and amortization and is consistent with the
definition of EBITDA in the Senior Subordinated Indenture and in the Senior
Credit Facility. EBITDA is not a measure of performance under GAAP. EBITDA
should not be considered in isolation or as a substitute for net income,
cash flows from operating activities and other income or cash flow
statement data prepared in accordance with GAAP, or as a measure of
profitability or liquidity. However, management has included EBITDA because
it may be used by certain investors to analyze and compare companies on the
basis of operating performance, leverage and liquidity and to determine a
company's ability to service debt. The Company's definition of EBITDA may
not be comparable to that of other companies.
13
<PAGE> 15
YEAR ENDED APRIL 30, 1998 COMPARED TO YEAR ENDED APRIL 30, 1997
Net revenues increased $8.7 million, or 9.5%, from $91.4 million in fiscal
1997 to $100.1 million in fiscal 1998. The Company published 139 directories in
fiscal 1997 as compared to 128 in fiscal 1997. The net revenue growth was due to
(i) growth in the same 123 directories of $6.0 million, (ii) $0.7 million of
revenue from five new directories and (iii) $5.7 million of revenue from 11
directories that moved into the period partially offset by $3.7 million of net
revenues associated with five directories that published in fiscal 1997 but not
in fiscal 1998.
As a result of a combination of factors, including the addition of new
customers, price increases, increases in the amount of advertising by current
customers and new directory features such as colorization of ads, additional ad
sizes and additional headings, same book revenue growth for the 123 directories
published in both periods was 6.8%. In addition, the average revenue per account
was 6.4% higher in the same books in fiscal 1998 than in fiscal 1997.
Cost of revenues increased $0.7 million, or 3.8%, from $19.5 million in
fiscal 1997 to $20.2 million in fiscal 1998. The increase was the result of (i)
$0.3 million of costs associated with 5 new directories published in fiscal
1998, (ii) $1.5 million of costs associated with 11 books that published in
fiscal 1998, but not in fiscal 1997 and (iii) $137,000 of additional production
and distribution overhead costs, offset by (a) $0.5 million of lower costs for
the same 123 directories published in both fiscal years and (b) $0.7 million of
costs associated with 5 directories published during fiscal 1997, but not in
fiscal 1998. For the same 123 directories that were published in both fiscal
years, cost of revenues as a percentage of net revenues decreased from 21.3.% in
fiscal 1997 to 19.7% in fiscal 1998, primarily due to a decrease in printing and
production costs and license fees.
As a result of the above factors, gross profit increased $8.0 million, or
11.1%, from $71.9 million in fiscal 1997 to $79.9 million in fiscal 1998. Gross
margin increased from 78.7% in fiscal 1997 to 79.8% in fiscal 1998 as a result
of reduced printing and production costs and license fees and increased sales on
a same directory basis.
Selling and marketing expense increased $3.7 million, or 10.0%, from $36.6
million in fiscal 1997 to $40.3 million in fiscal 1998. The increase was
attributable to (i) $0.3 million of costs associated with 5 new directories,
(ii) $1.9 million of additional sales costs on the same 123 directories, (iii)
$1.4 million of costs associated with 11 books that published in fiscal 1998 but
not in fiscal 1997, (iv) $468,000 of higher sales management costs and (v) a
$368,000 increase in the provision for bad debt for write-offs due to the change
in the mix of directories published in fiscal 1998 as compared to fiscal 1997.
These increases were partially offset by $0.7 million of reduced selling and
marketing expenses associated with the five directories that published in fiscal
1997 but not in fiscal 1998. Selling and marketing expense as a percentage of
net revenues increased slightly from 40.1% in fiscal 1997 to 40.2% in fiscal
1998.
General and administrative expense increased $5.3 million, or 31.6% from
$16.8 million in fiscal 1997 to $22.1 million in fiscal 1998 as a result of a
contribution to the Equity Compensation Plan of $5.5 million made on October 1,
1997 in connection with the Recapitalization. There were no such contributions
in fiscal 1997. Exclusive of the contribution to the Equity Compensation Plan,
general and administrative expenses decreased $227,000 as a result of general
cost containment measures by the Company. General and administrative expense as
a percentage of net revenues increased from 18.4% in fiscal 1997 to 22.1% in
fiscal 1998.
As a result of the above factors, income from operations decreased $1.0
million, or 5.3%, from $18.5 million in fiscal 1997 to $17.5 million in fiscal
1998. Income from operations as a percentage of net revenues decreased from
20.2% in fiscal 1997 to 17.5% in fiscal 1998.
Interest expense increased $7.4 million, or 95.1%, from $7.8 million in
fiscal 1997 to $15.2 million in fiscal 1998.
Income before extraordinary item decreased $8.4 million, or 78.3%, from
$10.7 million in fiscal 1997 to $2.3 million in fiscal 1998.
14
<PAGE> 16
YEAR ENDED APRIL 30, 1997 COMPARED TO YEAR ENDED APRIL 30, 1996
Net revenues increased $13.7 million, or 17.6%, from $77.7 million in
fiscal 1996 to $91.4 million in fiscal 1997. The Company published 128
directories in fiscal 1997 as compared to 118 directories in fiscal 1996. The
net revenue growth was due to (i) $9.5 million from 21 new directories published
in fiscal 1997, (ii) an increase in net revenues of $5.6 million in the same 106
directories published in both periods, and (iii) $2.0 million from the second
publication of a directory during fiscal 1997, offset by $3.4 million of net
revenues associated with 12 directories published in fiscal 1996 but not in
fiscal 1997.
As a result of a combination of factors, including the addition of new
customers, price increases, increases in the amount of advertising by current
customers and new directory features such as colorization of ads, additional ad
sizes and additional headings, same book revenue growth for the 106 directories
published in both periods was 7.8%. In addition, the average revenue per account
was 4.8% higher in fiscal 1997 than in fiscal 1996.
Cost of revenues increased $1.3 million, or 7.1%, from $18.2 million in
fiscal 1996 to $19.5 million in fiscal 1997. The increase was the result of (i)
$2.7 million of costs associated with 21 new directories published in fiscal
1997 and (ii) $0.5 million of additional production and distribution overhead
costs, offset by (a) $1.0 million of lower costs for the same 106 directories
published in both fiscal years and (b) $0.9 million of costs associated with 12
directories published during fiscal 1996, but not in fiscal 1997. For the same
106 directories that were published in both fiscal years, cost of revenues as a
percentage of net revenues improved from 23.4% in fiscal 1996 to 21.3% in fiscal
1997, primarily due to a decrease in printing and production costs and license
fees.
As a result of the above factors, gross profit increased $12.4 million, or
20.8%, from $59.5 million in fiscal 1996 to $71.9 million in fiscal 1997. Gross
margin increased from 76.6% in fiscal 1996 to 78.7% in fiscal 1997 as a result
of reduced printing and production costs and license fees and increased sales on
a same directory basis.
Selling and marketing expense increased $6.7 million, or 22.5%, from $29.9
million in fiscal 1996 to $36.6 million in fiscal 1997. The majority of the
increase was attributable to increased sales staffing for new and acquired
directories, the establishment of a permanent sales office in the Nashville,
Tennessee market and an increase in the provision for bad debt for write-offs
expected on fiscal 1995 directories. Selling and marketing expense as a
percentage of net revenues increased from 38.5% in fiscal 1996 to 40.1% in
fiscal 1997.
General and administrative expense increased $1.7 million, or 11.6%, from
$15.1 million in fiscal 1996 to $16.8 million in fiscal 1997, primarily as a
result of increased depreciation and amortization. General and administrative
expense as a percentage of net revenues decreased from 19.4% in fiscal 1996 to
18.4% in fiscal 1997.
As a result of the above factors, income from operations increased $3.9
million, or 26.9%, from $14.5 million in fiscal 1996 to $18.5 million in fiscal
1997. Income from operations as a percentage of net revenues increased from
18.7% in fiscal 1996 to 20.2% in fiscal 1997.
Interest expense increased $1.2 million, or 17.9%, from $6.6 million in
fiscal 1996 to $7.8 million in fiscal 1997.
Income before extraordinary item increased $2.4 million, or 29.0%, from
$8.3 million in fiscal 1996 to $10.7 million in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures were $0.5 million, $1.0 million and $1.0 million in
fiscal 1996, 1997 and 1998, respectively. Capital spending is used largely for
computer hardware and software upgrades for the maintenance of its production
and operating systems. As of the end of fiscal 1998 the Company did not have any
material commitments for capital expenditures.
15
<PAGE> 17
Through its focus on increasing customer advance payments and the
acceleration of cash receipts, the Company has been able to reduce working
capital requirements despite strong revenue growth. Net accounts receivable,
which represents the largest component of working capital, increased to $26.1
million in fiscal 1998 compared to $23.3 million in fiscal 1997 and $21.4
million in fiscal 1996. Advance payments as a percentage of net revenues
increased from 41.0% in fiscal 1996 to 45.1% in fiscal 1997 and 45.9 % in fiscal
1998. Working capital improved in fiscal 1998 as compared to fiscal 1997 by $5.4
million primarily due to the reduction in the current maturity of debt due to
the Recapitalization. A related, but opposite, effect was seen in fiscal 1997 as
working capital decreased due to increased current debt related to the
refinancing completed in fiscal 1996.
Net cash provided by operating activities was approximately $13.1 million,
$15.3 million and $15.7 million in fiscal 1996, 1997 and 1998, respectively. The
increase from 1996 to 1997 was primarily related to the $3.8 million increase in
net income and increased non-cash charges for depreciation, amortization and
provision for bad debt along with an approximate $1.0 million reduction in
write-of of doubtful accounts to an amount which is in line with normal levels
associated with the growth in revenue. Also, the use of cash in fiscal 1997 from
increased trade receivables associated with high published revenues was
partially offset by the timing impact on accrued interest and accounts payable
balances totaling $1.9 million. The $0.4 million increase in operating cash
flows from 1997 to 1998 resulted from a combination of favorable and unfavorable
factors. The $(8.4) million decrease in net income (net of $4.8 million in
extraordinary items related to the Recapitalization) was offset by several
factors. The favorable items include $4.8 million in accrued interest due to the
Recapitalization which caused substantial changes in the amount and timing of
interest payments, the $1.8 million add back of non-cash accretion expense
related to amortization of the discount on the Senior Discount Notes, the $2.5
million increase in accrued liabilities primarily related to timing of the
equity trust payments and the $1.0 million increase in non-cash charges for
depreciation and amortization of deferred debt issuance costs relative to fiscal
1997. Unfavorable factors were the $(0.6) million increase in write-offs net of
recovered revenue, $(0.7) million increased use from other current assets,
primarily a note receivable resulting from acquisitions and $(0.4) million from
increased net receivables associated with higher sales. All remaining working
capital accounts represented a net $0.5 million increase in sources of cash.
Net cash used for investing activities was approximately $(5.7) million,
$(3.6) million and $(9.2) million in fiscal 1996, 1997 and 1998, respectively.
The decrease from 1996 to 1997 was caused by reduced amounts paid in connection
with directory asset purchases compared to fiscal 1996 and refinancing costs in
1996 which did not recur in 1997. The increase in fiscal 1998 was due primarily
as a result of increased acquisition related payments relative to 1997.
Net cash provided (used) for financing activities was approximately $(7.0)
million, $(11.8) million and $(6.2) million in fiscal 1996, 1997 and 1998,
respectively. The increased use from 1996 to 1997 was caused by a decrease in
the net proceeds of long term debt as fiscal 1997 did not include any
refinancing activity. The decrease in funds in fiscal 1998 relates directly to
the Recapitalization.
In connection with the Recapitalization, the Company and Holdings incurred
significant debt. As of April 30, 1998, Holdings had total consolidated
outstanding indebtedness of $214.0 million, including $100 million of the
Company's Series B 9 5/8% Senior Subordinated Notes due 2007, (the "Notes"),
$79.7 million of outstanding borrowings under the Company's Senior Credit
Facility, which ranks senior due to the Notes, and $34.3 million of Holdings
Series B 11 7/8% Senior Discount Notes due 2008 (the "Discount Notes"). The
Company has $40.0 million of additional borrowing availability under the Senior
Credit Facility, none of which was outstanding at April 30, 1998.
The Company's principal sources of funds are cash flows from operating
activities and $40.0 million of available funds under the Revolving Credit
Facility. Based upon the successful implementation of management's business and
operating strategy, the Company believes that these funds will provide it with
sufficient liquidity and capital resources to meet current and future financial
obligations, including the payment of principal and interest on the Notes, as
well as to provide funds for the Company's working capital, capital expenditures
and other needs. The Company's future operating performance will be subject to
future economic conditions and to financial, businesses and other factors, many
of which are beyond the Company's control. There can be no assurance that such
sources of funds will be adequate and that the Company will not require
additional capital
16
<PAGE> 18
from borrowings or securities offerings to satisfy such requirements. In
addition, the Company may require additional capital to fund future acquisitions
and there can be no assurance that such capital will be available.
The Senior Credit Facility and the indenture governing the Notes
significantly restrict the distribution of funds by TransWestern and the other
subsidiaries of Holdings. There can be no assurance that the agreements
governing indebtedness of Holdings' subsidiaries will permit such subsidiaries
to distribute funds to Holdings in amounts sufficient to pay the accreted value
or principal or interest on the Discount Notes when the same becomes due
(whether at maturity, upon acceleration or redemption or otherwise). The
Discount Notes will be effectively subordinated in right of payment to all
existing and future claims of creditors of subsidiaries of Holdings, including
the lenders under the Senior Credit Facility, the holders of the Notes and trade
creditors.
YEAR 2000 COMPLIANCE
In fiscal 1998 the Company commenced for all of its computer systems, a
year 2000 date conversion project to address all necessary code changes, testing
and implementation. Project completion is planned for the middle of 1999 at an
estimated total cost of approximately $500,000. The Company expects its year
2000 date conversion project to be completed on a timely basis, however there
can be no assurance in this regard. If the Company's conversion project is
unsuccessful or is not completed on a timely basis, it could have a material
adverse effect on the Company. The Company's date conversion project includes
reviewing the systems of certain of its suppliers with which it interacts. There
can be no assurance that the systems of other companies on which the Company's
systems interact will be timely converted and any such failure to convert by
such companies could have a material adverse effect on the Company's systems.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10K contains forward-looking statements which
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are based on the
beliefs of the Company's management as well as on assumptions made by and
information currently available to the Company at the time such statements were
made. When used in this Annual Report on Form 10K, the words "anticipate,"
"believe," "estimate," "expect," "intends" and similar expressions, as they
relate to the Company are intended to identify forward-looking statements.
Actual results could differ materially from those projected in the
forward-looking statements. Important factors that could affect the Company's
results include, but are not limited to, (i) the Company's high level of
indebtedness; (ii) the restrictions imposed by the terms of the Company's
indebtedness; (iii) the turnover rate amongst the Company's account executives;
(iv) the variation in the Company's quarterly results; (v) risks related to the
fact that a large portion of the Company's sales are to small, local businesses;
(vi) the Company's dependence on certain key personnel; (vii) risks related to
the acquisition and start-up of directories; (viii) risks related to substantial
competition in the Company's markets; (ix) risks related to changing technology
and new product developments; (x) the effect of fluctuations in paper costs and
(xi) the sensitivity of the Company's business to general economic conditions.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
N/A
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the Index on Page F-1 of the Financial Report included
herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
17
<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information (ages as of June 30,
1998) with respect to the persons who are members of the Board of Directors (the
"Board") of TCC or executive officers of Holdings TransWestern.
TCC controls the policies and operations of Holdings and TransWestern.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES
- ---- --- --------------------
<S> <C> <C>
Laurence H. Bloch........... 44 Chairman of the Board, Secretary and Director
Ricardo Puente.............. 45 President, Chief Executive Officer and Director
Joan M. Fiorito............. 44 Vice President, Chief Financial Officer and Assistant
Secretary
Marybeth Brennan............ 42 Vice President - Operations
Joseph L. Wazny............. 52 Vice President - Information Services
Michael Bynum............... 42 Executive Vice President - Sales
Richard Mellert............. 53 Executive Vice President - Sales
Ita Shea-Oglesby............ 40 Executive Vice President - Sales
C. Hunter Boll.............. 42 Director
Terrence M. Mullen.......... 31 Director
Christopher J. Perry........ 43 Director
Scott A. Schoen............. 39 Director
Marcus D. Wedner............ 35 Director
</TABLE>
Laurence H. Bloch is Chairman and Secretary of TransWestern and Holdings
and has been a Director of TCC since 1993. Prior to the Recapitalization, Mr.
Bloch served as Vice Chairman and Chief Financial Officer of the Company. Before
joining the Company, Mr. Bloch was Senior Vice President and Chief Financial
Officer of Lanxide Corporation, a materials technology company. Mr. Bloch was a
Vice President, then Managing Director of Smith Barney from 1985 to 1990, prior
to which he was Vice President, Corporate Finance with Thomson McKinnon
Securities, Inc. Mr. Bloch received a BA from the University of Rochester and an
MBA from Wharton Business School. Mr. Bloch also serves as a Director of The
Petersen Companies, Inc.
Ricardo Puente has been President of TransWestern and Holdings and a
Director of TCC since 1993 and became Chief Executive Officer as of the
Recapitalization. Previously, he held the positions of Vice President of Sales
and Controller of the TransWestern business which he joined in 1988. Before
joining US West, Mr. Puente held various financial positions with the Pillsbury
Company for nine years. After receiving his MS in Accounting from the University
of Miami, Mr. Puente was a senior auditor with Touche Ross & Co. Mr. Puente
earned a BS in Accounting from Florida State University.
Joan M. Fiorito is the Vice President, Chief Financial Officer and
Assistant Secretary of TransWestern and Holdings and prior to the
Recapitalization was Vice President and Controller. Ms. Fiorito joined the
TransWestern business in 1989 as Manager, Financial Planning & Analysis and
subsequently was promoted to Controller. Prior to joining the TransWestern
business, Ms. Fiorito was Controller of Coastal Office Products. Ms. Fiorito
received a BS in Management from Dominican College and an MBA in Finance from
Fordham University.
Marybeth Brennan has been the Company's Vice President of Operations since
its formation in 1993. Ms. Brennan joined the TransWestern business in 1987 as
Production Manager, prior to which Ms. Brennan was Director of Publications for
Maynard-Thomas Publishing. Ms. Brennan received a BA in English from Stonehill
College.
Joseph L. Wazny has been the Vice President, Management Information Systems
of the Company since its formation in 1993. Before joining the Company, Mr.
Wazny was Director of Systems Development and Director, Information Systems with
R.H. Donnelley Corp. Mr. Wazny graduated with a degree in Business
Administration and Computer Sciences from Roosevelt University.
Michael Bynum was promoted to Executive Vice President of the Company
effective May 1, 1998. His responsibilities include the management of the
Oklahoma/Kansas Region, North Texas Region, Tennessee Region, and
Ohio/Kentucky/Indiana/Michigan Region. Since 1993, Mr. Bynum was Regional Vice
President
18
<PAGE> 20
overseeing the Oklahoma/Kansas/Tennessee Region. Mr. Bynum joined the
TransWestern business in 1985 as a sales associate and holds a BA in Management
from Cameron University.
Richard Mellert was promoted to Executive Vice President of the Company
effective May 1, 1998. His responsibilities include the management of the
Upstate New York Region, Midstate New York Region, and Downstate New York
Region. Since 1993, Mr. Mellert was Regional Vice President overseeing the
Upstate New York Region. Mr. Mellert joined the TransWestern business in 1980.
Mr. Mellert was promoted to District Sales Manager in 1991. Mr. Mellert holds an
AA degree from Dutchess Community College.
Ita Shea-Oglesby was promoted to Executive Vice President of the Company
effective May 1, 1998. Her responsibilities include the management of the South
Texas, Louisiana Region and the Northern and Southern California Region. Since
1993, Ms. Shea-Oglesby was Regional Vice President overseeing the South Texas,
Louisiana Region and the Northern California Region. Ms. Shea-Oglesby joined the
TransWestern business in 1983 and previously held the positions of Area Sales
Manager, Sales Trainer and District Sales Manager. Ms. Shea-Oglesby earned a BA
from Louisiana State University.
