ITEM 2. PROPERTIES
We house our corporate, administrative and production staff at our headquarters located at 8344 Clairemont Mesa Boulevard, San Diego, California. Information as of December 31, 1999 relating to our leased corporate headquarters and other leased regional sales offices is set forth in the following table:
We lease 43 other sales offices in more remote sales areas and periodically lease facilities for storage of directories.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are a party to various litigation matters incidental to the conduct of our business. Management does not believe that the outcome of any of the matters in which we are currently involved will have a material adverse effect on our financial condition or the results of our operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for TransWestern's membership units, and it is not expected that such a market will develop in the future. As of March, 2000 TransWestern had 1,000 membership units outstanding, all of which are held by TransWestern Holdings L.P. ("Holdings"), which is the sole member of TransWestern.
Distributions on TransWestern's membership units are governed by the Limited Liability Company Agreement of TransWestern Publishing Company LLC. The payment of distributions by TransWestern are restricted by the indenture relating to its Series D 9 5/8% Senior Subordinated Notes due 2007 (the "Series D notes") and its senior credit facility.
In 1999, TransWestern and TWP Capital Corp. II, a wholly-owned subsidiary of TransWestern, exchanged $140,000,000 of their Series D notes, which were registered under the Securities Act of 1933, for their outstanding Series B 9 5/8% Senior Subordinated Notes, which were previously registered under the Securities Act of 1933 and their outstanding Series C 9 5/8% Senior Subordinated Notes, which had been privately placed in 1998.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth for the periods indicated selected historical consolidated financial data for the company. The following selected historical consolidated financial data is qualified by the more detailed consolidated financial statements of the company and the notes thereto included elsewhere in this annual report and should be read in conjunction with such consolidated financial statements and notes and the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this annual report.
On May 1, 1998, we changed our fiscal year end from April 30 to December 31. Starting with the quarter ending September 30, 1998, we began reporting on a calendar year end basis. The annual report on Form 10-K for the eight months ended December 31, 1998 included financial data for the transition period for the eight months ended December 31, 1998 and comparative data for the eight months ended December 31, 1997.
The consolidated statement of operations data for the years ended December 31, 1999, April 30, 1998 and 1997 and the eight months ended December 31, 1998 and balance sheet data as of December 31, 1999 and 1998 have been derived from our audited consolidated financial statements included elsewhere in this annual report.
The statement of operations data for the years ended April 30, 1996 and 1995 and the balance sheet data as of April 30, 1998, 1997, 1996 and 1995 have been derived from our audited consolidated financial statements, which do not appear in this annual report.
See accompanying notes to Selected Financial Data.
NOTES TO SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS)
(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 contained elsewhere in the annual report.
(b) "EBITDA" is defined as income (loss) before extraordinary item plus interest expense, discretionary contributions to the company's Equity Compensation Plan, which 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 indentures relating to the company's notes and in the company's senior credit facility. Contributions to the Equity Compensation Plan were $525 for the year ended April 30, 1995, $796 for the year ended April 30, 1996 and $5,543 for the year ended April 30, 1998. EBITDA is not a measure of performance under generally accepted accounting principles. 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 generally accepted accounting principles, 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. Bookings generated by predecessor owners of acquired directories are excluded when the directory's selling period is substantially complete as of the purchase date.
(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) "Ratio of earnings to fixed charges" is calculated by dividing earnings by fixed charges. Earnings consist of income (loss) before extraordinary item plus contributions to the Equity Compensation Plan plus fixed charges. Fixed charges consist of interest, whether expensed or capitalized, amortization of debt issuance costs, whether expensed or capitalized, and an allocation of one-fourth of the rental expense from operating leases which management considers to be a reasonable approximation of the interest factor of rental expense.