C. Hunter Boll became a Director of TCC upon the consummation of the
Recapitalization. Mr. Boll is a Managing Director of Thomas H. Lee Company where
he has been employed since 1986. Mr. Boll is also a Trustee of THL Equity Trust
III, the General Partner of THL Equity Advisors Limited Partnership III, which
is the General Partner of Thomas H. Lee Equity Fund III, L.P. Mr. Boll also
serves as a Director of Big V Supermarkets, Inc., New York Restaurant Group,
Inc., Cott Corporation and Freedom Securities. Mr. Boll holds an MBA from
Stanford University and a BA from Middlebury College.
Terrence M. Mullen became a Director of TCC upon consummation of the
Recapitalization. Mr. Mullen is currently an Associate of the Thomas H. Lee
Company. Mr. Mullen worked at the Thomas H. Lee Company from 1992 to 1994 and
rejoined in 1996. From 1990 to 1992, Mr. Mullen worked in the Corporate Finance
Department of Morgan Stanley & Co., Incorporated. Mr. Mullen also serves as a
Director of Cinnabon Corporation and Rayovac Corporation. Mr. Mullen received a
BBA in Finance and Economics from the University of Notre Dame and an MBA from
the Harvard Graduate School of Business Administration.
Christopher J. Perry has been a Director of TCC since 1994. Mr. Perry is
currently Managing Director and President of Continental Illinois Venture
Corporation, a position he has held since 1994, and is also a Managing Partner
of CIVC Partners III. Mr. Perry has been at Bank of America or, prior to its
merger with Bank of America, Continental Bank, since 1985. Prior positions with
Bank of America or Continental Bank include Managing Director and head of the
Mezzanine Investments Group and Managing Director and head of the Chicago
Structured Finance Group. Prior to joining Continental Bank, Mr. Perry was in
the Corporate Finance Department of Northern Trust. In addition to being a
Director of TCC, Mr. Perry is a Director of Duo-tang, Inc., The Brickman Group,
Ltd and RAM Reinsurance Company, Ltd. Mr. Perry received a BS from the
University of Illinois and an MBA from Pepperdine University and is a certified
public accountant.
Scott A. Schoen became a Direct of TCC upon consummation of the
Recapitalization. Mr. Schoen is a Managing Director of the Thomas H. Lee company
where he has been employed since 1986. Mr. Schoen is also a Trustee of THL
Equity Trust III, the General Partner of THL Equity Advisors Limited Partnership
III, which is the General Partner of Thomas H. Lee Equity Fund III L.P. Mr.
Schoen also serves as Vice President of Thomas H. Lee Advisors I and Thomas H.
Lee Advisors II. Mr. Schoen is a Director of Affordable Residential Communities
LLC, Rayovac Corporation and Syratech Corporation. Mr. Schoen received a BA in
History from Yale University, a JD from Harvard Law School and an MBA from the
Harvard Graduate School of Business Administration. Mr. Schoen is a member of
the New York Bar.
Marcus D. Wedner has been a Director of TCC since its formation in 1993.
Mr. Wedner is currently Managing Director of Continental Illinois Venture
Corporation, a position he has held since 1992, and is also a Managing Partner
of CIVC Partners III. Mr. Wedner joined Continental Illinois Venture Corporation
in 1988. Previously, Mr. Wedner held marketing and sales management positions at
Pacific Telesis Group and as an associate with Goldman, Sachs & Co. In addition
to being a Director of TCC, Mr. Wedner is a Director of Teletouch
Communications, Advanced Quick Circuits, L.P., Grapevine Communications, Inc.
and Precision
19
<PAGE> 21
Tube Technology, Inc. Mr. Wedner holds a BA from the University of California at
Los Angeles and received an MBA from the Harvard Graduate School of Business
Administration.
At present, all Directors are elected and serve until a successor is duly
elected and qualified or until his or her earlier death, resignation or removal.
All members of the Board of Directors set forth herein were elected pursuant to
an investors agreement that was entered into in connection with the
Recapitalization. See "Certain Relationships and Related Transactions --
Investors Agreement." There are no family relationships between any of the
Directors of TCC or executive officers of the Company. Executive officers of the
Company are elected by and serve at the discretion of the Board of Directors of
TCC.
ITEM 11. EXECUTIVE COMPENSATION
The compensation of executive officers of TransWestern is determined by the
Board of TCC. The following Summary Compensation Table includes individual
compensation information for the former Chairman and Chief Executive Officer,
the current President and Chief Executive Officer and each of the three other
most highly compensated executive officers of the Company in fiscal 1997 and
1998 (collectively, the "Named Executive Officers") for services rendered in all
capacities to the Company during fiscal 1997 and 1998. There were no stock
options exercised during the Company's last fiscal year nor were there any
options outstanding at the end of the Company's last fiscal year.
20
<PAGE> 22
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------
FISCAL OTHER ANNUAL LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(a) PAYMENTS(b) COMPENSATION(c)
- --------------------------- ---- ------ ----- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
James D. Dunning, Jr. (d) ..................... 1998 $119,629 $119,629 $ -- $ -- $318,672
Former Chairman and Chief Executive Officer 1997 277,709 277,709 -- -- 13,310
Laurence H. Bloch (e) ......................... 1998 222,167 56,497 -- -- 90,946
Chairman of the Board and Secretary 1997 222,167 222,167 -- -- 4,798
Ricardo Puente ................................ 1998 199,519 191,369 -- -- 134,734
President, Chief Executive Officer (f) 1997 199,519 171,822 -- -- 11,380
Marybeth Brennan .............................. 1998 132,698 130,460 -- 50,797 28,922
Vice President - Operations 1997 132,698 120,030 -- 9,322 13,805
Joan M. Fiorito (g) ........................... 1998 119,461 118,394 -- 50,743 29,686
Vice President, Chief Financial Officer and 1997 119,460 105,649 -- 9,232 14,449
Assistant Secretary
</TABLE>
(a) None of the prerequisites and other benefits paid to each named
executive officer exceeded the lesser of $50,000 or 10% of the annual
salary and bonus received by each Named Executive Officer.
(b) Represents distributions made pursuant to the Company's Equity
Compensation Plan. See "Equity Compensation Arrangements."
(c) All Other Compensation for fiscal year 1998 includes: (1) payments for
long-term disability insurance premiums: Bloch ($990), Puente ($1,013),
Brennan ($674) and Fiorito ($606); (2) payments for life insurance
premiums: Bloch ($3,150) and Puente ($6,530); (3) payments of $2,150
for tax preparation for each of the Named Executive Officers other than
Mr. Dunning; (4) contributions of $3,887 to the 401(k) Profit Sharing
Plan on behalf of each of the Named Executive Officers (other than Mr.
Dunning, for whom the contribution was $2,501); and (5) management fees
paid in connection with the Recapitalization: Dunning ($38,642), Bloch
($38,769), Puente ($121,154), Brennan ($22,212) and Fiorito ($22,212).
In addition, the amount for Mr. Dunning includes severance pay of
$277,709.
(d) Mr. Dunning resigned as Chairman of the Board and Chief Executive
Officer upon consummation of the Recapitalization
(e) Mr. Bloch served as Vice Chairman until consummation of the
Recapitalization, at which time he became Chairman and Secretary.
(f) Mr. Puente served as President until consummation of the
Recapitalization, at which time he became President and Chief Executive
Officer.
(g) Ms. Fiorito served as Vice President-Controller until consummation of
the Recapitalization, at which time she became Vice President, Chief
Financial Officer and Assistant Secretary.
COMPENSATION OF DIRECTORS
The Company is a limited liability company and Holdings is a limited
partnership, both of which are controlled by TCC. The Directors of TCC are not
be paid for their services, although Directors are reimbursed for out-of-pocket
expenses incurred in connection with attending Board meetings.
EQUITY COMPENSATION ARRANGEMENTS
Holdings' Class B Units are designed to encourage performance by providing
the members of management the opportunity to participate in the equity growth of
TransWestern. There are 10,000 Class B Units authorized, 8,500 of which were
issued to the Management Investors and 1,500 of which were issued to the Equity
Compensation Plan discussed below. See "Certain Relationships and Related
Transactions."
21
<PAGE> 23
In fiscal 1994, the Company established the TransWestern Publishing
Company, L.P. Equity Compensation Plan (the "Equity Compensation Plan") to
provide approximately 60 of the Company's managers (other than Messrs. Dunning,
Bloch and Puente) the opportunity to participate in the equity growth of the
Company without having direct ownership of the Company's securities. In
connection with the Recapitalization, the Company reserved $5.5 million for
distributions to participants in the Equity Compensation Plan, one half of which
was distributed in October 1997, and one half of which will be distributed in
October 1998 to participants employed by the Company at the time the
distribution is made. Special distributions made pursuant to the Equity
Compensation Plan were recorded as an expense in the Company's financial
statements when declared by the Board of Directors. Employees participating in
the Equity Compensation Plan were eligible to receive a ratable per unit share
of cash distributions made pursuant to the Equity Compensation Plan, if and
when, declared. In fiscal 1997, distributions totaling $2.6 million was paid and
at April 30, 1998, there was $2.9 million of undistributed proceeds under the
Equity Compensation Plan.
Upon the consummation of the Recapitalization, the existing Equity
Compensation Plan was terminated. However, the Company has adopted a new Equity
Compensation Plan which functions similarly to the old plan. As of April
30,1998, no assets had been contributed to the new plan.
EMPLOYMENT AGREEMENTS
Messrs. Bloch and Puente have each entered into an Employment Agreement
(each, an "Employment Agreement") with the Company. The Employment Agreements
provide for the employment of Mr. Bloch as the Chairman of the Board of
Directors of TCC and Chairman of the Partnership and Mr. Puente as the President
and Chief Executive Officer of the Partnership and TCC until October 1, 2002
unless terminated earlier as provided in the respective Employment Agreement.
The Employment Agreements of Messrs. Bloch and Puente provide for (i) an annual
base salary of $222,167 and $235,500, respectively (subject to annual increases
based on the consumer price index) and (ii) annual bonuses based on the
achievement of certain EBITDA (as defined in each Employment Agreement) targets
of up to 100% of their base salary. Each executive's employment may be
terminated by the Company at any time with cause or without cause. If such
executive is terminated by the Company with cause or resigns other than for good
reason, the executive will be entitled to his base salary and fringe benefits
until the date of termination, but will not be entitled to any unpaid bonus.
Messrs. Bloch and Puente will be entitled to their base salary and fringe
benefits and any accrued bonus for a period of 12 months following their
termination in the event such executive is terminated without cause or resigns
with good reason. The Employment Agreements also provide each executive with
customary fringe benefits and vacation periods. "Cause" is defined in the
Employment Agreements to mean (i) the commission of a felony or a crime
involving moral turpitude or the commission of any other act or omission
involving dishonesty, disloyalty or fraud, (ii) conduct tending to bring the
Company or any of its subsidiaries into substantial public disgrace or
disrepute, (iii) the substantial and repeated failure to perform duties as
reasonably directed by TCC or the Company, (iv) gross negligence or willful
misconduct with respect to the Company or any subsidiary, or (v) any other
material breach of the Employment Agreement or Company policy established by the
Board, which breach, if curable, is not cured within 15 days after written
notice thereof to the executive. "Good Reason" is defined to mean the
occurrence, without such executive's consent, of (i) a reduction by the Company
of the executive's annual base salary by more than 20%, (ii) any reduction in
the executive's annual base salary (in effect immediately prior to such
reduction) if in the fiscal year prior to such reduction the EBITDA for such
prior fiscal year was equal to or greater than 80% of the target EBITDA for such
prior year, (iii) any willful action by the Company that is intentionally
inconsistent with the terms of the Employment Agreement or the executive's
Executive Agreement (as defined herein), or (iv) any material reduction in the
powers, duties or responsibilities which the executive was entitled to exercise
as of the date of the Employment Agreement. Messrs. Bloch and Puente have also
entered into Executive Agreements with the Company pursuant to which they
purchased Class B Units of the Partnership. See "Certain Relationships and
Related Transactions - Executive Agreements."
22
<PAGE> 24
401 (k) AND PROFIT SHARING PLAN
The Company has a 401 (k) and profit-sharing retirement plan (the "Profit
Sharing Plan") for the benefit of substantially all of its employees, which was
qualified for tax exempt status by the Internal Revenue Service. Employees can
make contributions to the plan up to the maximum amount allowed by federal tax
code regulations. The Company may match the employee contributions, up to 83% of
the first 6% of annual earnings per participant. The Company may also make
annual discretionary profit sharing contributions. The Company's contributions
to the Profit Sharing Plan for the years ended April 30, 1996, 1997, and 1998
were approximately $0.8 million, $0.8 million, and $1.1 million respectively. On
May 12, 1998, Holdings elected to change its fiscal year from April 30 to
December 31 as reported on Form 8-K. As a result, Holdings also amended the plan
year of the TransWestern Publishing 401 (k) and Profit Sharing Plan from April
30 to December 31.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of TransWestern's membership interests are owned by Holdings. The
following table sets forth certain information regarding the beneficial
ownership of the equity securities of Holdings by: (i) each of the Directors of
TCC and the executive officers of TransWestern; (ii) all Directors of TCC and
executive officers of TransWestern as a group and (iii) each owner of more than
5% of any class of equity securities of the Partnership ("5% Owners"). Unless
otherwise noted, the address for each executive officer of TransWestern and the
Directors of TCC is c/o TransWestern, 8344 Clairemont Mesa Boulevard, San Diego,
California 92111.
<TABLE>
<CAPTION>
CLASS A
COMMON PERCENT PREFERRED PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER UNITS (a) OF CLASS UNITS OF CLASS
- ------------------------------------ --------- -------- ----- --------
<S> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Laurence H. Bloch (b) ......................... 19,209 1.51% 9,974 1.51%
Ricardo Puente (c) ............................ 28,813 2.27 14,961 2.27
Joan M. Fiorito (d) ........................... 5,282 * 2,743 *
Marybeth Brennan (d) .......................... 5,282 * 2,743 *
Joseph L. Wazny (d) ........................... 5,282 * 2,743 *
C. Hunter Boll (e) ............................ 715,193 56.29 371,351 56.29
Terrence M. Mullen (e) ........................ 712,231 56.06 369,813 56.06
Christopher J. Perry (f) ...................... 288,134 22.68 149,608 22.68
Scott A. Schoen (e) ........................... 715,193 56.29 371,351 56.29
Marcus D. Wedner (f) .......................... 288,134 22.68 149,608 22.68
All Directors and executive officers as a group
(10 persons) .............................. 1,070,551 84.27 555,862 84.27
5% OWNERS:
Thomas H. Lee Equity Fund III, L.P. (g) ....... 712,034 56.05 369,710 56.05
Thomas H. Lee Foreign Fund III, L.P.(h) ....... 712,034 56.05 369,710 56.05
THL-CCI Limited Partnership (i) ............... 712,034 56.05 369,710 56.05
Continental Illinois Venture Corporation (j) .. 288,134 22.68 149,608 22.68
CIVC Partners III (k) ......................... 288,134 22.68 149,608 22.68
</TABLE>
- ----------
* Represents less than one percent.
23
<PAGE> 25
(a) Holders of Class A Units are entitled to share in any distribution on a pro
rata basis, but only if the holders of the Preferred Units a certain
preference amount set forth in Holdings Third Amended and restated
Agreement of Limited Partnership, as amended. The Partnership also issued
Class B Units to the Management Investors. The Class B Units will be
entitled to share in any such distributions only if the holders of the
Preferred Units and Class A Units have achieved an internal rate of return
on their total investment of 12%. The percentage of such distributions that
the Class B Units will be entitled to receive will range from 10% to 20%,
based on the internal rate of return achieved by the holders of the
Preferred and Class A Units. All Common Units listed in the table represent
Class A Units unless otherwise noted.
(b) Does not include 800 Class B Units which are subject to vesting in equal
installments over a five year period.
(c) Does not include 2,500 Class B Units which are subject to vesting in equal
installments over a five year period.
(d) Does not include 352 Class B Units which are subject to vesting in equal
installments over a five year period.
(e) Includes 712,034 Class A Units and 369,710 Preferred Units beneficially
owned by Thomas H. Lee Equity Fund III, L.P. Such persons disclaim
beneficial ownership of all such interests. Such person's address is c/o
Thomas H. Lee Company, 75 State Street, Suite 2600, Boston, Massachusetts
02109.
(f) Includes 244,914 Class A Units and 127,167 Preferred Units owned by
Continental Illinois Venture Corporation and 43,220 Class A Units and
22,441 Preferred Units owned by CIVC Partners III. Such persons disclaim
beneficial ownership of all such interests. Such person's address is c/o
Continental Illinois Venture Corporation, 231 South LaSalle Street,
Chicago, Illinois 60697.
(g) Includes 39,259 Class A Units and 20,385 Preferred Units owned by Thomas H.
Lee Foreign Fund III, L.P. and 38,305 Class A Units and 19,889 Preferred
Units owned by THL-CCI Limited Partnership. Such person disclaims
beneficial ownership of all such interests. Such person's address is c/o
Thomas H. Lee Company, 75 State Street, Suite 2600, Boston, Massachusetts
02109.
(h) Includes 634,470 Class A Units and 329,437 Preferred Units owned by Thomas
H. Lee Equity Fund III, L.P. and 38,305 Class A Units and 19,889 Preferred
Units owned by THL-CCI Limited Partnership. Such person disclaims
beneficial ownership of all such interests. Such person's address is c/o
Thomas H. Lee Company, 75 State Street, Suite 2600, Boston, Massachusetts
02109.
(i) Includes 634,470 Class A Units and 329,437 Preferred Units owned by Thomas
H. Lee Equity Fund III, L.P. and 39,259 Class A Units and 20,385 Preferred
Units owned by Thomas H. Lee Foreign Fund III, L.P. Such person disclaims
beneficial ownership of all such interests. Such person's address is c/o
Thomas H. Lee Company, 75 State Street, Suite 2600, Boston, Massachusetts
02109.
(j) Includes 43,220 Class A Units and 22,441 Preferred Units owned by CIVC
Partners III. Such person disclaims beneficial ownership of such interests.
Such person's address is c/o Continental Illinois Venture Corporation, 231
South LaSalle Street, Chicago, Illinois 60697.
(k) Includes 244,914 Class A Units and 127,167 Preferred Units owned by
Continental Illinois Venture Corporation. Such person disclaims beneficial
ownership of all such interests. Such person's address is c/o Continental
Illinois Venture Corporation, 231 South LaSalle Street, Chicago, IL 60697.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RECAPITALIZATION
The Partnership completed the Recapitalization in October 1997. In the
Recapitalization, new investors led by Thomas H. Lee Equity Fund III, L.P.
("THL") and its affiliates (together, the "THL Parties"), along with other
investors, the Partnership's existing limited partners (the "Existing Limited
Partners"), and the Company's 25 most senior managers (the "Management
Investors"), invested new and continuing capital of $130.0 million in the
Partnership and TCC (the "Equity Investment"). The proceeds from the Equity
Investment, together with borrowings of approximately $107.7 million under the
Senior Credit Facility and $75.0 million under a senior subordinated financing
facility (which was subsequently repaid with a portion of the net proceeds from
the Notes), were used (i) for $224.5 million of Recapitalization consideration,
including the redemption of a portion of the limited partnership interests from
the Existing Limited Partners, (ii) to repay $75.6 million under the
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<PAGE> 26
Partnership's then existing credit facilities, (iii) to pay $10.6 million of
fees and expenses and (iv) for $2.0 million for general corporate purposes,
including working capital.
The Recapitalization Agreement contained customary provisions for such
agreements, including representations and warranties with respect to the
condition and operations of the business, covenants with respect to the conduct
of the business prior to the Recapitalization closing date and various closing
conditions, including the continued accuracy of representations and warranties.
The representations and warranties made by Holdings and the Existing Limited
Partners do not survive the Recapitalization closing date; except that no party
is prevented from bringing a claim or action against any other person for any
fraud or intentional tort committed directly by such person.