(i) Member deficit is the value of equity contributions to the Company by its member, TransWestern Holdings L.P., plus net income less Member distributions for income taxes and distributions related to recapitalization transactions completed during the years ended December 31, 1996 and 1998. Member distributions for income taxes during the years ended April 30, 1996, 1997 and 1998 totaled $3,400, and $5,801 and $2,100, respectively. In connection with the November 1995 refinancing of the Partnership, $36 million was distributed to the limited and general partners of the Partnership. Furthermore, in connection with the October 1997 refinancing of the Partnership, $174.4 million was distributed to the limited and general partners of the Partnership.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (AMOUNTS IN THOUSANDS)
TransWestern Publishing Company, L.P. (the "Partnership") was formed in 1993 to acquire the TransWestern Publishing Division of US West Marketing Resources Group, Inc., a subsidiary of US WEST INC. In October 1997, the Partnership completed a $312.7 million recapitalization (the "Recapitalization"). In November 1997, the Partnership formed and contributed substantially all of its assets to TransWestern and TransWestern assumed or guaranteed all of the liabilities of the Partnership and the Partnership changed its name to TransWestern Holdings L.P. As a result of this transaction, Holdings' only assets are all of the membership interests of TransWestern. All of the operations that were previously being conducted by the Partnership are being conducted by TransWestern
On May 1, 1998, the Board of Directors of TransWestern Communications Company, Inc. ("TCC"), the general partner of Holdings, the sole member of our company, authorized the change of our fiscal year from a fiscal year ending April 30 to a fiscal year ending December 31. Starting with the quarter ending September 30, 1998, we began reporting on a calendar year end basis.
We believe that comparisons between the year ended December 31, 1999 and the unaudited twelve month period ended December 31, 1998 are meaningful; therefore, these comparisons are discussed below.
OVERVIEW
Revenue Recognition. We recognize 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, our 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, our 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, which includes both advance payments and collections of accounts receivable, vary less than net revenues or EBITDA:
For definitions of "EBITDA," "Bookings," and "advance payments" see the notes to Item 6 "Selected Financial Data."
Revenue Growth. A key factor in our company's revenue growth has been the increase in the number of directories published. Compared to 1995, the number of directories published has increased by 85, from 106 to 191 as of December 31, 1999, and we increased our total number of accounts from nearly 62,000 to more than 135,000 over the same period. The growth in directories was primarily due to acquiring directories that expanded our presence in California, Ohio, Oklahoma, Texas, Georgia, Alabama, and Michigan. Excluding acquired directories, our net revenues grew 6.7%, and 7.1% for the years ended April 30, 1997 and 1998 and 7.6% in the year ended December 31, 1999. Our average revenue per account increased from $981 in the year ended April 30, 1997 to $1,084 in the year ended December 31, 1999. Our revenue renewal grew from 85.0% in the year ended April 30, 1998 to 87.1% in the year ended December 31, 1999 and account renewal rate grew from 72.9% in the year ended April 30, 1998 to 74.9% in the year ended December 31, 1999.
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 30.7% for the year ended December 31, 1999 versus the year ended December 31, 1998. Growth was 14.5% for the year ended April 30, 1998 versus the year ended April 30, 1997. To facilitate future growth, we increased the size of our sales force by approximately 33.8% from an average of 456 in the year ended December 31, 1998, to an average of 610 during the year ended December 31, 1999. The average number of account executives employed was 389 in the year ended April 30, 1997 and 438 in 1998. We employed an average of 482 account executives over the eight month period ended December 31, 1998.
Cost of Revenues. Our costs of revenue are: production, paper, printing distribution and licensing. Cost of revenues represented 18.0% of net revenues for the year ended December 31, 1999 compared to 19.2% for the year ended December 31, 1998. Total costs of revenue represented 20.2% of net revenues for the year ended April 30, 1998 compared to 21.3% for the year ended April 30, 1997, and 20.8% for the eight months ended December 31, 1998 compared to 22.9% for the same period in 1997. 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 1995, our constant focus on process improvement and increased productivity has enabled us to minimize additional production and administrative costs while increasing the number of directories.
Our principal raw material is paper. We used approximately 18.5 million and 23.6 million pounds of directory grade paper for the years ended December 31, 1998 and 1999, respectively, resulting in a total cost of paper during such periods of approximately $5.7 million and $6.6 million, respectively. We used approximately 17.6 million and 18.2 million pounds of paper for the years ended April 30, 1997 and 1998, respectively, resulting in a total cost of paper for such periods of approximately $5.8 million and $5.7 million, respectively. We used 10.9 million pounds of paper during the eight months ended December 31, 1998 for a total cost of approximately $4.3 million.
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 us were $0.9 million for the year ended December 31, 1999, $1.1 million for the year ended April 30, 1998, $1.0 million for the year ended April 30, 1997 and $0.4 million for the eight months ended December 31, 1998. Distribution is provided by several 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 our sales force. As we continue to increase the number of directories and to expand our total customer base, the number of account executives required to complete the annual selling cycle grows accordingly. Our ability to complete selling each directory within a prescribed time frame depends on account executive staffing levels and productivity. Historically, we have experienced a high turnover rate among our account executives, particularly among new hires, and therefore continue to invest in recruiting and training account executives to build the size of our sales force and to continue to grow revenue. The number of account executives has grown from an average of 456 in the in the year ended December 31, 1998, to an average of 610
during the year ended December 31, 1999.
Cash Flow Management. We have instituted several policies to accelerate customer payments including:
- requiring customers to make minimum deposits on their annual purchase at the time of contract signing;
- requiring customers with small advertising purchases to pay 100% at the time of contract signing;
- offering a cash discount to customers who pay 100% at the time of contract signing;
- providing commission incentives to account executives to collect higher customer deposits earlier in the sales process;
- shortening customer payment terms from 12 months to eight months or less; and
- 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 1994, advance payments received prior to directory publication as a percentage of net revenues has increased from 42.7% for the year ended December 31, 1995 to 45.3% for the year ended December 31, 1999. Advance payments as a percentage of net revenues decreased from 46.3% for the year ended December 31, 1998 to 45.3% in the same period in 1999 due to a lower advanced payment collection rate on acquired books compared to existing directories.
Although we collect an advance payment from most advertisers, credit is extended based upon the size of the advertising program and customer collection history. While our accounts receivable are not subject to any concentrated credit risk, credit losses represent a cost of doing business due to the nature of our 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 twelve 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 9.3% and 8.7% of net revenues for the years ended December 31, 1998 and 1999, respectively, and 9.8% and 9.1% of net revenues for the years ended April 30, 1997 and 1998, respectively. For the year ended December 31, 1998 management estimates that approximately $10.2 million will be written off, or 9.3% of the period's net revenue. Management regularly reviews actual write-offs of accounts receivable as compared to the reserve estimates made at the time individual directories are published.
RESULTS OF OPERATIONS
The following table summarizes the company's results of operations as a percentage of revenue for the periods indicated:
For the definition of "EBITDA," see the notes to Item 6, "Selected Financial Data."
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998 (Unaudited)
Net revenues increased $37.5 million, or 34.4%, from $108.9 million in the year ended December 31, 1998 to $146.4 million in the same period in 1999. We published 191 directories in the year ended December 31, 1999 compared to 147 in the same period in 1998. The net revenue growth was due to year to year growth in the same 136 directories published during both periods of $7.8 million, $28.5 million from 43 new directories and $7.3 million from twelve directories for which the publication date moved into the period; offset by $6.1 million of net revenues associated with eleven directories published in the year ended December 31, 1998 but not in the same period in 1999.
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 136 directories published in both periods was 7.6%.
Cost of revenues increased $5.4 million, or 25.9%, from $20.9 million in the year ended December 31, 1998 to $26.3 million in the same period in 1999. The increase was the result of $5.7 million of costs associated with 43 new directories published in the year ended December 31, 1999 and $1.0 million in costs associated with twelve books published in the year ended December 31, 1999, but not in the same period in 1998; offset by $1.6 million of costs associated with eleven directories published during the year ended December 31, 1998, but not in the same period in 1999. A decrease in direct costs of publishing the same 136 books in the years ended December 31, 1998 and 1999 of $0.6 million was substantially offset by increased indirect production costs of $0.9 million.
As a result of the above factors, gross profit increased $32.1 million, or 36.5%, from $88.0 million in the year ended December 31, 1998 to $120.1 million in the same period in 1999. Gross margin increased from 80.8% in the year ended December 31, 1998 to 82.0% in the same period in 1999 as a result of increased sales on a same directory basis without a corresponding increase in direct or indirect production costs.