Pursuant to the Recapitalization Agreement, each Existing Limited Partner
that reinvested in Holdings has agreed that for a period ending on the later of
the second anniversary of the Recapitalization closing date and the one year
anniversary of the termination of such reinvesting Manager's employment with the
Company not to own, control, participate or engage in any yellow pages directory
publishing directory business or any business competing for the same customers
as the businesses of the Company as such businesses exist or are in process
during such period in any markets (or markets contiguous thereto) in which the
Company engages or plans to engage during such period.
James D. Dunning, Jr., the Partnership's and TCC's former Chairman and
Chief Executive Officer, has agreed that for the three-year period commencing on
the Recapitalization closing date not to participate, directly or indirectly, in
any yellow pages directory publishing business in the United States or any
business competing for the same customers as the Company in the geographic areas
in which the Company is engaged in the local or national yellow pages directory
publishing business as of August 27, 1997; provided that Mr. Dunning may
participate in any industry specific yellow pages business or any trade or
industry publications.
In addition, each Existing Limited Partner that reinvested in Holdings has
agreed that for the two-year period commencing on the Recapitalization closing
date not to solicit the employment of or hire any employee of the Company (other
than Laurence Bloch), and further, under the Recapitalization Agreement, during
such two-year period, each Existing Limited Partner that reinvested in Holdings
is subject to a confidentiality agreement with respect to all information
concerning the business of the Company and TCC of which such person has
knowledge and which is not in the public domain.
MANAGEMENT AGREEMENT
Effective upon the Recapitalization, the Company entered into a Management
Agreement with Thomas H. Lee Company ("THL Co.") pursuant to which THL Co.
agreed to provide (i) general executive and management services, (ii)
identification, negotiation and analysis of financial and strategic
alternatives, and (iii) other services agreed upon by the Company and THL Co. On
the Recapitalization closing date, THL Co. and the other equity investors in the
Company each received their pro rata portion of a $5.0 million transaction fee.
In addition, THL and all other equity investors receive a pro rata portion of
the $500,000 annual management fee (the "Management Fee"), plus THL will be
reimbursed for all reasonable out-of-pocket expenses (payable monthly in
arrears). The Management Agreement has an initial term of one year, subject to
automatic one-year extensions, unless the Company or THL Co. provides written
notice of termination no later than 30 days prior to the end of the initial or
any successive period.
INVESTORS AGREEMENT
Pursuant to the Recapitalization, Holdings, TCC, the the THL Parties, CIBC
Argosy Merchant Fund 2, L.L.C. ("CIBC Merchant Fund"), CIVC Partners III ("CIVC
III" and, together with the THL Parties and CIBC Merchant Fund, the "New
Investors") and the reinvesting Existing Limited Partners (together with the New
Investors, the "New Partners") entered into an Investors Agreement (the
"Investors Agreement"). The Investors Agreement requires that each of the
parties thereto vote all of his or its voting securities and take all other
necessary or desirable actions to cause the size of the Board of Directors of
TCC to be established at nine members and to cause the election to the Board of
five representatives designated by THL (the "THL
25
<PAGE> 27
Designees"), each of the then current chairman and president of the Partnership
(the "Executive Directors") and two representatives designated by Continental
Illinois Venture Corporation ("CIVC") and CIVC III (together, the "CIVC Parties"
(the "CIVC Designees"), of which one CIVC Designee will at all times serve on
the Board's compensation committee, audit committee and executive committee.
Currently, however, only three of the THL Designees have been appointed to TCC's
Board of Directors. The respective rights of THL and the CIVC Parties to
designate representatives to the Board terminates at such time when such party
owns less than 30% of the Common Units held by such party as of the
Recapitalization closing date. If at any time THL and its permitted transferees
own less partnership interests in Holdings or less equity securities in TCC than
the amount of such partnership interests or such equity securities, as the case
may be, owned by the CIVC Parties and the Management Investors, taken as a
group, then the number of THL Designees will be reduced automatically from five
to three and the number of CIVC Designees will be increased automatically from
two to three. The Investors Agreement provides that certain significant actions
may not be taken without the express approval of the at least one of the CIVC
Designees and at least one of the Executive Directors.
In addition to the foregoing, the Investors Agreement (i) requires the
holders of interests in Holdings and common stock of TCC (other than THL and
CIVC) to obtain the prior written consent of THL prior to transferring any
interests in Holdings or TCC stock (other than interests or securities held by
the Management Investors pursuant to Executive Agreements), (ii) grants in
connection with the sale of interests in Holdings or TCC stock by the Management
Investors certain preemptive rights with respect to such sale first to Holdings,
then to the limited partners, (iii) grants the New Partners certain
participation rights in connection with certain transfers made by THL, (iv)
grants the New Partners certain preemptive rights in connection with certain
issuances, sales or other transfers for consideration of any securities by
Holdings or TCC, (v) requires the holders of shares of TCC's common stock to
consent to a sale of TCC to an independent third party if such sale is approved
by the Board and the holders of a majority of the shares of TCC's common stock,
and (vi) requires the holders of interests in Holdings to consent to the sale of
Holdings in the event TCC and the holders of a majority of Class A Units approve
a sale of Holdings. The foregoing agreements terminate on the earlier of October
1, 2001 and the date on which the Partnership consummates a public offering of
$40 million or more of its equity securities (a "Qualified Public Offering").
The agreements with respect to the participation rights and preemptive rights
described above continue with respect to each security until the earlier of (i)
October 1, 2007, (ii) a Qualified Public Offering, (iii) the transfer in a
public sale of such security, (iv) with respect to equity securities of
Holdings, upon the sale of the Holdings, and (v) with respect to equity
securities of TCC, upon the sale of TCC.
REGISTRATION AGREEMENT
Pursuant to the Recapitalization, Holdings, TCC, and the New Partners
entered into a registration agreement (the "Registration Agreement"). Under the
Registration Agreement, the holders of a majority of registrable securities
owned by the THL Parties and the CIVC Parties have the right at any time,
subject to certain conditions, to require Holdings to register any or all of
their interests in Holdings' under the Securities Act on Form S-1 (a "Long-Form
Registration") on three occasions at Holdings' expense and on Form S-2 or Form
S-3 (a "Short-Form Registration") on three occasions at Holdings' expense.
Holdings is not required, however, to effect any such Long-Form Registration or
Short-Form Registration within six months after the effective date of a prior
demand registration. In addition, all holders of registrable securities are
entitled to request the inclusion of such securities in any registration
statement at Holdings' expense whenever Holdings proposes to register any of its
securities under the Securities Act (other than pursuant to a demand
registration). In connection with such registrations, Holdings has agreed to
indemnify all holders of registrable securities against certain liabilities
including liabilities under the Securities Act. In addition, Holdings has the
one-time right to preempt a demand registration with a piggyback registration.
EXECUTIVE AGREEMENTS
Each Management Investor has entered into an Executive Agreement with
Holdings and TCC (each, an "Executive Agreement"), pursuant to which such
Management Investor purchased Class B Units which are subject to a five-year
vesting period, which vesting schedule accelerates upon a sale of Holdings. The
Class B Units were issued in connection with the Recapitalization to members of
management as incentive units at fair market value.
26
<PAGE> 28
Under each Management Investor's Executive Agreement, in the event that such
Management Investor's employment with the Company is terminated for any reason,
Holdings has the option to repurchase all of such Management Investor's vested
Class B Units in accordance with the provisions outlined in the Partnership
Agreement and all other of such Management Investor's interests in Holdings and
TCC at a price per unit derived as specified in the Partnership Agreement. In
addition, in the event of a termination of the Management Investor's employment
by Holdings without "cause" or by such Management Investor for "good reason" or
such Management Investor's death or disability, such Management Investor may
require Holdings or TCC to repurchase his or her vested Class B Units in
accordance with the provisions outlined in the Partnership Agreement and all
other interests of such Management Investor in Holdings and TCC at a price per
unit derived as specified in the Partnership Agreement.
The Partnership completed the Recapitalization in October 1997. In the
Recapitalization, new investors led by Thomas H. Lee Equity Fund III, L.P.
("THL") and its affiliates (together, the "THL Parties"), along with other
investors, the Partnership's existing limited partners (the "Existing Limited
Partners"), and the Company's 25 most senior managers (the "Management
Investors"), invested new and continuing capital of $130.0 million in the
Partnership and TCC (the "Equity Investment"). The proceeds from the Equity
Investment, together with borrowings of approximately $107.7 million under the
Senior Credit Facility and $75.0 million under a senior subordinated financing
facility (which was subsequently repaid with a portion of the net proceeds from
the Notes), were used (i) for $224.5 million of Recapitalization consideration,
including the redemption of a portion of the limited partnership interests from
the Existing Limited Partners, (ii) to repay $75.6 million under the
Partnership's then existing credit facilities, (iii) to pay $10.6 million of
fees and expenses and (iv) for $2.0 million for general corporate purposes,
including working capital.
BENEFITS OF THE RECAPITALIZATION TO CERTAIN EXISTING SECURITY OWNERS AND
MANAGEMENT INVESTORS
Pursuant to the Recapitalization, Holdings redeemed a portion of the
limited partnership interests held by Existing Limited Partners and the New
Investors purchased a portion of TCC's common stock from the Existing Limited
Partners. In the Recapitalization, the Company's Named Executive Officers
received approximately $50 million and exchanged their remaining limited
partnership interests, valued at approximately $7 million in the
Recapitalization, for newly issued Preferred and Class A Units. As a group, the
Named Executive Officers continuing with the Company received an aggregate of
approximately $24 million in the Recapitalization and exchanged their remaining
limited partnership interests, valued at approximately $6 million in the
Recapitalization, for newly issued Preferred and Class A Units. All Management
Investors as a group received an aggregate of approximately $38 million in the
Recapitalization and exchanged their remaining limited partnership interests,
valued at approximately $1.1 million in the Recapitalization, for newly issued
Preferred and Class A Units. CIVC and its affiliates, including Christopher J.
Perry and Marcus D. Wedner, received an aggregate of approximately $70 million
in the Recapitalization and exchanged their remaining limited partnership
interests, valued at approximately $25 million in the Recapitalization, for
newly issued Preferred and Class A Units. In addition, CIVC III, an affiliate of
CIVC, contributed $4.4 million at the closing of the Recapitalization in
exchange for newly issued Preferred and Class A Units and paid approximately
$78,000 to certain of the Existing Limited Partners to purchase TCC common
stock.
PAYMENTS ON TCC NOTE
Since the 1993 Acquisition, TCC loaned to the Company all amounts
distributed to TCC in connection with the periodic and special distributions
made by the Company to its partners (the "TCC Loans"). As of September 1, 1997,
the aggregate amount of principal and interest due under the TCC Loans was
$833,419. Shortly before the consummation of the Recapitalization, the Company
repaid in full the outstanding balance of all TCC Loans.
TCC used the proceeds received from the TCC Loans to (i) pay $500,000 to
First Union Capital Markets Corp. for certain advisory services rendered in
advance of the Recapitalization, (ii) pay $100,000 to Kirkland & Ellis, counsel
to the Company, for certain services rendered in advance of the
Recapitalization, (iii) pay $143,419 for miscellaneous expenses and (iv) pay a
dividend immediately prior to the Recapitalization to TCC's stockholders of
$90,000 in the aggregate.
27
<PAGE> 29
REDEMPTION OF PREFERRED UNITS
Holdings used $31.3 million of the proceeds from its sale of $57.4 million
aggregate principal amount at maturity of Series B 11 7/8% Senior Discount Notes
due 2008 to redeem a portion of the Equity Investment. Holdings' limited
partners received the following amounts as a result of the redemption of
approximately one half of the Preferred Units: THL Parties $18.6 million; Named
Executive Officers $1.7 million; Named Executive Officers continuing with the
Company $1.5 million; Management Investors $2.9 million; CIVC $6.1 million; CIVC
III $1.1 million; First Union Capital Partners Inc. $1.2 million; CIBC Merchant
Fund $1.2 million.
28
<PAGE> 30
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Index to Consolidated Financial Statements
The consolidated financial statements required by this item are submitted in a
separate section beginning on page F-1 of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors ...................... F-2
Consolidated Balance Sheets at April 30, 1998 and 1997 ................. F-3
Consolidated Statements of Operations for Each of the Three Years in
the Period Ended April 30, 1998 ........................................ F-4
Consolidated Statements of Changes in Members' Deficit of Each
of the Three Years in the Period Ended April 30, 1998 .................. F-5
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended April 30, 1998 ............................................ F-6
Notes to Consolidated Financial Statements ............................. F-7
</TABLE>
(a) (2) Index to Consolidated Financial Statement Schedules
All schedules have been omitted since they are either not required, not
applicable or because the information required is included in the consolidated
financial statements or the notes thereto.
(a) (3) Index to Exhibits
The following exhibits are filed as part of, or incorporated by reference into,
this report:
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
2.1 Securities Purchase and Redemption Agreement, dated August 27, 1997,
as amended, by and among Holdings, TCC, TWP Recapitalization Corp.,
THL and certain limited partners of Holdings. + (1)
2.2 Contribution and Assumption Agreement, dated November 6,1997, by and
among Holdings and TransWestern. (2)
2.3 Assignment and Assumption Agreement, dated November 6,1997, by and
among Holdings and TransWestern. (2)
2.4 Bill of Sale, dated November 6, 1997, by and among Holdings and
TransWestern. (2)
2.5 Asset Purchase Agreement with Mast Advertising and Publishing. (3)
2.6 Asset Purchase Agreement with Target Directories of Michigan Inc.
3.7 Certificate of Limited Partnership of Holdings. (1)
3.8 Third Amended and Restated Agreement of Limited Partnership as
amended, of Holdings. (Incorporated herein by reference to exhibit
number 3.4 to Holdings' Registration Statement on Form S-4
(Registration No. 333-42117))
3.9 Certification of Incorporation of TCC. (Incorporated herein by
reference to exhibit number 3.5 to Holdings' Registration Statement
on Form S-4 (Registration No. 333-42117))
3.10 By-Laws of TCC. (Incorporated herein by reference to exhibit number
3.6 to Holdings' Registration Statement on Form S-4 (Registration No.
333-42117))
4.11 Indenture, dated as of November 12, 1997, by and between the Discount
note Issuers and Wilmington Trust Company, as Trustee. (2)
4.12 Form of Series B 11 7/8% Senior Discount Notes due 2008. (1)
4.13 Securities Purchase Agreement, dated as of November 6, 1997, by and
among the Discount Note issuers, TransWestern, TCC, and the Initial
Purchasers of the Discount Notes. (2)
4.4 Registration Rights Agreement, dated as of November 12, 1997 by and
among the Discount Note Issuers and the Initial Purchasers of the
Discount Notes. (2)
</TABLE>
29
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.1 Management Agreement, dated as of October 1, 1997, by and between
Holdings (formerly know as TransWestern Publishing Company, L.P. )
and Thomas H. Lee Company. (1)
10.2 Investors Agreement, dated as of October 1, 1997, by and between
Holdings (formerly known as TransWestern Publishing Company, L.P.),
TCC and the limited partners of Holdings. + (1)
10.3 Registration Agreement, dated as of October 1, 1997, by and between
Holdings (formerly known as TransWestern Publishing Company, L. P.),
TCC and the limited partners of Holdings. (1)
10.4 Form of Executive Agreement between Holdings (formerly known as
TransWestern Publishing Company, L. P.), TCC and each Management
Investor. (2)
10.5 Employment Agreement, dated as of October 1, 1997, by and between
Laurence H Bloch and TransWestern. (2)
10.6 Employment Agreement, dated as of October 1, 1997, by and between
Ricardo Puente and TransWestern. (2)
10.7 Assumption Agreement and Amended and Restated Credit Agreement, dated
as of November 6, 1997, among the Company, the lenders listed therein
and Canadian Imperial bank of Commerce, as Administrative agent, and
First Union National Bank, as documentation agent. (2)
10.8 Securities Purchase Agreement, dated as of November 6,1 997, by and
among the Company, Holdings, TCC and the Initial Purchasers of the
Notes. (2)
10.9 Indenture, dated as of November 12, 1997, by and between the Company
and Wilmington Trust Company, as Trustee. (2)
10.10 Registration Rights Agreement, dated as of November 12, 1997, by and
among the Company and the Initial Purchasers of the Notes. (2)
10.11 Form of Equity Compensation Plan. (1)
12.1 Statement regarding computation of ratios of earnings to fixed
charges.
21.1 Subsidiaries of Holdings.
27.1 Consolidated Financial Data Schedule.
</TABLE>
- -----------
(1) Incorporated herein by reference to the same numbered exhibit to the
Holdings Registration Statement on Form S-4 (Registration No.
333-42085).
(2) Filed as an Exhibit to the Registration Statement of Form S-4
(Registration No. 333-42085) filed by TransWestern Publishing Company
LLC and TWP Capital Corp. II with the Securities and Exchange
Commission on December 12, 1997.
(3) Incorporated herein by reference to exhibit number 2.1 to the
Company's Quarterly Report of Form 10-Q filed by TransWestern
Publishing Company LLC on March 17, 1998 (File No. 333-42085).
+ The Company agrees to furnish supplementally to the Commission a
copy of any omitted schedule or exhibit to such agreement upon
request by the Commission.
(b) On May 12, 1998, Holdings filed a report on Form 8-K reporting
pursuant to Item 8 thereof that on May 1, 1998, the Board of
Directors of TCC authorized the change of the Holding's fiscal year
from a fiscal year ending April 30 to a fiscal year ending December
31.
30
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRANSWESTERN HOLDINGS, L.P.
(Registrant)
BY: TransWestern Communications Company, Inc.