Selling and marketing expenses increased $14.4 million, or 32.0%, from $45.0 million in the year ended December 31, 1998 to $59.4 million in the same period in 1999. The increase in direct sales costs was attributable to $6.7 million of costs associated with 43 new directories, $1.5 million of additional sales costs for the same 136 directories published during both periods, $1.4 million of costs associated with twelve directories that published in the year ended December 31, 1999 but not in the same period in 1998 offset by $1.6 million of costs associated with eleven books that published in the year ended December 31, 1998 but not in the same period in 1999. Indirect sales management costs increased $4.1 million due to the acquisition of sales offices and higher training costs and a $2.3 million increase in the provision for bad debt for write-offs due primarily to an increase in net revenue. Selling and marketing expense as a percentage of net revenues decreased from 41.3% in the year ended December 31, 1998 to 40.6% in the same period in 1999 primarily as a result increased net revenues from acquired directories.
General and administrative expense excluding depreciation and amortization increased $3.7 million, or 33.9%, from $10.9 million for the year ended December 31, 1998 to $14.5 million for the same period in 1999 primarily as a result of higher incentive compensation and professional service costs in 1999 compared to 1998. Depreciation and amortization increased $12.7 million or 175.2% from $7.2 million in the year ended December 31, 1998 to $19.9 million for the same period in 1999 due to the amortization of acquired intangibles attributed to recently acquired directories.
As a result of the above factors, income from operations increased $1.3 million, or 5.3%, from $24.9 million in the year ended December 31, 1998 to $26.2 million in the same period in 1999. Income from operations as a percentage of net revenues decreased from 22.9% in the year ended December 31, 1998 to 17.9% in the same period in 1999.
Interest expense increased $5.0 million, or 28.1%, from $17.8 million in the year ended December 31, 1998 to $22.8 million in the same period in 1999.
Income before extraordinary item decreased $3.6 million, or 46.5%, from $7.4 million in the year ended December 31, 1998 to $3.8 million in the same period in 1999.
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 the year ended April 30, 1997 to $100.1 million in the same period in 1998. We published 139 directories in the year ended April 30, 1998 as compared to 128 in the year ended April 30, 1997. The net revenue growth was due to growth in the same 123 directories of $6.0 million, $0.7 million of revenue from five new directories and $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 the twelve months ended April 30, 1997 but not in the same period in 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 the year ended April 30, 1998 than in the same period in 1997.
Cost of revenues increased $0.7 million, or 3.8%, from $19.5 million in the year ended April 30, 1997 to $20.2 million in the same period in 1998. The increase was the result of $0.3 million of costs associated with 5 new directories published during the year ended April 30, 1998, $1.5 million of costs associated with 11 books that published in the year ended April 30, 1998, but not in the same period in 1997 and $137,000 of additional production and distribution overhead costs; offset by $0.5 million of lower costs for the same 123 directories published in both periods and $0.7 million of costs associated with 5 directories published during the year ended April 30, 1997, but not in the same period in 1998. For the same 123 directories that were published in both periods, cost of revenues as a percentage of net revenues decreased from 21.3% in 1997 to 19.7% in 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 the year ended April 30, 1997 to $79.9 million in the same period in 1998. Gross margin increased from 78.7% in the year ended April 30, 1997 to 79.8% in the year ended April 30, 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 the year ended April 30, 1997 to $40.3 million in the same period in 1998. The increase was attributable to $0.3 million of costs associated with 5 new directories, $1.9 million of additional sales costs on the same 128 directories, $1.4 million of costs associated with 11 books that published in the year ended April 30, 1998 but not in the same period in 1997, $468,000 of higher sales management costs, and a $368,000 increase in the provision for bad debt for write-offs due to the change in the mix of directories published in the year ended April 30, 1998 as compared to the same period in 1997.
These increases were partially offset by $0.7 million of reduced selling and marketing expenses associated with the five directories that published in the year ended April 30, 1997 but not in the same period in 1998. Selling and marketing expense as a percentage of net revenues increased slightly from 40.1% in the year ended April 30, 1997 to 40.2% in the same period in 1998.
General and administrative expense excluding amortization and depreciation decreased $0.9 million, or 8.8%, from $10.4 million in the year ended April 30, 1997 to $9.5 million in the same period in 1998 as a result of cost containment programs. Amortization and depreciation increased $0.7 million from $6.4 million in the year ended April 30, 1997 to $7.1 million in the same period in 1998 due to the amortization of acquired intangibles attributed to acquired directories. General and administrative expense as a percentage of net revenues decreased from 11.4% in the year ended April 30, 1997 to 9.5% in the same period in 1998.
As a result of the above factors, income from operations decreased $1.0 million, or 5.2%, from $18.5 million in the year ended April 30, 1997 to $17.5 million in the same period in 1998. Income from operations as a percentage of net revenues decreased from 20.2% in the year ended April 30, 1997 to 17.5% in the same period in 1998.
Interest expense increased $5.6 million, or 71.3%, from $7.8 million in the year ended April 30, 1997 to $13.4 million in the same period in 1998.
Income before extraordinary item decreased $6.5 million, or 60.8%, from $10.7 million in the year ended April 30, 1997 to $4.2 million in the same period in 1998.
Eight Months Ended December 31, 1998 Compared to Eight Months Ended December 31, 1997
Net revenues increased $8.8 million, or 16.7%, from $52.3 million in the eight months ended December 31, 1997 to $61.1 million in the same period in 1998. We published 84 directories in the eight months ended December 31, 1998 compared to 76 in the same period in 1997. The net revenue growth was due to year to year growth in the same 68 directories published during both periods of $3.3 million, $6.6 million from nine new directories and $3.9 million from seven directories for which the publication date moved into the period; offset by $5.1 million of net revenues associated with eight directories published in the eight months ended December 31, 1997 but not in the same period in 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 68 directories published in both periods was 7.0%.
Cost of revenues increased $0.7 million, or 5.8%, from $12.0 million in the eight months ended December 31, 1997 to $12.7 million in the same period in 1998. The increase was the result of $1.2 million of costs associated with nine new directories published in the eight months ended December 31, 1998 and $0.7 million in costs associated with seven books published in the eight months ended December 31, 1998, but not in the same period in 1997; offset by $1.2 million of costs associated with eight directories published during the eight months ended December 31, 1997, but not in the same period in 1998. A decrease in direct costs of publishing the same 68 books in the eight months ended December 31, 1998 and 1997 of $0.3 million was substantially offset by increased indirect production costs of $0.2 million.
As a result of the above factors, gross profit increased $8.0 million, or 20.0%, from $40.3 million in the eight months ended December 31, 1997 to $48.4 million in the same period in 1998. Gross margin increased from 77.1% in the eight months ended December 31, 1997 to 79.2% in the same period in 1998 as a result of reduced production costs and license fees and increased sales on a same directory basis.
Selling and marketing expenses increased $4.7 million, or 20.5%, from $22.9 million in the eight months ended December 31, 1997 to $27.6 million in the same period in 1998. The increase was attributable to $1.2 million of costs associated with nine new directories, $0.6 million of additional sales costs for the same 68 directories published during both periods, $1.0 million of costs associated with seven directories that published in the eight months ended December 31, 1998 but not in the same period in 1997, $2.0 million of higher sales management costs and a $1.0 million increase in the provision for bad debt for write-offs due primarily to an increase in net revenue. These increases were partially offset by $1.0 million of reduced selling and marketing expenses associated with the eight directories published in the eight months ended December 31, 1997 but not in the same period in 1998. Selling and marketing expense as a percentage of net revenues increased from 43.7% in the eight months ended December 31, 1997 to 45.1% in the same period in 1998 primarily as a result of the reorganization of the company's sales management and the addition of account executives.