(General Partner)
BY: /s/Joan M. Fiorito
------------------------------------------
Name: Joan M. Fiorito
Title: Vice President, Chief Financial
Officer
(Principal Financial and Accounting
Officer)
Date: July 24, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOAN M. FIORITO Vice President, Assistant Secretary July 24, 1998
- --------------------------------- Chief Executive Officer
Joan M. Fiorito (Principal Executive Officer)
/s/ LAURENCE H. BLOCH Chairman, Secretary July 24, 1998
- -------------------------------- (Principal Executive Officer)
Laurence H. Bloch
/s/ RICARDO PUENTE Chief Executive Officer July 24, 1998
- -------------------------------- President
Ricardo Puente (Principal Executive Officer)
/s/ CHRIS J. PERRY Director July 24, 1998
- --------------------------------
Christopher J. Perry
/s/ MARCUS D. WEDNER Director July 24, 1998
- --------------------------------
Marcus D. Wedner
/s/ C. HUNTER BOLL Director July 24, 1998
- --------------------------------
C. Hunter Boll
/s/ SCOTT A. SCHOEN Director July 24, 1998
- --------------------------------
Scott A. Schoen
/s/ TERRENCE M. MULLEN Director July 24, 1998
- --------------------------------
Terrence M. Mullen
</TABLE>
31
<PAGE> 33
TRANSWESTERN HOLDINGS L.P.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets at April 30, 1998 and 1997 F-3
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended April 30, 1998 F-4
Consolidated Statements of Changes in Partners' Deficit
of Each of the Three Years in the Period Ended April 30, 1998 F-5
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended April 30, 1998 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 34
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 April 30, 1998 and 1997 and the related consolidated
statements of operations, changes in member deficit and cash flows for each of
the three years in the period ended April 30, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TransWestern
Holdings L.P. at April 30, 1998 and 1997 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
April 30, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
June 10, 1998
F-2
<PAGE> 35
TRANSWESTERN HOLDINGS L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,512 $ 1,254
Trade receivable, (less allowance for doubtful
accounts of $9,532 in 1998 and $7,626 in 1997) 26,127 23,279
Deferred directory costs 6,226 6,412
Other current assets 950 518
--------- ---------
Total current assets 34,815 31,463
Property, equipment and leasehold improvements, net 2,694 2,840
Acquired intangibles, net 14,326 12,093
Other assets, primarily debt issuance costs, net 10,162 1,835
--------- ---------
Total assets $ 61,997 $ 48,231
========= =========
LIABILITIES AND PARTNERSHIP DEFICIT
Current liabilities:
Accounts payable $ 4,373 $ 3,901
Salaries and benefits payable 3,075 4,112
Accrued acquisition costs 504 986
Accrued Equity Compensation Plan contribution 2,900 --
Accrued interest 4,841 69
Other accrued liabilities 1,129 448
Amount due general partner -- 805
Customer deposits 10,164 10,197
Current portion, long-term debt 2,391 10,921
--------- ---------
Total current liabilities 29,377 31,439
Long-term debt:
Senior Credit Facility 77,344 67,514
Series B 9 5/8% Senior Subordinated Notes 100,000 --
Series B 11 7/8% Senior Discount Notes, net 34,303 --
Partnership deficit:
General Partner (3,043) (517)
Limited Partner (175,984) (50,205)
--------- ---------
Total partnership deficit (179,027) (50,722)
--------- ---------
Total Liabilities and partnership deficit $ 61,997 $ 48,231
========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE> 36
TRANSWESTERN HOLDINGS L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net revenues $ 100,143 $ 91,414 $ 77,731
Cost of revenues 20,233 19,500 18,202
--------- --------- ---------
Gross profit 79,910 71,914 59,529
Operating expenses:
Sales and marketing 40,290 36,640 29,919
General and administrative 16,594 16,821 14,276
Contribution to Equity Compensation Plan 5,543 -- 796
--------- --------- ---------
Total operating expenses 62,427 53,461 44,991
--------- --------- ---------
Income from operations 17,483 18,453 14,538
Other income, net 82 48 375
Interest expense (15,246) (7,816) (6,630)
--------- --------- ---------
(15,164) (7,768) (6,255)
--------- --------- ---------
Income before extraordinary item 2,319 10,685 8,283
Extraordinary loss $ (4,791) -- $ (1,368)
--------- --------- ---------
Net income (loss) $ (2,472) $ 10,685 $ 6,915
========= ========= =========
Net income (loss) allocated to General Partner units $ (42) $ 107 $ 69
========= ========= =========
Net income (loss) allocated to Limited Partner units $ (2,430) $ 10,578 $ 6,846
========= ========= =========
Net income (loss) per General Partner unit $ (4.3) $ 10.9 $ 7.0
========= ========= =========
Net income (loss) per Limited Partner unit $ (1.0) $ 2.65 $ 1.72
========= ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 37
TRANSWESTERN HOLDINGS L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNER'S DEFICIT
YEARS ENDED APRIL 30, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
--------- --------- ---------
<S> <C> <C> <C>
Balance at April 30, 1995 ... $ (227) $ (22,494) $ (22,721)
Net income ................ 69 6,846 6,915
Distributions to partners . (406) (39,394) (39,800)
--------- --------- ---------
Balance at April 30, 1996 ... (564) (55,042) (55,606)
Net income ................ 107 10,578 10,685
Distributions to partners . (59) (5,742) (5,801)
--------- --------- ---------
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)
========= ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 38
TRANSWESTERN HOLDINGS L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (2,472) $ 10,685 $ 6,915
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item-non cash 4,791 -- 1,368
Depreciation and amortization 7,086 6,399 4,691
Amortization of deferred debt issuance costs 1,000 703 804
Amortization of Senior Note discount 1,803 -- --
Provision for doubtful accounts 9,094 8,920 7,069
Changes in operating assets & liabilities, net
of effects of purchased directories:
Trade receivables (4,754) (4,142) (684)
Write-off of doubtful accounts (7,672) (7,287) (8,231)
Recoveries of doubtful accounts 485 679 660
Deferred directory costs 186 (302) 97
Other current assets (433) 247 (158)
Accounts payable 471 710 (96)
Accrued liabilities 1,358 (1,136) 1,038
Accrued interest 4,772 69 (1,054)
Customer deposits (34) (243) 672
--------- --------- ---------
Net cash provided by operating activities 15,681 15,302 13,091
INVESTING ACTIVITIES
Purchase of property, equipment and leasehold
improvements (996) (1,034) (484)
Payment for purchase of directories (8,204) (2,558) (5,229)
--------- --------- ---------
Net cash used for investing activities (9,200) (3,592) (5,713)
FINANCING ACTIVITIES
Borrowings under long-term debt agreements:
Senior Term Loan 85,000 -- 80,000
Revolving Credit Facility 37,039 24,000 23,846
Increase in other assets, primarily debt issuance costs, net (14,190) -- (2,631)
Series B 9 5/8% Senior Subordinated Notes 100,000 -- --
Senior Subordinated Facility 75,000 -- --
Series B 11 7/8% Senior Discount Notes 32,500 -- --
Repayments of long-term debt:
Revolving Credit Facility (47,108) (21,975) (16,546)
Senior Subordinated Facility (75,000) -- (4,461)
Senior Term Loan (73,631) (8,000) (47,400)
Equity transaction costs (3,858) -- --
Contributions from partners 85,756 -- --
Distributions to partners (207,731) (5,801) (39,800)
--------- --------- ---------
Net cash used for financing activities (6,223) (11,776) (6,992)
--------- --------- ---------
Net increase (decrease) in cash 258 (66) 386
Cash at beginning of year 1,254 1,320 934
--------- --------- ---------
Cash at end of period $ 1,512 $ 1,254 $ 1,320
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 7,724 $ 7,131 $ 7,223
========= ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 39
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
(ALL DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization, Business Activities and Basis of Presentation
TransWestern Publishing Company, L.P. (the "Partnership") was formed in
1993 to acquire the business of TransWestern Publishing from US West Marketing
Resources Group, Inc. TransWestern Publishing was a division of US West prior to
May 1993.
In October 1997, the Partnership completed certain recapitalization
transactions involving $312,709 (the "Recapitalization"). In the
Recapitalization, New Investors (as defined) including Thomas H. Lee Equity Fund
III, L.P. and its affiliates and other investors, the existing limited partners
of the Partnership and the Partnership's senior managers invested new and
continuing capital of $130,009 in the Partnership and TCC (the General Partner
of Holdings). 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 of which $174,300 was used 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 Holdings 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, the Partnership 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 are all of the TransWestern membership interests
and all of TWP Capital Corp. ("Capital") 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 TransWestern 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 consist of a single class of
authorized common units (the "Member Units"). Holdings is the sole member of
TransWestern and accordingly, holds all 1,000 of the authorized 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 of the Partnership
(1993) through September 1997. Upon the consummation of the Recapitalization (as
defined), TCC held approximately 1.7% of Holdings outstanding partnership units.
TransWestern publishes and distributes local yellow page directories in
thirteen states.
F-7
<PAGE> 40
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Holdings published and recognized revenue for 118, 128, and 139
directories in fiscal 1996, 1997, and 1998 respectively.
Fiscal Year End
Effective May 1, 1998 as reported on Form 8-K dated May 12, 1998, Holdings
elected to change its fiscal year from April 30 to December 31. Accordingly,
Holdings will begin reporting interim results on a calendar year basis beginning
June, 30, 1998.
Principles of Consolidation
The consolidated financial statements include the accounts of Holdings and
its wholly-owned subsidiaries, TransWestern and Capital. These companies have a
limited number of intercompany transactions. All intercompany transactions have
been eliminated in consolidation.
Concentration of Credit Risk
Management believes it is not subject to a concentration of credit risk as
revenues are not significantly concentrated in any single directory, industry,
geographic region, or customer. However credit losses have represented a cost of
doing business due to the nature of the customer base (predominantly small
businesses) and the use of extended credit terms.
A provision for doubtful accounts based on historical experience is
recorded at the time revenue is recognized for individual directories. The
estimated provision for doubtful accounts as a percentage of net revenues
equaled 9.2%, 9.1%, and 9.1% in fiscal 1996, 1997 and 1998, respectively. Actual
write-offs are taken against the allowance when management determines that an
account is uncollectible. In general, management makes this determination when
an account has declared bankruptcy, has gone out of business or fails to renew
for the following year's directory.
F-8
<PAGE> 41
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments
In accordance with requirements of Statement of Financial Accounting
Standards No. 107, Disclosures about Fair Value of Financial Instruments, the
following methods and assumptions were used by Holdings in estimating the fair
value disclosures:
Cash and Short-Term Receivables
The carrying amounts approximate fair values because of short maturities of
these instruments and the reserves for doubtful accounts which in the opinion of
management is adequate to state short-term receiveables at their fair value.
Long-Term Debt
Based on the borrowing rates currently available to the Company for loans
with similar terms and average maturities, management of the Company believes
the fair value of long-term debt approximates its carrying value at April 30,
1998.
Long-Lived Assets
Property, equipment and leasehold improvements are carried at cost, less
depreciation and amortization. Depreciation is computed using the straight-line
method over the assets' estimated useful lives which range from three to seven
years. Leasehold improvements are amortized over the shorter of their estimated
useful lives or the lease period.
Acquired intangibles are carried at cost which represents the excess of the
purchase price over the fair value of net tangible assets acquired in connection
with acquisitions of regional providers of yellow page directories. Acquired
intangibles consist primarily of consumer lists with initial carrying values,
which, in the opinion of management, are equal to fair value on the date of
acquisition. Acquired intangibles are being amortized over five years.
In accordance with Statement of Financial Accounting Standard No. 121,
Holdings reviews the carrying value of property, equipment and leasehold
improvements for evidence of impairment through comparison of the undiscounted
cash flows generated form those assets to the related carrying amounts of theses
assets. The carrying value of acquired intangibles is evaluated for impairment
through comparison of the undercounted cash flows derived form publication of
acquired directories to the carrying value of the related intangibles.
Debt Issuance Costs
Debt issuance costs are being amortized over the term of the related debt
using the weighted-average declining balance method (which approximates the
interest method) or the straight line method based on the repayment terms of the
related debt. Amortization of debt issuance costs is included in interest
expense in the accompanying statements of operations.
Income Taxes
No provision has been made in the accompanying statements of income for
federal and state income taxes, except for the California minimum franchise tax,
as any taxable income or loss of the Partnership was included in the income tax
returns of the Partnership's partners.
F-9
<PAGE> 42
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Standards
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income (SFAS 130), which Holdings is required
to adopt for fiscal 1999. This statement will require Holdings to report in the
financial statements, in addition to net income comprehensive income and its
components including foreign currency items and unrealized gains and losses on
certain investments in debt and equity securities. Upon adoption of SFAS 130,
Holdings is also required to, reclassify financial statements for earlier
periods provided for comparative purposes. Management of Management believes
that the carrying value of Holdings long-term debt materially approximates its
fair value as all debt outstanding at April 30, 1998 is variable rate debt which
is tied to standard indices which adjust over relatively short periods (one to
six months). These rates are similar to current rates offered to Holdings for
debt of similar maturity. Management of Holdings believes the adoption of SFAS
130 will not have a significant impact on Holdings' consolidated financial
statement.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
(SFAS 131), which Holdings is required to adopt in fiscal 1999. This statement
establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Under SFAS 131, operating segments are to
be determined consistent with the way that management organizes and evaluates
financial information internally for making operating decisions and assessing
performance. Management of Holdings believes the adoption of SFAS 130 will not
have a significant impact on Holding's consolidated financial statement.
2. DIRECTORY ACQUISITIONS
In fiscal 1998 (February 2, 1998), Holdings purchased certain tangible and
intangible assets totaling $8,433 of Mast Advertising & Publishing, Inc. for
cash of $7,734 and other obligations totaling $699. The obligations represent a
Seller Note Payable and potential adjustment of the Note based on actual cash
collection performance of certain directories acquired and certain acquisition
related expenses The estimated payments due under the agreement have been
accrued April 30, 1998 on the accompanying balance sheet.
In fiscal 1997, Holdings purchased certain tangible and intangible assets
totaling $5,119 (including related liabilities totaling $535) of Alliance Media,
Inc. for cash of $2,558 and recorded other obligations totaling $2,026. The
obligations represent the realized contribution margin contingent upon the
operating results (as defined in the purchase agreement) of certain directories
acquired and certain acquisition related expenses. Management believes the
contingent payments due under the 1997 acquisition agreement were reasonably
assured and have been accrued.
F-10
<PAGE> 43
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
2. DIRECTORY ACQUISITIONS (CONTINUED)
Assuming that the acquisition of Mast Advertising & Publishing, Inc. and
Alliance Media Inc. had occurred on May 1, 1996 and 1997, pro forma results of
operations would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues ........................................... $104,816 $ 95,882
Net Income ......................................... 27 10,517
</TABLE>
These results give effect to pro forma adjustments for the amortization of
acquired intangibles.
3. FINANCIAL STATEMENT DETAILS
Property, Equipment and Leasehold Improvements
<TABLE>
<CAPTION>
APRIL 30,
---------------------
1998 1997
------- -------
<S> <C> <C>
Computer and office equipment ...................... $ 5,148 $ 4,335
Furniture and fixtures ............................. 1,508 1,370
Leasehold improvements ............................. 278 233
------- -------
6,934 5,938
Less accumulated depreciation and amortization ..... (4,240) (3,098)
------- -------
$ 2,694 $ 2,840
======= =======
</TABLE>
Acquired Intangibles
<TABLE>
<CAPTION>
APRIL 30,
---------------------
1998 1997
------- -------
<S> <C> <C>
Customer Base ...................................... $35,791 $27,693
Less accumulated amortization ...................... (21,465) (15,600)
------- -------
$14,326 $12,093
======= =======
</TABLE>
Other Assets
<TABLE>
<CAPTION>
APRIL 30,
---------------------
1998 1997
------- -------
<S> <C> <C>
Debt issuance costs ................................ $10,304 $ 2,827
Other .............................................. 729 264
------- -------
11,033 3,091
Less accumulated amortization ...................... (871) (1,256)
------- -------
$10,162 $ 1,835
======= =======
</TABLE>
F-11
<PAGE> 44
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
4. FINANCING ARRANGEMENTS
Principal balances under Holdings long-term financing arrangements
consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Series B 9 5/8% Senior Subordinated Notes $100,000 $ --
Series B 11 7/8% Senior Discount Notes .. 34,303 --
Senior Credit Facility:
Senior term loan .................... 79,469 68,100
Revolving loan ...................... -- 9,400
Other notes payable ..................... 266 935
-------- --------
214,038 78,435
Current portion of long-term debt ....... 2,391 10,921
-------- --------
Long-term debt net of current portion ... $211,647 $ 67,514
======== ========
</TABLE>
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 $3.9 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 B 9 5/8% SENIOR SUBORDINATED NOTES
Maturity, Interest and Principal. The Senior Subordinated Notes (the
"Notes") will mature on November 15, 2007 and bear interest at a rate of 9 5/8%
per annum from the date of original issuance until maturity. Interest is payable
semiannually in arrears on each May 15 and November 15, commencing May 15, 1998,
to holders of record of the Notes at the close of business on the immediately
preceding May 1 and November 1, respectively. The Company will pay interest on
any overdue principal (including post-petition interest in a proceeding under
any Bankruptcy Law), and interest, to the extent lawful, at the rate specified
in the Senior Subordinated Note Agreement. The Notes are general unsecured
obligations of the Company, subordinated in right of payment to all existing and
future senior indebtedness of the Company, pari passu in right of payment to all
senior subordinated indebtedness of the Company and senior in right of payment
to all subordinated indebtedness.
Optional Redemption. The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after November 15, 2002 at the
following redemption prices (expressed as a percentage of principal amount),
together, in each case, with accrued interest to the redemption date, if
redeemed during the twelve-month period beginning on November 15 of each year
listed below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002.................................................. 104.813%
2003.................................................. 103.208%
2004.................................................. 101.604%
2005 and thereafter................................... 100.000%
</TABLE>
F-12
<PAGE> 45
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
4. FINANCING ARRANGEMENTS (CONTINUED)
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 Note.
Covenants. The Senior Subordinated Indenture Agreement contains covenants
restricting the ability of the Company and its subsidiaries to, among other
things, (i) incur additional indebtedness; (ii) prepay, redeem or repurchase
debt; (iii) make loans and investments; (iv) incur liens and engage in sale
lease-back transactions; (v) transact with affiliates; (vi) engage in mergers,
acquisitions and asset sales; (vii) make optional payments on or modify the
terms of subordinated debt; (viii) restrict preferred and capital stock of
subsidiaries and (ix) declare dividends or redeem or repurchase capital stock.
As of April 30, 1998, the Company was in compliance with covenants specified in
the Senior Subordinated Indenture Agreement.
The Exchange Offer On April 3, 1998, the Company consummated its exchange
offer to exchange $100 million of aggregate principal amount outstanding of the
Notes (the "Old Notes") for $100 million of the aggregate principal of Series B
9 5/8% Senior Subordinated Notes due 2007 (the "Exchange Notes"). The form and
terms of the Exchange Notes are the same as the form and term of the Old Notes
except that (i) the Exchange Notes bear a Series B designation and (ii) the
Exchange Notes have been registered under the Securities Act of 1933 as amended
and therefore, do not bear legends restricting the transfer thereof. The
Exchange Notes evidence the same debt as the Old Notes (which they replace).
The Notes will be unconditionally guaranteed, on a senior subordinated
basis, as to payment of principal, premium, if any, and interest, jointly and
severally, by each Restricted Subsidiary which guarantees payment of the Senior
Subordinated Notes pursuant to the covenant described under "Limitation on
Creation of Subsidiaries' (the "Guarantors")
SENIOR SUBORDINATED FACILITY
In connection with the Recapitalization, the Company also entered into the
Senior Subordinated Facility with Canadian Imperial Bank of Commerce ("CIBC")
and First Union National Bank ("First Union"). The Company initially borrowed
$75.0 million under this agreement in October 1997 and capitalized associated
loan fees of $3.4 million. Upon the issuance of the $100 million of Series B 9
5/8% Notes in November 1997, the Company exercised its permitted redemption
rights under this agreement and Prepaid the $75.0 million principal balance
outstanding under the agreement and the agreement was terminated. In connection
with the redemption, the capitalized loan fees of $3.4 million were written off
as an extraordinary expense in the fiscal 1998 statement of operations.
F-13
<PAGE> 46
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
4. FINANCING ARRANGEMENTS (CONTINUED)
SENIOR CREDIT FACILITY
In connection with the Recapitalization, the Company entered into the
Senior Credit Facility with CIBC and First Union and other lenders, pursuant to
which the Company may borrow up to $125.0 million consisting of a revolving
credit facility of up to $40.0 million (the "Revolving Credit Facility") and a
Senior Term Loan in an aggregate principal amount of $85.0 million (the "Senior
Term Loan"). Principal payments on the Senior Term Loan are due quarterly
through maturity, October 1, 2004. The revolving credit agreement expires on
October 1, 2003. Borrowings under this agreement rank senior to all other
indebtedness of the Company and are secured by all the assets of the Company.
Repayment. Principal outstanding under the Senior Credit Facility is
required to be paid on a quarterly basis commencing, January 1, 1998 are as
follows in fiscal year ended April 30:
<TABLE>
<S> <C>
1999........................................ $ 2,125
2000........................................ 2,125
2001........................................ 2,125
2002........................................ 2,125
2003........................................ 14,875
Thereafter.................................. 56,094
--------
$ 79,469
========
</TABLE>
Revolving Credit Facility. Commitments under the Revolving Credit Facility
will be reduced on a quarterly basis commencing on January 1, 2000. The
commitment on the Revolving Credit Facility is reduced by $6.0 million in each
of the fiscal years, 2000, 2001, 2002 and expires in fiscal 2003. As of April
30, 1998, no borrowings were outstanding under the Revolving Credit Facility.
Security; Guaranty. The Revolving Credit Facility and the Senior Term Loan
are secured by a first priority lien on substantially all of the properties and
assets of the Company and its future subsidiaries, including a pledge of all of
the shares of the Company's future subsidiaries, if any. Future subsidiaries of
the Company (if any) will be required to guarantee the Revolving Credit Facility
and the Senior Term Loan.
Interest. At the Company's option, the interest rates per annum applicable
to the Revolving Credit Facility and the Term Loans will be a fluctuating rate
of interest measured by reference to (i) LIBOR plus the applicable borrowing
margin, or (ii) a rate per annum equal to the higher of the published prime rate
of the Agent Bank or the Federal Funds Rate (as defined in the Senior Credit
Facility) as quoted by the Agent Bank plus 1/2 of 1% (the "ABR") plus the
applicable borrowing margin. The applicable borrowing margin for the Revolving
Credit Facility ranges from 1.375% to 2.500% for LIBOR based borrowings and
0.375% to 1.500% for ABR based borrowings. The applicable borrowing margin for
the Term Loan ranges from 1.875% to 2.750% for LIBOR based borrowings and 0.875%
to 1.750% for ABR based borrowings. At April 30, 1998 the Company had $79.5
million outstanding on the Senior Term Loan under a one month LIBOR at 8.40625%.
F-14
<PAGE> 47
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
4. FINANCING ARRANGEMENTS (CONTINUED)
Prepayments; Reductions of Commitments. The Senior Term Loan is required to
be prepaid and commitments under the Revolving Credit Facility are required to
be permanently reduced with: (i) 100% of the net cash proceeds of asset sales or
other dispositions of property if such proceeds are not used to purchase or
acquire other assets within 180 days of the original asset sale, subject to
limited exceptions, (ii) 50% of excess cash flow (as defined) for a fiscal year
if the Company's total leverage ratio (as defined) determined as of the last day
of such fiscal year equals or exceeds 5.0 to 1, (iii) 100% of excess insurance
proceeds (as defined) and (iv) 100% of the net proceeds (as defined) of
issuances of equity securities or debt obligations of the Company, subject to
limited exceptions, and subject to reduction to 50% of such proceeds if the
Company's total leverage ratio (as defined) is less than 5.0 to 1. Such
mandatory prepayments and reductions will first be applied to the permanent
reduction of the Senior Term Loan and second to the permanent reduction of the
Revolving Credit Facility. Within the Senior Term Loan, prepayments with
proceeds described in clause (I) or (iii) above will be applied pro rata to the
remaining installments of the Senior Term Loan and prepayments with proceeds
described in clause (ii) or (iv) above will be applied to each remaining
installment of the Senior Term Loan in inverse order of maturity. The Company
may make voluntary prepayments in minimum principal amounts of $50,000 or a
whole multiple thereof.
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, deem re or
repurchase debt, (iii) incur liens and engage in sale lease-back transactions,
(iv) make loans and investments, (v) incur additional indebtedness, (vi) amend
or otherwise alter debt and other material agreements, (vii) make capital
expenditures, (viii) engage in mergers, acquisitions and asset sales, (ix)
transact with affiliates, (x) alter its line of business, (xi) enter into
guarantees of indebtedness, and (xii) make optional payments on or modify the
terms of subordinated debt. The Company must also make certain customary
indemnifications of the Lenders and their agents is required to comply with
financial covenants with respect to: (a) a minimum interest coverage ratio, (b)
a minimum EBITDA, (c) a maximum leverage ratio, and (d) a minimum fixed charge
coverage ratio (all defined in the Senior Credit Facility Agreement). The Senior
Credit Facility also contains certain customary affirmative covenants. As of
April 30, 1998, the Company was in compliance with all covenants specified in
the Senior Credit Facility.
Events of Default. Events of default under the Senior Credit Facility
include (i) the Company's failure to pay principal or interest when due, (ii)
the Company's material breach of any covenant, representation or warranty
contained in the loan documents, (iii) customary cross-default provisions, (iv)
events of bankruptcy, insolvency or dissolution of the Company, (v) the levy of
certain judgments against the Company, (vi) certain adverse events under ERISA
plans of the Company, (vii) the actual or asserted invalidity of security
documents or guarantees of the Company or its subsidiaries, and (viii) a change
of control of the Company.
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 (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.
F-15
<PAGE> 48
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
4. FINANCING ARRANGEMENTS (CONTINUED)
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.
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, 1998, 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. 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:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................ 105.938%
2003........................................ 103.958%
2004........................................ 101.979%
2005 and thereafter......................... 100.000%
</TABLE>
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).
F-16
<PAGE> 49
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
4. FINANCING ARRANGEMENTS (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
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.
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 April 30, 1998, 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-17
<PAGE> 50
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
As of April 30, 1998 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 659,656 issued and outstanding
Preferred units, 1,270,456 authorized, issued and outstanding Class A Common
units and 10,000 authorized, 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
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").
F-18
<PAGE> 51
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
5. PARTNERSHIP DEFICIT (CONTINUED)
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. Holdings 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
April 30, 1996, 1997 and 1998 were approximately, $761, $761, and $1.1 million
respectively.
As mentioned in Note 1, Holdings elected to change its fiscal year from
April 30 to December 31. As a result, Holdings also amended the plan year of the
TransWestern Publishing 401 (k) and Profit Sharing Plan from April 30 to
December 31.
Equity Compensation Plan
During fiscal 1994, Holdings established the TransWestern Publishing
Company, L.P. Equity Compensation Plan (the "Plan"). The Plan provides select
key full-time employees with deferred compensation benefits for income tax
purposes. Special distributions to the Plan are recorded as expense in the
accompanying statements of income when declared by the Board of Directors,
generally following a significant refinancing transaction.
Distributions to the Plan related to refinancing transactions completed in
fiscal 1996 and fiscal 1998 totaled $796 and $5,543, respectively. Employees
receiving units in the Plan are eligible to receive a ratable per unit share of
cash distributions from the Plan, if and when declared by the Plan
Administrators.
Generally, the Plan Administrators intend to distribute to employee unit
holders all assets contributed to the Plan within three years of the date of
contribution. In fiscal 1997 and 1998, the Plan Administrators paid
distributions totaling $411 and $2.6 million. As of April 30, 1998,
undistributed equity trust proceeds total $2.9 million.
As a result of the Recapitalization, the existing Equity Compensation Plan
was terminated. The Company adopted a new Equity Compensation Plan which will
function similar to the old plan. As of April 30,1998, no assets had been
contributed to the new plan.
F-19
<PAGE> 52
TRANSWESTERN HOLDINGS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
7. LEASE COMMITMENTS
Holdings leases office facilities in several cities throughout the United
States under operating leases with remaining terms ranging from one to six
years. Total rent expense in fiscal 1996, 1997, and 1998, was $1,750, $1,866 and
$1,745 respectively. Future minimum lease payments, under these leases are as
follows for years ending April 30:
<TABLE>
<S> <C>
1999................................... $ 1,547
2000................................... 1,397
2001................................... 1,140
2002................................... 796
2003................................... 567
Thereafter............................. 243
--------
$ 5,690
========
</TABLE>
8. RELATED PARTY TRANSACTIONS
TCC advanced $694 and $4 in fiscal 1996 and 1997, respectively, to Holdings
for working capital purposes. Holdings accrued interest on these advances at the
established senior term loan rate (see Note 4).
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 Holdings and THL Co. On the Recapitalization
closing date, THL Co. and the other equity investors in Holdings each received
their pro rata portion of a $5.0 million transaction fee. In addition, THL and
all other equity investors will receive a pro rata portion of the $500,000
annual management fee (the "Management Fee"), plus THL will be reimbursed for
all reasonable out-of-pocket expenses (payable monthly in arrears). The
Management Agreement has an initial term of one year, subject to automatic
one-year extensions, unless Holdings or THL Co. provides written notice of
termination no later than 30 days prior to the end of the initial or any
successive period.
9. SUBSEQUENT EVENT
On June 4, 1998 the Company executed a Letter of Intent to purchase all of
the outstanding stock of Target Directories of Michigan, Inc. ("Target") for
cash of approximately $5.2 million. Target publishes two directories in
southeast Michigan.
F-20
<PAGE> 1
EXHIBIT 2.6
================================================================================
STOCK PURCHASE AGREEMENT
AMONG
TRANSWESTERN PUBLISHING COMPANY LLC,
A DELAWARE LIMITED LIABILITY COMPANY,
DALE R. ENGBERSON
AND
RHONDA L. ENGBERSON
DATED
AS OF
JULY 16, 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE 1 - CERTAIN DEFINITIONS............................................................. 1
ARTICLE 2 - PURCHASE AND SALE................................................................ 4
2.1 Stock Purchase................................................................ 4
2.2 Purchase Price................................................................ 4
2.3 Closing Transactions.......................................................... 5
(a) Closing................................................................ 5
(b) Closing Deliveries..................................................... 5
ARTICLE 3 - REPRESENTATIONS AND WARRANTIES
CONCERNING THE COMPANY............................................................... 6
3.1 Representations and Warranties of Seller...................................... 6
(a) Organization, Qualification and Corporate Power........................ 6
(b) Authorization of Transaction; Execution and Delivery................... 6
(c) Capital Stock and Related Matters...................................... 7
(d) Subsidiaries; Investments.............................................. 7
(e) Noncontravention....................................................... 7
(f) Governmental Consent................................................... 7
(g) Recent Events.......................................................... 8
(h) Intellectual Property.................................................. 9
(i) Contracts and Commitments.............................................. 9
(j) Financial Statements.................................................. 10
(k) Accuracy of Information Furnished..................................... 10
(l) Customer Contract Receivables; Advance Payments....................... 10
(m) Legal Compliance with Laws............................................ 10
(n) Litigation; Proceedings............................................... 11
(o) Title and Sufficiency of Assets....................................... 11
(p) Directory Listings.................................................... 11
(q) Brokers' Fees......................................................... 11
(r) Tax Matters........................................................... 11
(s) Title and Condition of Real Properties................................ 13
(t) Insurance............................................................. 13
(u) Employees............................................................. 14
(v) Employee Benefit Plans................................................ 14
(w) Environmental and Safety Matters...................................... 16
(x) Affiliated Transactions............................................... 17
(y) Customers and Suppliers............................................... 17
</TABLE>
- i -
<PAGE> 3
<TABLE>
<S> <C>
(z) Undisclosed Liabilities............................................... 17
(aa) Disclosure............................................................ 17
3.2 Representations and Warranties of Sellers.................................... 17
(a) Authority and Power................................................... 17
(b) No Breach............................................................. 18
(c) Title to Company Stock................................................ 18
(d) Brokerage............................................................. 18
(e) Litigation............................................................ 18
(f) Compliance with Laws.................................................. 18
(g) Company Transactions.................................................. 19
3.3 Representations and Warranties of Purchaser.................................. 19
(a) Organization.......................................................... 19
(b) Authorization of Transaction.......................................... 19
(c) Noncontravention...................................................... 19
(d) Governmental Consent.................................................. 19
(e) Brokers' Fees......................................................... 19
(f) Investment Purposes................................................... 19
ARTICLE 4 - ADDITIONAL AGREEMENTS........................................................... 20
4.1 Post-Closing Assistance...................................................... 20
4.2 Confidentiality.............................................................. 20
(a) Information Concerning the Parties.................................... 20
(b) Notice of Compulsory Disclosure....................................... 20
(c) Non-Competition....................................................... 20
4.3 Indemnification.............................................................. 21
4.4 Arbitration.................................................................. 23
4.5 Tax Matters.................................................................. 25
4.6 Miscellaneous................................................................ 25
(a) Representations and Warranties........................................ 25
(b) No Third Party Beneficiaries.......................................... 25
(c) Entire Agreement...................................................... 26
(d) Succession and Assignment............................................. 26
(e) Counterparts.......................................................... 26
(f) Headings.............................................................. 26
(g) Notices............................................................... 26
(h) Governing Law......................................................... 27
(i) Amendments and Waivers................................................ 27
</TABLE>
- ii -
<PAGE> 4
<TABLE>
<S> <C>
(j) Severability.......................................................... 27
(k) Expenses.............................................................. 27
(l) Taxes; Recording Charges.............................................. 27
(m) Construction.......................................................... 27
(n) Incorporation of Exhibits and Schedules............................... 28
(o) Number and Gender..................................................... 28
</TABLE>
- iii -
<PAGE> 5
<TABLE>
<CAPTION>
SCHEDULES Section Reference
-----------------
<S> <C>
Net Asset Value
Asset Value Methodology Schedule 2.2(b)
Contracts Schedule 3.1(i)
Qualifications Schedule 3.1(a)
Capitalization Schedule 3.1(c)(i)
Recent Events Schedule 3.1(g)
Intellectual Property Schedule 3.1(h)
Contracts Schedule 3.1(i)
Financial Statements Schedule 3.1(j)
Litigation Schedule 3.1(n)
Taxes Schedule 3.1(r)(i)
Leased Property Schedule 3.1(s)(ii)
Insurance Schedule 3.1(t)
Employees Schedule 3.1(u)
Employee Benefits Schedule 3.1(v)(ii)
Environmental Schedule 3.1(w)
Affiliated Transactions Schedule 3.1(x)
</TABLE>
- iv -
<PAGE> 6
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made and
entered into as of July 16, 1998, by and among TransWestern Publishing Company
LLC, a Delaware limited liability company ("Purchaser") and Dale R. Engberson
and Rhonda L. Engberson, the sole shareholders of the Company (each, a "Seller"
and together, "Sellers"). Purchaser and Sellers sometimes are referred to
individually as a "Party" and collectively as the "Parties."
Each of the Company and Purchaser is in the business of printing,
publishing and distributing telephone directory "yellow pages."
The authorized capital stock of the Company consists of 50,000
shares of common stock, par value $1.00 per share (the "Company Stock"). Sellers
own beneficially and of record 100% of the outstanding Company Stock. On the
terms and subject to the conditions set forth in this Agreement, Purchaser
desires to acquire from each Seller and each Seller desires to sell to
Purchaser, all of the outstanding shares of Company Stock owned by such Seller.
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the Parties hereby agree as follows:
ARTICLE 1 - CERTAIN DEFINITIONS
"Advance Payment" means a customer payment made with respect to
any Customer Contract associated with any edition of any Directory prior to
publication of such edition.
"Code" means the Internal Revenue Code of 1986, as amended, and
all rules and regulations promulgated thereunder.
"Company" means Target Directories of Michigan, Inc., a Michigan
corporation.
"Company Transaction" means any (i) liquidation, dissolution or
recapitalization, (ii) merger or consolidation or share exchange, (iii)
acquisition or purchase of securities or assets or (iv) similar transaction or
business combination involving Sellers, the Company or the Directories, or any
proposal or offer (whether oral or written) in respect thereof.
"Customer Contract" means any written contract or agreement
(other than trade contracts) between the Company and any of its customers (or
under which the Company has rights) which has been entered into and signed by
the parties thereto in connection with the publication of the Directories and
corresponding provision of Directory Services.
"Directories" means, collectively, the Greater Lenawee Directory
and the Greater Hillsdale/Branch Directory.
<PAGE> 7
"Directory Services" means the printing and publishing of
advertisements in any Directory.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and all rules and regulations promulgated thereunder.
"Escrow Agent" means Key Bank, N.A., a national banking
association.
"Escrow Agreement" means the escrow agreement dated as of the
date hereof by and among the Escrow Agent, Purchaser and Seller.
"Future Editions" means, collectively, any edition of any of the
Directories which is published after the Closing Date.
"Greater Hillsdale/Branch Directory" means the telephone
directory as owned by Seller on the date hereof which covers Hillsdale County,
Michigan and Branch County, Michigan.
"Greater Lenawee Directory" means the telephone directory owned
by Seller as of the date hereof which covers Lenawee County, Michigan.
"Intellectual Property" means all (i) patents, patent
applications, patent disclosures, and improvements thereto, (ii) trademarks,
service marks, trade dress, logos, trade names, and corpo rate names and
registrations and applications for registration thereof, (iii) copyrights and
registra tions and applications for registration thereof, (iv) mask works and
registrations and applications for registration thereof, (v) computer software,
data and documentation, (vi) trade secrets and confi dential business
information (including ideas, formulas, compositions, inventions (whether patent
able or unpatentable and whether or not reduced to practice), know-how,
manufacturing and produc tion processes and techniques, research and development
information, software products in development, drawings, specifications,
designs, plans, proposals, technical data, copyrightable works, financial
(excluding employee benefit plans), marketing, and business data, pricing and
cost information, business and marketing plans, and customer and supplier lists
and information), and (vii) copies and tangible embodiments thereof (in whatever
form or medium).
"Liability" or "Liabilities" means any liability (whether known
or unknown, whether asserted or not asserted, whether absolute or contingent,
whether liquidated or unliquidated, and whether due or to become due), including
any liability for Taxes.
"Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge, of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof, any sale of receivables with recourse against the Company or any of its
Affiliates or any filing or agreement to file a financing statement as debtor
under the Uniform Commercial Code or any similar statute other than to reflect
ownership by a third party of property leased to the Company under a lease which
is not in the nature of a conditional sale or title retention agreement, or any
subordination arrangement in favor of another Person (other than any
subordination arising in the ordinary course of business).
- 2 -
<PAGE> 8
"Loss" means any loss, Liability, damage or expense, whether or
not arising out of third party claims (including, without limitation, interest,
penalties, reasonable attorneys' fees and expenses and all amounts paid in
investigation, defense or settlement of any of the foregoing).
"Material Adverse Effect" means any change, event or occurrence
which has a material adverse effect upon the assets, business, operations or
condition (financial or otherwise) of the Company or any Directory or the
Directories considered as a whole.
"Net Asset Value" means the excess of the Company's Cash, Cash
Receivables and all fixed assets (excluding intangible assets) over the
Company's liabilities (excluding all costs and expenses incurred in connection
with the consummation of the transactions contemplated herein); provided that in
determining New Asset Value hereunder, the Parties shall take into account those
categories of items identified on, and follow the methodology and accounting
principles set forth in, the attached "Net Asset Value Schedule." In computing
Net Asset Value, all accounting entries will be taken into account regardless of
their amount, all known errors and omissions with respect to those categories of
items identified on the New Asset Value Schedule will be corrected and all known
proper adjustments will be made.
"Ordinary Course of Business" means the ordinary course of
business of the Company consistent with past custom and practice of the Company
(including with respect to quantity and frequency) during the twelve-month
period prior to the date hereof.
"Person" means an individual, a partnership, a corporation, an
association, a limited liability company, a joint stock company, a trust, a
joint venture, an unincorporated organization, a governmental entity or any
department, agency or political subdivision thereof or any other entity.
"Prior Editions" means, collectively, all editions of any
Directory which have a publication date prior to the Closing Date.
"Tax" or "Taxes" means any federal, state, local, or foreign
income, (including the Michigan Single Business Tax), gross receipts, license,
payroll, employment, excise, communications, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code Sec. 59A),
customs duties, capital stock, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property, sales,
use, transaction, transfer, registration, value added, alternative or add-on
minimum, estimated, or other tax of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, information report or filing with
respect to Taxes, including any schedules attached thereto and including any
amendment thereof.
- 3 -
<PAGE> 9
ARTICLE 2 - PURCHASE AND SALE
2.1 Stock Purchase. On the terms set forth in this Agreement, at
the closing of the transactions contemplated herein on the date hereof
(the "Closing"), Purchaser agrees to purchase from Seller, and Seller
agrees to sell, transfer, convey and deliver to Purchaser, free and
clear of any Liens, all of the outstanding shares of Company Stock owned
by Seller.
2.2 Purchase Price.
(a) The total purchase price payable by Purchaser to Seller for
the Company Stock owned by Seller (the "Purchase Price") shall be
$5,327,211.03 (the "Estimated Purchase Price"), as may be adjusted
pursuant to clause (e) of this Section 2.2.
(b) In connection with the determination of the Estimated
Purchase Price, as of the date hereof, Purchaser has caused its
accountants to prepare and deliver to Sellers a statement setting forth
its calculation of the Company's Net Asset Value as of June 30, 1998
(the "June Net Asset Value"), and Sellers have agreed to the June Net
Asset Value and the items set forth in such statement.
(c) As soon as practicable but not later than 45 days following
the Closing, Purchaser shall cause its accountants to prepare and
deliver to Sellers a balance sheet for the Company as of the closing of
business on the date hereof, together with a statement (the "Closing
Statement"), setting forth Purchaser's determination of the Net Asset
Value (and the components thereof) as of the Closing Date (the "Closing
Net Asset Value"). During such forty-five (45) day period, Sellers may
challenge the Closing Statement and Purchaser's calculation of the
Closing Net Asset Value. Any such challenge by Seller must be made by
delivery to Purchaser of a detailed statement setting forth such
objections thereto (the "Sellers' Statement"). If the Sellers' Statement
is not delivered to the Purchaser within such forty-five (45) day
period, the Closing Statement and the Closing Net Value set forth
therein shall immediately become final, binding and non-appealable by
the Parties.
(d) The Parties shall negotiate in good faith to resolve any
objections set forth in Sellers' Statement, but if the Parties do not
reach a final resolution within fifteen (15) days after Purchaser has
received the Sellers' Statement, Purchaser and Sellers shall select an
accounting firm mutually acceptable to both of them to resolve any
remaining objections. If such Parties are unable to agree on the choice
of an accounting firm, they shall select one of the five largest
national accounting firms (or any of their respective successors) by lot
(after excluding their respective regular outside accounting firms). The
selection of the accounting firm shall be conclusive, final, binding and
non-appealable by the Parties. The accounting firm so selected (the
"Accounting Firm") shall prepare a written report to the Parties which
shall address its resolution of the disputed items and shall make any
required adjustments to the Closing Statement and Purchaser's
calculation of the Closing Net Asset Value to reflect the resolution of
all disputed items. Purchaser, on the one hand, and Sellers, on the
other hand, shall each pay one-half of the fees and expenses of the
Accounting Firm.
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<PAGE> 10
(e) Within five (5) business days after the date on which the
Closing Net Asset Value Sheet is finally determined pursuant to this
Section 2.2, the Estimated Purchase Price shall be adjusted as follows:
(i) if the Closing Net Asset Value exceeds the June Net
Asset Value, Purchaser shall deliver to Sellers an amount equal
to such excess, by wire transfer of immediately available funds
to a bank account designated by Sellers; and
(ii) if the Closing Net Asset Value is less than the
June Net Asset Value, Sellers shall deliver to Purchaser an
amount equal to such deficiency, by wire transfer of immediately
available funds to a bank account designated by Purchaser.
2.3 Closing Transactions.
(a) Closing. The Closing shall take on the date hereof in
accordance with the terms set forth herein.
(b) Closing Deliveries. In connection with the Closing, the
Parties shall take the following actions (as of, or promptly following
the deliver of funds described in (i) below)):
(i) Purchaser shall deliver to Sellers $4,527,211.03, by
wire transfer of immediately available funds to an account
jointly designated by Sellers;
(ii) Purchaser shall deliver to the Escrow Agent the
amount of $800,000 (the "Escrow Amount") to be held and
disbursed in accordance with the Escrow Agreement;
(iii) Sellers shall deliver to Purchaser stock
certificates representing all of the outstanding shares of the
Company Stock, free and clear of all Liens, together with such
warranty bills of sale, assignments, stock powers and other
documents or instruments as shall be reasonably necessary to
convey to Purchaser full right, title and interest in and to
such shares;
(iv) the Company shall deliver to Purchaser evidence
that all Liens in any of the Company's businesses, assets,
properties and operations have been released;
(v) each Seller shall certify to Purchaser that all
governmental or third party filings, licenses, consents,
authorizations, waivers and approvals that are required to be
made or obtained for the transfer to Purchaser of the Company
Stock have been duly made and obtained without conditions or
requirements that are materially adverse to Purchaser;
(vi) Purchaser shall deliver to Sellers a certificate
signed by an officer of Purchaser to the effect that all
governmental or third party filings, licenses, consents,
authorizations, waivers and approvals that are required to be
made or obtained by
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<PAGE> 11
Purchaser for the transfer to Purchaser of the Company Stock
have been duly made and obtained without conditions or
requirements that are materially adverse to Sellers;
(vii) Dykema Gossett PLLC, counsel to Sellers and the
Company, shall deliver to Purchaser an opinion in form and
substance reasonably satisfactory to Purchaser;
(viii) the Company shall deliver to Purchaser a good
standing certificate of the Company issued by the Secretary of
State of the State of Michigan, dated as of a date within ten
(10) days prior to the Closing Date;
(ix) the Company shall deliver to Purchaser a copy of
its Articles of Incorporation, as effect as of the date hereof,
certified by the Secretary of State of Michigan and copy of its
bylaws as an effect as of the date hereof, as certified by an
officer of the Company; and
(x) each Seller and each of the other principals of the
Company designated by Purchaser shall execute and deliver to
Purchaser a non-compete agreement in form and substance
satisfactory to Purchaser.
ARTICLE 3 - REPRESENTATIONS AND WARRANTIES
CONCERNING THE COMPANY
3.1 Representations and Warranties of Seller. As a material
inducement to Purchaser to enter into this Agreement and to consummate the
transactions contemplated hereby, each Seller hereby represents and warrants to
Purchaser that:
(a) Organization, Qualification and Corporate Power. The Company
is a corporation duly organized, validly existing, and in good standing
under the laws of the State of Michigan. The Company is qualified to
conduct business in each of the jurisdictions indicated on the attached
"Qualifications Schedule" which jurisdictions represent all of the
jurisdictions in which the conduct of its business or its ownership of
property require it to be so qualified.
(b) Authorization of Transaction; Execution and Delivery. The
Company has full requisite corporate power and authority and all
material licenses, permits and authorization necessary to own and
operate its business as now conducted and as proposed to be conducted,
to execute and deliver this Agreement and the other agreements
contemplated hereby to which it is a party and to perform its
obligations hereunder and thereunder. Without limiting the generality of
the foregoing, the Company has obtained all consents and approvals that
are necessary to the consummation of the transactions contemplated
hereby.
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<PAGE> 12
(c) Capital Stock and Related Matters.
(i) The authorized capital stock of the Company is 50,000 shares
of common stock, of which, immediately prior to the transactions
contemplated herein, 200 shares are issued and outstanding ("Outstanding
Shares").
(ii) The Company does not have outstanding any stock or
securities convertible or exchangeable for any shares of its capital
stock or containing any profit participation features, or any rights or
options to subscribe for or to purchase its capital stock or any stock
or securities convertible into or exchangeable for its capital stock or
any stock appreciation rights or phantom stock plans. The Company is not
subject to any obligation (contingent or otherwise) to repurchase or
otherwise acquire or retire any shares of its capital stock or any
warrants, options or other rights to acquire its capital stock. All of
the outstanding shares of the Company's capital stock are validly
issued, fully paid and nonassessable.
(iii) There are no statutory or contractual stockholders
preemptive rights or rights of first refusal with respect to the sale of
the Company Stock hereunder. The Company has not violated any applicable
federal or state securities laws in connection with the offer, sale or
issuance of any of its capital stock, and the sale of the Company Stock
hereunder do not require registration under the Securities Act or any
applicable state securities laws. There are no agreements with respect
to the voting or transfer of the Company's capital stock or with respect
to any other aspect of the Company's affairs.
(iv) The Company is not a party to or bound by any agreement with
respect to a Company Transaction other than this Agreement.
(d) Subsidiaries; Investments. The Company does not own or hold
the right to acquire any stock, partnership interest or joint venture
interest or other equity ownership interest in any other Person and the
Company does not have any Subsidiaries.
(e) Noncontravention. Neither the execution and the delivery of
this Agreement and the other agreements contemplated hereby, nor the
consummation of the transactions contemplated hereby or thereby will
violate, conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, termi nate, modify, or cancel, or require any authorization,
consent, approval, execution or other action by or notice to any third
party under, the Company's articles of incorporation or bylaws, or any
contract, lease, sublease, license, sublicense, franchise, permit,
indenture, agreement, instrument of indebtedness, Lien, or other
arrangement by which the Company is bound or affected or to which the
Company Stock or any assets of the Company is subject, or any law,
statute, rule, regulation, order, judgment, decree, stipulation,
injunction, charge or other restriction, to which the Company is subject
or to which the Company Stock or any assets of the Company is subject.
(f) Governmental Consent. The Company is not required to give any
notice to, make any material declaration to or registration or filing
with, or to obtain any permit,
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<PAGE> 13
license, consent, accreditation, exemption, approval or authorization
from, any governmental or regulatory authority in connection with the
execution, delivery or performance of this Agreement or the consummation
of any of the transactions contemplated hereby.
(g) Recent Events. Except as described in the attached "Recent
Events Schedule", since December 31, 1997, the Company has not
experienced any change that has had a Material Adverse Effect. Without
limiting the generality of the foregoing, since such date:
(i) the Company has not sold, leased, transferred,
assigned encumbered, mortgaged or pledged any of its properties
or assets;
(ii) the Company has not entered into any agreement,
contract, lease or license or other transaction with respect to
the Directories (or any series of related agreements, contracts,
leases or licenses) other than in the Ordinary Course of
Business;
(iii) no party (including, without limitation, the Company
and Seller) has, accelerated, terminated, modified or canceled
any contract, lease, sublease, license or sublicense (or series
of related contracts, leases, subleases, licenses and
sublicenses) involving more than $5,000 to which the Company is a
party or by which the Company is bound and no party intends to
take such action;
(iv) the Company has not failed to make or delayed or
postponed the payment of accounts payable relating to or
affecting the Directories or the operation of the Directories or
other Liabilities associated with the operation of the
Directories outside the Ordinary Course of Business;
(v) there has not been any other material occurrence,
event, incident, action, failure to act or other transaction
outside the Ordinary Course of Business;
(vi) the Company has not increased or decreased billing
rates under its Customer Contracts and has not agreed to payment
terms under any Customer Contract other than in the Ordinary
Course of Business;
(vii) the Company has not suffered any extraordinary loss,
damage, destruction or casualty loss or waived any rights to any
asset, whether or not covered by insurance and whether or not in
the Ordinary Course of Business;
(viii) the Company has not received any indication that
any customer or supplier will cease, reduce or adversely affect
the rate of business done with it;
(ix) the Company has not made any loans or advances to,
guarantees for the benefit of, or any investments in, any Persons;
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<PAGE> 14
(x) except as agreed with Purchaser in connection with
this Agreement, the Company has not granted any increase in the base
compensation of, or made any other change in the employment terms for,
any of its directors, officers and employees (other than in the ordinary
course of business) or adopted, amended, modified or terminated any
bonus, profit-sharing, incentive, severance, or other plan, contract or
commitment for the benefit of any of its directors, officers and
employees (other than in the ordinary course of business); or
(xi) the Company has not committed to any of the
foregoing.
(h) Intellectual Property. The attached "Intellectual Property
Schedule" contains a complete and accurate list of all Intellectual
Property owned or used by the Company in connection with its ownership
and publication of the Directories and the operation of its business and
such Intellectual Property comprises all proprietary or other
intellectual property rights necessary for operation and publication of
the Directories as currently operated and published. The Intellectual
Property Schedule identifies each license, agreement, or other
permission which the Company has granted to any third party with respect
to any of its Intellectual Property (together with any exceptions). With
respect to each item of Intellectual Property that the Company owns in
connection with the operation of the Directories: (i) the Company
possesses all right, title, and interest in and to the item; (ii) the
item is not subject to any outstanding judgment, order, decree,
stipulation, injunction, or charge; and (iii) no charge, complaint,
action, suit, proceeding, hearing, investigation, claim, or demand is
pending or, to Sellers' knowledge, threatened which challenges the
legality, validity, enforceability, use, or ownership of the item. The
Company has taken all necessary or desirable action to protect each item
of Intellectual Property that it owns.
(i) Contracts and Commitments. The Company has delivered to
Purchaser a true and complete list of all Customer Contracts associated
with the Directories (the "Customer List"). Except as set forth on the
Customer List, the Company is not party to any Customer Contract or any
other written or oral contract or commitment that relates to the
provision of Directory Services in connection with any Directories
(including, without limitation, any contract with a third party or
parties relating to the purchase or sale by the Company of services or
products relating to any Directories), or any other agreement material
to the operation of the Company's businesses, whether or not entered
into in the Ordinary Course of Business. The Company has delivered or
otherwise made available to Purchaser a correct and complete copy of the
standard forms of Customer Contract used in connection with any
Directories and each written agreement (including all amendments
thereto) identified on the Contracts Schedule. The Contracts Schedule
identifies all contracts (other than Customer Contracts) associated with
the Prior Editions and, to the extent available, the Future Editions.
With respect to each written agreement so identified, except as
otherwise would result in a Material Adverse Effect: (A) the written
agreement is legal, valid, binding, enforceable, and will continue to be
in full force and effect after the consummation of the transactions
contemplated hereby; (B) the written agreement will continue to be
legal, valid, binding, and enforceable and in full force and effect on
identical terms immediately after the Closing Date; and (C) neither the
Company nor any other party is in breach or default, and no event
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<PAGE> 15
has occurred which with notice or lapse of time would constitute a
breach or default by the Company or permit termination, modification, or
acceleration (in each case, other than by Seller), under the written
agreement. The Company has not waived or modified any limitation on
liability or similar provision in any Customer Contract.
(j) Financial Statements. The attached "Financial Statements
Schedule" contains the following financial statements (the "Financial
Statements"):
(i) the unaudited consolidated and consolidating balance
sheets of the Company as of December 31, 1995, December 31, 1996,
and December 31, 1997, and the related statements of income,
changes in stockholders' equity and cash flow for the
twelve-month period then ended; and
(ii) the unaudited balance sheet of Seller as of June 30,
1998 (the "Latest Balance Sheet") and the related statements of
income, changes in stockholders' equity and cash flow for the
six-month period then ended.
Each of the foregoing Financial Statements (including in all cases the
notes thereto, if any) is accurate and complete, is consistent with the
books and records of the Company (which, in turn, are accurate and
complete) and presents fairly the financial condition and results of
operations of the Company in accordance with the accounting principles
following by the Company, consistently applied throughout the periods
covered thereby.
(k) Accuracy of Information Furnished. No representation or
warranty of the Company contained in this Agreement or in any document
delivered to Purchaser by or on behalf of the Company in connection with
the transactions contemplated hereby (including, without limitation, any
Customer Contract, customer list, or other records or data compiled in
connection with the Directories) contains or will contain as of the date
such representation and warranty is made or other document has been, is
or will be furnished, any untrue statement of a material fact or
omitted, omits, or will omit to state as of the date such representation
or warranty is made or such document is or will be furnished, any
material fact which is necessary not to make the statement contained
herein or therein not misleading.
(l) Customer Contract Receivables; Advance Payments. The
receivables associated with Customer Contracts reflected on the books
and records of the Company as of the date hereof are bona fide
receivables recorded in the Ordinary Course of Business. The Advance
Payments associated with Customer Contracts reflected on the books and
records of the Company as of the Closing Date are bona fide Advance
Payments recorded in the Ordinary Course of Business. Such books and
records of the Company identify receivables associated with the Prior
Editions and the Future Editions, respectively.
(m) Legal Compliance with Laws. The Company has complied (and is
in compliance) with and has not violated any applicable law, rule or
regulation of any federal, state, local or foreign government or agency
thereof with respect to its business or any of the Directories and no
notice, claim, charge, complaint, action, suit, proceeding,
investigation
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<PAGE> 16
or hearing has been received by the Company or filed, commenced or,
threatened in writing against the Company alleging any such violation.
The Company has complied (and is in compliance) with permits, licenses
and other authorizations required for publication of the Directories and
the provision of Directory Services. There are no permits, filings,
notices, licenses, consents, authorizations, accreditation, waivers and
approvals of, to or with any governmental or third party entity which
are (or required to be) used by the Company or required for ownership of
its assets or the publication and operation of the Directories (as
presently operated and published by the Company and as proposed to be
operated after the date hereof).
(n) Litigation; Proceedings. Except as set forth in the attached
"Litigation Schedule," there are no actions, suits, proceedings,
hearings, orders, investigations, charges, complaints or claims against
or affecting the Company or the Directories or to which the Company or
the Directories may be bound or affected, at law or in equity, or before
or by any federal, state, municipal, foreign or other governmental
department, commission, board, bureau, agency or instrumentality,
domestic or foreign, and there is no basis for any of the foregoing; the
Company is not subject to any judgment, order or decree of any court or
governmental agency; the Company has not received any opinion or
memorandum or legal advice from legal counsel to the effect that it is
exposed, from a legal standpoint, to any liability or disadvantage which
may be material to its business and the Company is not engaged in any
legal action to recover monies due it or for damages sustained by it.
(o) Title and Sufficiency of Assets. The Company owns good and
marketable title, or has a valid and enforceable lease or license, free
and clear of all Liens, to all real property and all personal and
intangible personal property and assets used by the Company or located
on its premises or shown on the Latest Balance Sheet, except for Liens
for current Taxes not yet due and payable.
(p) Directory Listings. Each of the directory listings associated
with the Directories has been published in the Ordinary Course of
Business and in accordance with customary practices currently prevailing
in the telephone directory industry for companies of a size comparable
to the Company. No such listing has been published in violation of any
applicable law, code or regulation. The Company has provided Purchaser
with copies of all invoices (or other evidence reasonably satisfactory
to Purchaser) relating to the purchase by the Company of the white page
listings and yellow page listings used or to be used in connection with
the printing and publication of any Directory.
(q) Brokers' Fees. The Company does not have any Liability to pay
any fees or commissions to any broker, finder, or agent with respect to
the transactions contemplated by this Agreement or which Purchaser or
any other party could become liable or obligated.
(r) Tax Matters.
(i) The Company timely filed all Tax Returns required to
be filed by it, and all such Tax Returns are true and accurate in
all material respects. Except as set
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<PAGE> 17
forth in the attached "Taxes Schedule," all Taxes due and
payable by the Company (whether or not shown on any Tax Return)
have been paid.
(ii) Except as set forth in the Taxes Schedule:
(A) no deficiency or proposed adjustment which has
not been settled or otherwise resolved for any amount of
Tax has been proposed, asserted or assessed by any taxing
authority against the Company;
(B) the Company has not consented to extend the
time in which any Tax may be assessed or collected by any
taxing authority;
(C) the Company has not requested or been granted
an extension of the time for filing any Tax Return to a
date later than the date hereof;
(D) there is no action, suit, taxing authority
proceeding or audit now in progress, pending or, to the
Sellers' knowledge, threatened against or with respect to
the Company with respect to any Tax;
(E) the Company has not been a member of an
Affiliated Group or filed or been included in a combined,
consolidated or unitary income Tax Return;
(F) the Company is not a party to or bound by any
Tax allocation or Tax sharing agreement and the Company
has no current or potential contractual obligation to
indemnify any other Person with respect to Taxes;
(G) the Company does not reasonably expect any
taxing authority to claim or assess any additional Taxes
for any period;
(H) the Company does not have any obligation to
make any payment that will be non-deductible under Section
280G of the Code (or any corresponding provision of state,
local or foreign Tax law);
(I) no claim has ever been made by a taxing
authority in a jurisdiction where the Company does not pay
Tax or file Tax Returns that the Company is or may be
subject to Taxes assessed by such jurisdiction;
(J) the Company has withheld and paid all Taxes
required to have been withheld and paid in connection with
amounts paid or owing to any employee, creditor,
independent contractor or other third party;
(K) the Company has not been a United States real
property holding corporation within the meaning of Code
Section 897(c)(2) during the applicable period specified
in Code Section 897(c)(1)(A)(ii).
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<PAGE> 18
(iii) The Company is only required to file a state Tax
Return in the State of Michigan.
(iv) The Company's unpaid Taxes attributable to all
periods (or portions thereof) ending as of the Closing Date will
not exceed the aggregate amount taken into account in the
determination of the June Net Asset Value (as such amount may be
adjusted and reflect in the final Closing Statement); provided,
however, that the foregoing representation is conditioned upon
the assumptions that (A) the Company's 1997 Tax year would have
ended on the Closing Date, and (B) no operations, tax elections
or other actions or omissions of the Company or Purchaser after
the Closing Date would be deemed to affect the obligations of the
Company for Taxes attributable to the period before the Closing
Date.
(s) Title and Condition of Real Properties.
(i) The Company does not own any real property.
(ii) Leased Properties. The attached "Leased Property
Schedule" lists and describes briefly all real property that is used or
occupied by the Company in connection with its business but not owned by
the Company and the Leases, subleases and agreements by which such
property is used and occupied (the "Leased Property").
(iii) The Company has delivered to Purchaser correct and
complete copies of the leases and subleases listed in the Leased
Property Schedule (collectively, the "Leases")). Each of the Leases is
legal, valid, binding, enforceable and in full force and effect. Neither
the Company nor any other party to such leases is, in breach or default
of such lease and no event has occurred which, with notice or lapse of
time, would constitute such a breach or default or permit terminations,
modification or accelerations under the Leases. No party to the Leases
has repudiated any provision thereof and there are no disputes, oral
agreements, or forbearance programs in effect as to the Lease. The
Leases have not been modified in any respect, except to the extent that
such modifications are disclosed by the documents delivered to
Purchaser, and the Company has not assigned, transferred, conveyed,
mortgaged, deeded in trust or encumbered any interest in the Leases.
(iv) All buildings and all components of all buildings,
structures and other improvements included within the Leased Property
(the "Improvements"), are in good condition and repair and adequate to
operate such facilities as currently used. All utilities and other
similar systems serving the Leased Property are installed and operating
and are sufficient to enable the Leased Property to continue to be used
and operated in the manner currently being used and operated, and any
so-call hook-up fees or other associated charges have been fully paid.
Each Improvement has direct access to a public street adjoining the
Leased Property on which such Improvement is situated over the driveways
and accessways currently being used in connection with the use and
operation of such Improvement.
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<PAGE> 19
(t) Insurance. The attached "Insurance Schedule" sets forth a
true and complete description of each insurance policy maintained by the
Company with respect to its properties, assets and businesses, and each
such policy is in full force and effect as of the Closing. Except as
would have a Material Adverse Effect, the Company is not in default with
respect to its obligations under any insurance policy maintained by it,
and neither the Company has not been denied insurance coverage. The
Company has no self-insurance or co-insurance programs.
(u) Employees. To the Sellers' knowledge, no member of the
Company's sales force has any plans to terminate employment with the
Company. Except as set forth on the attached "Employees Schedule", none
of the employees of the Company are subject to any noncompete,
nondisclosure, confidentiality, employment, consulting or similar
agreements relating to, affecting or in conflict with the present or
proposed business activities of the Company. The Company is in
compliance with all laws pertaining to the employment of employees.
(v) Employee Benefit Plans.
(i) The attached "Employee Benefits Schedule" contains an
accurate and complete list of (a) each "employee benefit plan" (as such
term is defined in Section 3(3) of ERISA at any time contributed to,
maintained or sponsored by the Company, or with respect to which the
Company has any liability or potential liability; and (b) each other
retirement, savings, thrift, deferred compensation, severance, stock
ownership, stock purchase, stock option, performance, bonus, incentive,
vacation or holiday pay, travel, fringe benefit, hospitalization or
other medical, disability, life or other insurance, and any other
welfare benefit policy, trust, understanding or arrangement of any kind,
whether written or oral, contributed to, maintained or sponsored by the
Company for the benefit of any present or former employee, officer or
director of the Company, or with respect to which the Company has any
liability or potential liability. Each such item listed on the Employee
Benefits Schedule is referred to herein as a "Benefit Plan."
(ii) The Employee Benefits Schedule contains an accurate
and complete list of each collective bargaining agreement, each other
agreement, arrangement, commitment, understanding, plan, or policy of
any kind, whether written or oral, with or for the benefit of any
current or former employee, officer or director and each other written
agreement, arrangement, commitment, understanding, plan or policy with
any consultant (including, without limitation, each employment,
compensation, termination or consulting agreement or arrangement). Each
such item listed on the Employee Benefits Schedule is referred to herein
as a "Compensation Commitment."
(iii) Each Benefit Plan that is intended to be qualified
within the meaning of Section 401(a) of the Code and each trust which
forms a part of any such Benefit Plan (a) has received a determination
from the Internal Revenue Service (the "IRS") that such Benefit Plan is
qualified under Section 401(a) of the Code and that such related trust
is exempt from taxation under Section 501(a) of the Code, and nothing
has occurred since the date of such
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<PAGE> 20
determination that could adversely affect the qualification of such
Benefit Plan or the exemption from taxation of such related trust; and
(b) is in compliance with the requirements of Sections 401(a)(4) and
410(b) of the Code for each plan year of such Benefit Plan commencing on
or before the Closing Date.
(iv) Except as set forth on the Employee Benefits
Schedule, the Company does not contribute to, maintain, sponsor or have
any liability with respect to any defined benefit "employee pension
benefit plan" (as such term is defined in Section 3(2) of ERISA) that is
subject to Section 302 of ERISA or Section 412 of the Code, and the
Company has not contributed to, maintained or sponsored or has any
liability with respect to any such employee pension benefit plan for any
time during the six-year period immediately preceding the date hereof.
(v) Except as set forth on the Employee Benefits Schedule,
none of the Benefit Plans or Compensation Commitments obligates the
Company to pay any separation, severance, termination or similar benefit
solely as a result of any transaction contemplated by this Agreement or
solely as a result of a change in control or ownership.
(vi) Except as set forth on the Employee Benefits
Schedule, (a) each Benefit Plan and any related trust, insurance
contract or fund has been maintained, funded and administered in
compliance in all material respects with its respective terms and the
terms of any applicable collective bargaining agreements and in
compliance with all applicable laws and regulations, including, but not
limited to, ERISA and the Code; (b) there has been no application for or
waiver of the minimum funding standards imposed by Section 412 of the
Code with respect to any Benefit Plan, and the Seller is not aware of
any facts or
(vii) Except as set forth on the Employee Benefits
Schedule, (a) the Company has complied with the health care continuation
requirements of Part 6 of Title I of ERISA ("COBRA") as applicable; and
(b) the Company has no obligation under any Benefit Plan or otherwise to
provide health benefits to former employees of the Business or any other
person, except as specifically required by COBRA.
(viii) Except as set forth on the Employee Benefits
Schedule, (a) the Company has not incurred any liability on account of a
"partial withdrawal" or a "complete withdrawal" (within the meaning of
Sections 4205 and 4203, respectively, of ERISA) from any Benefit Plan
subject to Title IV of ERISA which is a "multiemployer plan" (as such
term is defined in Section 3(37) of ERISA) (a "Multiemployer Plan"), no
such liability has been asserted, and there are no events or
circumstances which could result in any such partial or complete
withdrawal; and (b) the Company is not bound by any contract or
agreement or has any obligation or liability described in Section 4204
of ERISA.
(ix) Except as set forth on the Employee Benefits
Schedule, the actions contemplated by this Agreement will not give rise
to any liability with respect to any "employee welfare benefit plan" (as
such term is defined in Section 3(1) of ERISA) that is a "multiemployer
plan" (as such term is defined in Section 3(37) of ERISA).
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<PAGE> 21
(x) The Company has no liability with respect to any
"employee benefit plan" (as defined in Section 3(3) of ERISA) solely by
reason of being treated as a single employer under Section 414 of the
Code with any trade, business or entity other than the Company and the
Seller.
(xi) With respect to each Benefit Plan and each
Compensation Commitment, the Company has provided Purchaser with true,
complete and correct copies of (to the extent applicable) (a) all
documents pursuant to which the Benefit Plan or Compensation Commitment
is maintained, funded and administered, (b) the most recent annual
report (Form 5500 series) filed with the IRS (with applicable
attachments), (c) the most recent financial statement, (iv) the most
recent actuarial valuation of benefit obligations, and (d) the most
recent determination letter received from the IRS and the most recent
application to the IRS for such determination letter.
(w) Environmental and Safety Matters. Except as set forth on the
attached "Environmental Schedule":
(i) The Company has complied, and is in compliance, in all
material respects, with all Environmental and Safety Requirements.
(ii) The Company has not received any material written or
oral notice, report or other information, aside from such of the
foregoing which have been substantially settled or otherwise resolved,
regarding any actual or alleged material violation of Environmental and
Safety Requirements, or any material liabilities or potentially material
liabilities (whether accrued, absolute, contingent, unliquidated or
otherwise), including any material investigatory, remedial or corrective
obligations, relating to its past or current business or facilities and
arising under Environmental and Safety Requirements.
(iii) The Company has not treated, stored, disposed of,
arranged for or permitted the disposal of, transported, handled, or
released any substance, including without limitation any hazardous
substance, or owned or operated any property or facility (and no such
property or facility is contaminated by any such substance) in a manner
that has given or would give rise to material liabilities, including any
material liability for response costs, corrective action costs, personal
injury, property damage, natural resources damages or attorney fees, or
any investigative, corrective or remedial obligations, pursuant to
CERCLA or the Solid Waste Disposal Act, as amended ("SWDA") or any other
Environmental and Safety Requirements.
(iv) The Company has not, either expressly or by operation
of law, assumed or undertaken any material liability, including without
limitation any material obligation for corrective or remedial action, of
any other Person arising under Environmental and Safety Requirements.
(v) The Company has provided Purchaser all material
environmental study, assessment, audit and analytical reports in their
possession or under their reasonable
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<PAGE> 22
control relating to the past or current properties or facilities of the
Company and all other documents materially bearing on environmental
compliance or liability issues relating to the Company.
(x) Affiliated Transactions. Except as set forth on the attached
"Affiliated Transactions Schedule," no officer, director, employee or
other Affiliate of the Company, or any individual related by blood,
marriage or adoption to any such individual or entity in which any such
Person or individual owns any beneficial interest, is a party to any
agree ment, contract, commitment or transaction with the Company or has
any material interest in any material property used by the Company.
(y) Customers and Suppliers. The Company has not received any
notice that any material customer or supplier intends to terminate or
materially reduce its business with the Company and no material customer
or supplier has terminated or materially reduced its business with the
Company in the last twelve (12) months.
(z) Undisclosed Liabilities. Except as set forth on the attached
"Liabilities Schedule," the Company does not have any material
obligations or liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise, whether or not known to the Company, whether
due or to become due and regardless of when asserted) arising out of
transactions entered into at or prior to the date hereof, or any action
or inaction at or prior to the date hereof, or any state of facts
existing at or prior to the date hereof other than: (i) liabilities set
forth on the Latest Balance Sheet (including any notes thereto) and (ii)
liabilities and obligations which have arisen after the date of the
Latest Balance Sheet in the ordinary course of business (none of which
is a liability resulting from breach of contract, breach of warranty,
tort, infringement, claim or lawsuit and all of which will be reflected
on the Closing Balance Sheet).
(aa) Disclosure. Except for the representations and warranties
contained in this Agreement and in any schedule, exhibit or other
written material delivered in connection with this Agreement, the
Sellers have not made any representation or warranty concerning the
Company in connection with the transactions contemplated by this
Agreement (including, without limitation, any oral representations or
warranties or any representation or warranty regarding any financial
projections heretofore delivered to Purchaser).
3.2 Representations and Warranties of Sellers. As a material
inducement to Purchaser to enter into this Agreement and acquire the Company
Stock hereunder, Sellers hereby, jointly and severally, represent and warrant to
Purchaser that:
(a) Authority and Power. Each Seller has the authority and power
to enter into this Agreement and carry out the transactions contemplated
hereby. This Agreement and the other agreements contemplated hereby to
which the Sellers are party have been (or will be) duly executed and
delivered by the Sellers.
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<PAGE> 23
(b) No Breach. This Agreement and each of the other documents,
instruments or agreements delivered hereunder to which any Seller is a
party each constitutes a valid and binding obligation of such Seller,
enforceable in accordance with its terms. The execution and delivery by
any Seller of this Agreement and all other agreements, documents or
instruments contemplated hereby to which such Seller is a party, the
sale of the Company Stock hereunder, and the fulfillment of and
compliance with the respective terms hereof and thereof by such Seller,
do not and shall not (i) conflict with or result in a breach of the
terms, conditions or provisions of, (ii) constitute a default under,
(iii) result in the creation of any Lien upon such Seller's assets
pursuant to, (iv) give any third party the right to modify, terminate or
accelerate any obligation under, (v) result in a violation of, or (vi)
require any authorization, consent, approval, exemption or other action
by or notice or declaration to, or filing with, any court or
administrative or governmental body or agency pursuant to, or any law,
statute, rule or regulation to which such Seller is subject, or any
agreement, instrument, order, judgment or decree to which such Seller is
subject.
(c) Title to Company Stock. Each Seller owns beneficially and of
record and has good and marketable title to one-half of the issued and
outstanding shares of the Company Stock. Upon consummation of the
transactions contemplated herein, Purchaser shall own good and
marketable title to all of the Company Stock, which will constitute all
of the outstanding equity securities of the Company, free and clear of
all Liens, options, proxies, voting trusts or other agreements,
applicable federal and state securities law restrictions and any other
restrictions whatsoever created or suffered to exist by Sellers. Upon
consummation of the transactions contemplated herein, the Company shall
not have outstanding any stock or securities convertible or exchangeable
for any of its Company Stock or containing any profit participation
features, nor shall it have outstanding any rights or options to
subscribe for or to purchase the Company Stock (other than pursuant to
this Agreement) or any stock or securities convertible into or
exchangeable for Company Stock or any stock appreciation rights or
phantom stock plans.
(d) Brokerage. There are no claims for brokerage commissions,
finders' fees or similar compensation in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement binding upon Sellers.
(e) Litigation. There are no actions, suits or proceedings
pending or, to Sellers' knowledge, threatened against any Seller, at law
or in equity, or before or by any federal, state, municipal or other
governmental department, commission, board, bureau, agency or
instrumentality, domestic of foreign, which if determined adversely to
such Seller would have a Material Adverse Effect.
(f) Compliance with Laws. With respect to matters affecting the
Company, each Seller is in compliance with all applicable laws and
regulations of foreign, federal, state and local governments and all
agencies thereof.
(g) Company Transactions. No Seller is a party to or bound by any
agreement with respect to a Company Transaction other than this
Agreement.
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<PAGE> 24
3.3 Representations and Warranties of Purchaser. As a material
inducement to Sellers and the Company to execute this Agreement and consummate
the transactions contemplated hereby, Purchaser hereby represents and warrants
to Sellers and the Company that:
(a) Organization. Purchaser is a limited liability company duly
organized, validly existing and in good standing under the laws of the
State of Delaware. Purchaser is qualified to conduct business in each
other jurisdiction wherein the nature of its business or ownership of
property requires it to be so qualified except where failure to so
qualify would not materially adversely effect the assets, business,
operations or financial condition of Purchaser.
(b) Authorization of Transaction. Purchaser has the power and
authority to execute and deliver this Agreement and the other agreements
contemplated hereby to which it is a party and to perform its
obligations hereunder and thereunder. This Agreement and the other
agreements contemplated hereby to which Purchaser is a party have been
duly executed and delivered by Purchaser and constitute the valid and
legally binding obligations of Purchaser, enforceable against Purchaser
in accordance with their respective terms.
(c) Noncontravention. The consummation of the transactions
contemplated hereby will not (i) violate any statute, regulation, rule,
judgment, order, decree, stipulation, injunction, charge, or other
restriction of any government, governmental agency, or court to which
Purchaser is subject or any provision of the Operating Agreement of
Limited Liability Company of Purchaser or (ii) conflict with, result in
a breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify, or
cancel, or require any notice under any contract, lease, sublease,
license, sublicense, fran chise, permit, indenture, agreement or
mortgage for borrowed money, instrument of indebtedness, Lien, or other
arrangement to which Purchaser or any of its Affiliates is a party or by
which any of them is bound or to which any of their assets is subject.
(d) Governmental Consent. Purchaser is not required to give any
notice to, make any material declaration to or registration or filing
with, or to obtain any material permit, license, consent, accreditation,
exemption, approval or authorization from, any governmental or
regulatory authority in connection with the execution, delivery or
performance of this Agreement or the consummation of any of the
transactions contemplated hereby.
(e) Brokers' Fees. Purchaser has no Liability to pay any fees or
commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which Sellers could
become liable or obligated.
(f) Investment Purposes. Purchaser is aware that the shares of
the Company Stock delivered to Purchaser hereunder have not been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), or under applicable state securities laws. Purchaser is
purchasing the Company Stock for its own account for investment and not
with a view to or for sale in connection with any distribution in
violation of the Securities Act. By virtue
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<PAGE> 25
of Purchaser's acumen, knowledge and business experience, Purchaser is
capable of understanding and evaluating the risks, hazards and merits of
purchasing the Company Stock.
ARTICLE 4 - ADDITIONAL AGREEMENTS
4.1 Post-Closing Assistance. In case at any time after the date
hereof any further action is necessary or desirable to carry out the purposes of
this Agreement and to effect, consummate, confirm or evidence the consummation
of the transactions contemplated hereby (including, without limitation, with
respect to the sales into, printing and publication of each of the Future
Editions), each of the Parties will take such further action (including, without
limitation, the execution and delivery of such further instruments and
documents) as any other Party reasonably may request, at the sole cost and
expense of the requesting Party (unless the requesting Party is entitled to
indemnification therefor under Section 4.3).
4.2 Confidentiality.
(a) Information Concerning the Parties. Each Seller shall keep
confidential all information regarding the Directories or Purchaser's
businesses which is or has been furnished to Seller or his
representatives, employees, advisors or Affiliates; provided that the
foregoing restriction shall not apply to any information which (i)
becomes generally available to the public other than as a result of any
breach of this Section 4.2(a) or (ii) becomes available to Sellers on a
non-confidential basis from a source other than the Party to which the
information relates (provided that such source is not bound by a legal
or fiduciary obligation or secrecy with or the Party to which the
information relates).
(b) Notice of Compulsory Disclosure. In the event any Seller is
required to disclose any confidential information pursuant to applicable
law, such Seller shall promptly notify Purchaser in writing, which
notification shall include the nature of the legal requirement and the
extent of the required disclosure, and shall cooperate with to preserve
the confidentiality of such information consistent with applicable law.
(c) Non-Competition.
(i) As a material inducement to Purchaser to enter into
and perform its obligations under this Agreement, for the
five-year period commencing with the date hereof, neither Seller
will, directly or indirectly, either for himself or herself or
for or on behalf of any partnership, individual, corporation,
joint venture or any other entity participate in any business
(including, without limitation, any division, group or franchise
of a larger organization) which engages in or proposes to engage
in the promotion, sale, distribution, production or printing of
telephone directory "yellow pages" or similar products or related
services in any area within the 50-mile radius surrounding
locations covered by any yellow page directory published by
Purchaser (including the Directories) in Michigan or Ohio. For
purposes of this Agreement, the term "participate in" shall
include, without limitation, having any direct or indirect
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<PAGE> 26
interest in any corporation, partnership, joint venture or other
entity, whether as a sole proprietor, owner, shareholder,
partner, joint venturer, creditor or otherwise, or rendering any
direct or indirect service or assistance to any individual
corporation, partnership, joint venture and other business entity
(whether as a director, officer, manager, supervisor, employee,
agent, consultant or otherwise).
(ii) Each Seller agrees that Purchaser would suffer
irreparable harm from a breach by such Seller or any of such
Seller's representatives of any of the covenants or agreements
contained in Section 4.2. In the event of an alleged or
threatened breach by any Seller or any of such Seller's
representatives of any of the provisions of this Section 4.2,
Purchaser or its successors or assigns may, in addition to all
other rights and remedies existing in its favor, apply to any
court of competent jurisdiction for specific performance and/or
injunctive or other relief in order to enforce or prevent any
violations of the provisions hereof equal to the length of the
violation of this Section 4.2(c).
(iii) If, at the time of enforcement of this Section 4.2,
a court shall hold that the duration, scope or area restrictions
stated herein are unreasonable under circumstances then existing,
the Parties agree that the maximum duration, scope or area
reasonable under such circumstances shall be substituted for the
stated duration, scope or area and that the court shall be
allowed to revise the restrictions contained herein to cover the
maximum period, scope and area permitted by law. Seller agrees
that the restrictions contained in this Subsection 4.2(c) are
reasonable.
(iv) Each Party agrees that the covenants made in this
Section 4.2 shall be construed as an agreement independent of any
other provision of this Agreement and shall survive any order of
a court of competent jurisdiction terminating any other provision
of this Agreement.
4.3 Indemnification.
(a) In addition to all rights and remedies available to Purchaser
at law or in equity, Seller shall indemnify Purchaser, its Affiliates,
members, managers, officers, employees, agents, representatives,
permitted successors and assigns (collectively, the "Purchaser
Indemnitees") in respect of, and save and hold each Purchaser Indemnitee
harmless against, and pay on behalf of or reimburse each Purchaser
Indemnitee for, as and when incurred at any time after the date hereof,
any Loss which any such Purchaser Indemnitee may suffer, sustain or
become subject to, as a result of, in connection with, relating or
incidental to or by virtue of (i) subject to the limitations set forth
in Section 4.5(a), any breach of any representation or warranty made by
any Seller in this Agreement or any facts or circumstances constituting
such a breach or (ii) any breach of any covenant or agreement by any
Seller contained in this Agreement or any other agreement delivered
pursuant hereto; provided that Sellers' liability hereunder with respect
to Losses arising out of Section 4.3(a)(i) (other than as a result of
any breach of Sections 3.1(a), (b), (q), (r) and (v) and Sections 3.2(a)
and (c) (collectively, the "Unlimited Warranties") (i) Sellers'
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<PAGE> 27
aggregate liability shall not exceed the Escrow Amount, as may be
reduced pursuant to the terms of the Escrow Agreement and (ii) Sellers
shall have no liability until and then, to the extent that, such Losses
exceed $5,000 in the aggregate.
(b) In addition to all rights and remedies available to Sellers
at law or in equity, Purchaser shall indemnify Sellers in respect of,
and save and hold them harmless from and against, and pay on behalf of
or reimburse Sellers for, as and when incurred at any time after the
Closing, any Loss which Sellers may suffer, sustain or become subject
to, as the result of, in connection with, relating to or incidental to
or by virtue of the breach by Purchaser of any representation, warranty,
covenant or agreement made by Purchaser contained in this Agreement or
the ownership and operation of the Directories by Purchaser after the
date hereof.
(c) If a party hereto seeks indemnification under this Section
4.3, such Party (the "Indemnified Party") shall give written notice to
the other Party (the "Indemnifying Party") of the facts and
circumstances giving rise to the claim. In that regard, if any suit,
action, claim, liability or obligation (a "Proceeding") shall be brought
or asserted by any third party which, if adversely determined, would
entitle the Indemnified Party to indemnity pursuant to this Section 4.3,
the Indemnified Party shall within thirty (30) days notify the
Indemnifying Party of the same in writing, specifying in detail the
basis of such claim and the facts pertaining thereto; provided, that the
failure to so notify an Indemnifying Party shall not relieve the
Indemnifying Party of its obligations hereunder except to the extent
such failure shall have harmed the Indemnifying Party. The Indemnifying
Party, if it so elects, shall assume and control the defense of such
Proceeding (and shall consult with the Indemnified Party with respect
thereto), including the employment of counsel reasonably satisfactory to
the Indemnified Party and the payment of expenses; provided however,
that in the event any Proceeding shall be brought or asserted by any
third party which, if adversely determined, would not entitle the
Indemnified Party to full Indemnity pursuant to Section 4.3, the
Indemnified Party may elect to participate in a joint defense of such
Proceeding (a "Joint Defense Proceeding") for which the expenses of such
joint defense will be shared equally by such parties and the employment
of counsel shall be reasonably satisfactory to both parties. If the
Indemnifying Party elects to assume and control the defense of a
Proceeding, it will provide notice thereof within thirty (30) days after
the Indemnified Party has given notice of the matter and if such
Proceeding is not a Joint Defense Proceeding, the Indemnified Party
shall have the right to employ counsel separate from counsel employed by
the Indemnifying Party in any such action and to participate in the
defense thereof, but the fees and expenses of such counsel employed by
the Indemnified Party shall be at the expense of the Indemnified Party
unless (i) the employment thereof has been specifically authorized by
the Indemnifying Party in writing or (ii) the Indemnifying Party has
failed to assume the defense and employ counsel. The Indemnifying Party
shall not be liable for any settlement of any Proceeding, the defense of
which it has elected to assume, which settlement is effected without the
written consent of the Indemnifying Party; provided that no settlement
of a Joint Defense Proceeding may be effected without the written
consent of both parties. If there shall be a settlement to which the
Indemnifying Party consents or a final judgment for the plaintiff in any
Proceeding, the defense of which the Indemnifying Party has elected to
assume, the
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<PAGE> 28
Indemnifying Party shall indemnify the Indemnified Party with respect to
the settlement or judgment. If the Indemnifying Party elects to assume
and control the defense or in the event of a Joint Defense Proceeding,
the Indemnified Party shall take all reasonable efforts necessary to
assist the Indemnifying Party in such defense.
(d) The Indemnifying Party shall pay the Indemnified Party in
immediately available funds promptly after the Indemnified Party
provides the Indemnifying Party with written notice of any Loss incurred
by the Indemnified Party hereunder but in any event not later than
thirty (30) days after Indemnifying Party received notice of a Loss.
(e) Purchaser's sole and exclusive remedy against Seller with
respect to Losses arising out of any breach of the representations and
warranties set forth in Sections 3.1 and 3.2 (other than the Unlimited
Warranties) shall be recourse, pursuant to Section 4.4, against the
Escrow Amount.
4.4 Arbitration.
(a) The arbitration procedure set forth below shall be the sole
and exclusive method for resolving and remedying claims for money
damages arising out of the provisions of Section 4.3 (the "Disputes"),
provided that, nothing in this Section 4.4 shall prohibit a party hereto
from instituting litigation to enforce any Final Determination or
availing itself of the remedies set forth in Section 4.2(c). The Parties
hereby agree and acknowledge that, except as otherwise provided in this
Section 4.4 or in the Commercial Arbitration Rules of the American
Arbitration Association as in effect from time to time, the arbitration
procedures and any Final Determination hereunder shall be governed by,
and shall be enforced pursuant to the Uniform Arbitration Act and
applicable provisions of Michigan law.
(b) In the event that any Party asserts that there exists a
Dispute, such Party shall deliver a written notice to each other Party
involved therein specifying the nature of the asserted Dispute and
requesting a meeting to attempt to resolve the same. If no such
resolution is reached within fifteen business days after such delivery
of such notice, the Party delivering such notice of Dispute (the
"Disputing Person") may, within 45 business days after delivery of such
notice, commence arbitration hereunder by delivering to each other Party
involved therein a notice of arbitration (a "Notice of Arbitration") and
by filing a copy of such Notice of Arbitration with the Detroit,
Michigan office of the American Arbitration Association. Such Notice of
Arbitration shall specify the matters as to which arbitration is sought,
the nature of any Dispute, the claims of each Party to the arbitration
and shall specify the amount and nature of any damages, if any, sought
to be recovered as a result of any alleged claim, and any other matters
required by the Commercial Arbitration Rules of the American Arbitration
Association as in effect from time to time to be included therein, if
any.
(c) Sellers and Purchaser shall agree upon one independent
arbitrator expert in the subject matter of the Dispute. If Sellers and
Purchaser are unable to agree on an arbitrator within 20 days after
their selection, Sellers and Purchaser shall each prepare a list
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<PAGE> 29
of three independent arbitrators. Sellers and Purchaser shall each have
the opportunity to designate as objectionable and eliminate one
arbitrator from the other arbitrator's list within 7 days after
submission thereof, and the arbitrator shall then be selected by lot
from the arbitrators remaining on the lists submitted by Sellers and
Purchaser.
(d) The arbitrator selected pursuant to clause (c) will determine
the allocation of the costs and expenses of arbitration based upon the
percentage which the portion of the contested amount not awarded to each
Party bears to the amount actually contested by such Party. For example,
if Purchaser submits a claim for $1,000, and if Seller contests only
$500 of the amount claimed by Purchaser, and if the arbitrator(s)
ultimately resolves the dispute by awarding Purchaser $300 of the $500
contested, then the costs and expenses of arbitration will be allocated
60% (i.e. 300 / 500) to Seller and 40% (i.e. 200 / 500) to Purchaser.
(e) The arbitration shall be conducted under the Commercial
Arbitration Rules of the American Arbitration Association as in effect
from time to time, except as otherwise set forth herein or as modified
by the agreement of all of the parties to this Agreement. The
arbitrator(s) shall so conduct the arbitration that a final result,
determination, finding, judgment and/or award (the "Final
Determination") is made or rendered as soon as practicable, but in no
event later than 90 business days after the delivery of the Notice of
Arbitration nor later than 10 days following completion of the
arbitration. The Final Determination must be agreed upon and signed by
the sole arbitrator or by at least two of the three arbitrators (as the
case may be). The Final Determination shall be final and binding on all
parties and there shall be no appeal from or reexamination of the Final
Determination, except for fraud, perjury, evident partiality or
misconduct by an arbitrator prejudicing the rights of any Party and to
correct manifest clerical errors.
(f) Purchaser and Seller may enforce any Final Determination in
any state or federal court having jurisdiction over the dispute. For the
purpose of any action or proceeding instituted with respect to any Final
Determination, each Party hereto hereby irrevocably submits to the
jurisdiction of such courts, irrevocably consents to the service of
process by registered mail or personal service and hereby irrevocably
waives, to the fullest extent permitted by law, any objection which it
may have or hereafter have as to personal jurisdiction, the laying of
the venue of any such action or proceeding brought in any such court and
any claim that any such action or proceeding brought in such court has
been brought in an inconvenient forum.
(g) If any Party shall fail to pay the amount of any damages, if
any, assessed against it within ten (10) days of the delivery to such
Party of such Final Determination, the unpaid amount shall bear interest
from the date of such delivery at the lesser of (i) the prime rate of
interest announced by Key Bank, N.A., in effect from time to time (which
rate shall be adjusted on the effective date of each change in such
prime rate) plus 3.00% and (ii) the maximum rate permitted by applicable
usury laws. Interest on any such unpaid amount shall be compounded
semi-annually, computed on the basis of a 360-day year consisting of
twelve 30-day months and shall be payable on demand. In addition, such
Party shall promptly reimburse the other Party for any and all costs or
expenses of any nature or kind whatsoever
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<PAGE> 30
(including but not limited to all attorneys' fees) incurred in seeking
to collect such damages or to enforce any Final Determination.
4.5 Tax Matters. Sellers and Purchasers shall provide each other
with such cooperation and information as either of them reasonably may request
of the other in filing any tax return, amended return or claim for refund,
determining a liability for Taxes or a right to refund of Taxes or in conducting
any audit or other proceeding in respect of Taxes. Such cooperation and
information shall include providing copies of all relevant Tax returns, together
with accompanying schedules and related workpapers, documents relating to
rulings or other determinations by taxing authorities and records concerning the
ownership and tax basis of property, which either party may possess. Upon
reasonable notice from the Sellers, Purchaser shall cause the Company to make
its employees available on a mutually convenient basis to provide explanation of
any documents or information provided hereunder. Notwithstanding the foregoing,
neither party shall be required to prepare any documents, or determine any
information not then in its possession, in response to a request under this
Section. Except as otherwise provided in this Agreement, the party requesting
assistance hereunder shall reimburse the other for any reasonable out-of-pocket
costs incurred in providing any return, document or other written information,
and shall compensate the other for any reasonable costs (excluding wages and
salaries) of making employees available, upon receipt of reasonable
documentation of such costs. Purchaser will retain all returns, schedules and
workpapers and all material records or other documents relating thereto, until
the expiration of the statute of limitations (including extensions) of the
taxable years to which such returns and other documents relate and, unless such
returns and other documents are offered to the other party, until the final
determination of any payments which may be required in respect of such years
under this Agreement. Any information obtained under this Section shall be kept
confidential, except as may be otherwise necessary in connection with the filing
of returns or claims for refund or in conducting any audit or other proceeding.
Sellers will have the right to control any response to any audit or litigation
with respect to Taxes for which they are obliged to indemnify Purchaser as an
Unlimited Warranty under this Agreement; provided that Sellers will not enter
into any compromise or settlement with respect to such Taxes without Purchaser's
prior consent (which consent shall not be unreasonably withheld).
4.6 Miscellaneous.
(a) Representations and Warranties. Subject to Section 4.3(e),
all of the representations and warranties made by Purchaser in this
Agreement and all of the representations and warranties made hereunder
by the Parties (other than the Unlimited Warranties) shall survive the
execution and delivery of this Agreement and consummation of the
transactions contemplated hereby, regardless of any investigation made
by any Party or on its behalf through the one-year anniversary of the
date hereof. Neither Party's participation in the consummation of any
transaction pursuant to this Agreement (or any agreement contemplated
hereby) nor any waiver of any condition to such participation (including
any condition that a representation or warranty of any other Party be
true and correct) will constitute a waiver by such participating Party
of any representation or warranty of any Party or otherwise affect the
survival of any such representation and warranty which shall continue in
full force and effect after the Closing.
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<PAGE> 31
(b) No Third Party Beneficiaries. This Agreement shall not confer
any rights or remedies upon any Person other than the Parties and their
respective successors and permitted assigns.
(c) Entire Agreement. This Agreement (including the documents
referred to herein) constitutes the entire agreement between the Parties
and supersedes any prior understandings, agreements, or representations
by or between the Parties, written or oral, that may have related in any
way to the subject matter hereof (including the letter agreement by
Purchaser to Sellers dated June 4, 1998).
(d) Succession and Assignment. This Agreement shall be binding
upon and inure to the benefit of the Parties named herein and their
respective successors and permitted assigns. No Party may assign either
this Agreement or any of its rights, interests, or obligations hereunder
without the prior written approval of the other Parties hereto.
(e) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(f) Headings. The section headings contained in this Agreement
are inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Agreement.
(g) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request,
demand, claim, or other communication hereunder shall be deemed duly
given (i) when delivered, if personally delivered, (ii) when receipt is
electronically confirmed, if faxed (with hard copy to follow via first
class mail, postage prepaid) or (iii) one day after deposit with a
reputable overnight courier, in each case addressed to the intended
recipient as set forth below:
If to Seller: with a copy (which shall not constitute
notice) to:
Dale Engberson
676 Stonecrest Drive Dykema Gossett PLLC
Adrian, MI 49221 315 East Eisenhower Parkway
Suite 100
Ann Arbor, MI 48101
Attn: Jeffrey Lipshaw
Telecopy #: (734) 214-7696
- 26 -
<PAGE> 32
If to Purchaser: with a copy (which shall not constitute
notice) to:
TransWestern Publishing
Company LLC
8328 Clairemont Mesa Blvd. Kirkland & Ellis
San Diego, CA 92111 200 East Randolph Drive
Attn: Joan Fiorito Chicago, IL 60601
Chief Financial Officer Attn: Wendy L. Chronister
Telecopy #: (619) 292-4125 Telecopy #: (312) 861-2200
Any Party may change the address and/or telecopier number to
which notices, requests, demands, claims, and other communications hereunder are
to be delivered by giving the other Party notice in the manner herein set forth.
(H) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF MICHIGAN,
WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION
OR RULE (WHETHER OF THE STATE OF MICHIGAN OR ANY OTHER JURISDICTION)
THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER
THAN THE STATE OF MICHIGAN.
(i) Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed
by each Party. No waiver by any Party of any default, misrepresentation,
or breach of warranty or covenant hereunder, whether intentional or not,
shall be deemed to extend to any prior or subsequent default,
misrepresentation, or breach of warranty or covenant hereunder or affect
in any way any rights arising by virtue of any prior or subsequent such
occurrence.
(j) Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and
provisions hereof or the validity or enforceability of the offending
term or provision in any other situation or in any other jurisdiction.
If the final judgment of a court of competent jurisdiction declares that
any term or provision hereof is invalid or unenforceable, the Parties
agree that the court making the determination of invalidity or
unenforceability shall have the power to reduce the scope, duration, or
area of the term or provision, to delete specific words or phrases, or
to replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to
expressing the intention of the invalid or unenforceable term or
provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
(k) Expenses. Except as otherwise specifically provided herein,
Sellers and Purchaser each will bear their own costs and expenses
(including legal and broker fees and expenses) incurred in connection
with this Agreement and the transactions contemplated hereby.
- 27 -
<PAGE> 33
(l) Taxes; Recording Charges. All transfer, documentary, sales,
use, stamp, registration, conveyance, income, gains, value added or
other Taxes and fees arising out of the sale of the Company Stock or
otherwise incurred in connection with this Agreement or the consummation
of the transactions contemplated hereby shall be paid by Sellers when
due and will not be paid with the assets of the Company. Sellers will,
at their own expense, file all necessary Tax Returns and other
documentation in connection with the Taxes and fees encompassed in this
Section 4.5(l).
(m) Construction. The Parties have jointly participated in the
negotiation and drafting of this Agreement. In the event of an ambiguity
or question of intent or interpretation arises, this Agreement shall be
construed as if drafted jointly by the Parties and no presumptions or
burdens of proof shall arise favoring any Party by virtue of the
authorship of any of the provisions of this Agreement. Any reference to
any federal, state, local, or foreign statute or law shall be deemed
also to refer to all rules and regulations promulgated thereunder,
unless the context requires otherwise.
(n) Incorporation of Exhibits and Schedules. The Exhibits and
Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
(o) Number and Gender. Each defined term used in this Agreement
has a comparable meaning when used in its plural or singular form. Each
gender-specific term used herein has a comparable meaning whether used
in a masculine, feminine or gender- neutral form.
* * * * *
- 28 -
<PAGE> 34
IN WITNESS WHEREOF, the Parties hereto have executed this
Agreement as of the date first above written.
TRANSWESTERN PUBLISHING COMPANY LLC
By: TransWestern Communication Inc.,
its Manager
By: /s/ RICARDO PUENTE
--------------------------------
Its: President and CEO
TARGET DIRECTORIES OF MICHIGAN, INC.
/s/ DALE ENGBERSON
-------------------------------------
Dale Engberson
President
/s/ DALE ENGBERSON
-------------------------------------
Dale Engberson
/s/ RHONDA L. ENGBERSON
-------------------------------------
Rhonda L. Engberson
(Signature Page to Stock Purchase Agreement)
<PAGE> 1
Exhibit 12.1
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended April 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before extraordinary item and contribution
to Equity Compensation Plan $ 7,862 $10,685 $ 9,079 $ 8,064 $1,486
Interest expense including amortization of debt issuance costs 15,246 7,816 6,630 4,345 2,951
Interest portion of Rental Expense 436 467 438 428 439
------- ------- ------- ------- ------
Total Earnings $23,544 $18,968 $16,147 $12,837 $4,876
======= ======= ======= ======= ======
Fixed Costs:
Interest expenses including amortization of
debt issuance costs $15,246 $ 7,816 $ 6,630 $ 4,345 $2,951
Interest portion of Rental Expense 436 467 438 428 439
------- ------- ------- ------- ------
Total Fixed Charges $15,682 $ 8,283 $ 7,068 $ 4,773 $3,390
======= ======= ======= ======= ======
Ratio of Earnings to Fixed Charges 1.50x 2.29x 2.28x 2.69x 1.44x
======= ======= ======= ======= ======
</TABLE>
<PAGE> 1
EXHIBIT 21.1
TransWestern Holdings L.P. Subsidiaries:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
NAME OF SUBSIDIARY STATE OR OTHER JURISDICTION OF NAMES UNDER WHICH SUCH
INCORPORATION OR ORGANIZATION SUBSIDIARY DOES BUSINESS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TWP Capital Corp. Delaware n/a
- -------------------------------------------------------------------------------------------------------------
TransWestern Publishing Company LLC Delaware n/a
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<CASH> 1,512
<SECURITIES> 0
<RECEIVABLES> 35,659
<ALLOWANCES> (9,532)
<INVENTORY> 0
<CURRENT-ASSETS> 34,815
<PP&E> 6,934
<DEPRECIATION> (4,240)
<TOTAL-ASSETS> 61,997
<CURRENT-LIABILITIES> 29,377
<BONDS> 211,647
0
0
<COMMON> 0
<OTHER-SE> (179,027)
<TOTAL-LIABILITY-AND-EQUITY> 61,997
<SALES> 100,143
<TOTAL-REVENUES> 100,143
<CGS> 0
<TOTAL-COSTS> 64,427
<OTHER-EXPENSES> (82)
<LOSS-PROVISION> 9,094
<INTEREST-EXPENSE> 15,246
<INCOME-PRETAX> 2,319
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,319
<DISCONTINUED> 0
<EXTRAORDINARY> 4,791
<CHANGES> 0
<NET-INCOME> (2,472)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