General and administrative expense excluding depreciation and amortization increased $1.4 million, or 22%, from $6.2 million for the eight months ended December 31, 1997 to $7.6 million for the same period in 1998 primarily due to additional professional fees incurred related to the recapitalization, increased recruiting and temporary employee costs, internet service related costs, and higher incentive based compensation. In the eight months ended December 31, 1997 a contribution of $5.5 million was made to our Equity Contribution Plan that was made in connection with the recapitalization of our company that was completed in October 1997. There were no such contributions in the eight months ended December 31, 1998. Depreciation and amortization increased $0.1 million or 3.3% from $4.4 million to $4.5 million due to amortization of acquired intangibles associated with acquisitions.
As a result of the above factors, income from operations increased $7.4 million, or 544.7%, from $1.4 million in the eight months ended December 31, 1997 to $8.8 million in the same period in 1998. Income from operations as a percentage of net revenues increased from 2.6% in the eight months ended December 31, 1997 to 14.3% in the same period in 1998.
Interest expense increased $4.4 million, or 59.8%, from $7.4 million in the eight months ended December 31, 1997 to $11.8 million in the same period in 1998.
Loss before extraordinary item decreased $(3.2) million, or 54.2%, from a loss of $(6.0) million in the eight months ended December 31, 1997 to a loss of $(2.8) million in the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures were $1.5 million for the year ended December 31, 1999, $0.8 million for the eight months ended December 31, 1998 and $1.0 million and $1.0 million for the years ended April 30, 1998 and 1997, respectively. Capital spending is used largely for computer hardware and software upgrades for the maintenance of production and operating systems. As of December 31, 1999, we did not have any material commitments for capital expenditures.
Working capital decreased $6.8 million from $15.2 million at December 31, 1998 to $8.4 million at December 31, 1999. Net accounts receivable, which represents the largest component of working capital, increased to $36.2 million as of December 31, 1999 compared to $20.9 million as of December 31, 1998 due to an increase in net revenues. Cash decreased to $1.2 million as of December 31, 1999 from $14.1 million as of December 31, 1998 due to cash drawn from existing credit facilities in late 1998 in preparation for the acquisition of United Directory Services, Inc. in January 1999. Current liabilities increased to $40.2 million as of December 31, 1999 from $29.6 million as of December 31, 1998 due to acquisitions. Advance payments as a percentage of net revenues decreased from 46.3% for the year ended December 31, 1998 to 45.3% in the same period in 1999 due to a lower advanced payment collection rate on acquired books compared to existing directories.
Net cash provided by operating activities was $10.5 million in the year ended December 31, 1999, $4.5 million in the eight months ended December 31, 1998, and $15.7 million and $15.3 million in the years ended April 30, 1998 and 1997, respectively. The decrease from the year ending April 30, 1998 to the year ending December 31, 1999 of $5.2 million was due to: a higher level of trade receivables attributed to higher net revenue, higher write-offs of doubtful accounts due to an increase in the rate of account write-offs, and a lower level of accrued payables, interest and other accrued liabilities in December 1999 compared to April 1998. These items more than offset an increase in net income over the same period.
Net cash used for investing activities was approximately $(58.2) million in the year ended December 31, 1999, ($22.2) million for the eight months ended December 31, 1998, and $(9.2) million and $(3.6) million in the years ended April 30, 1998 and 1997, respectively. The increase from 1997 to 1998 was caused by higher directory asset purchases compared to the year ended April 30, 1997. The increase in the year ended December 31, 1999 was due to the substantial directory acquisition related payments compared to the year ended April 30, 1998.
Net cash provided (used) for financing activities was approximately $34.7 million in the year ended December 31, 1999, $30.2 million in the eight months ended December 31, 1998, and ($6.2) million and ($11.8) million in the years ended April 30, 1998 and 1997, respectively. The cash used by financing activities in the year ended April 30, 1998 was due to the net use of cash relating to the recapitalization in October of 1997. The increase in funds in the year ended December 31, 1999 is due to the net increase in the revolving credit facility of $40.1 million for the purposes of acquiring new directories. Funds were drawn in late 1998 in the anticipation of the United Directory Services, Inc. acquisition in January 1999. In the eight months ended December 31, 1998 an additional $40.0 million of 9 5/8% Senior Subordinated Notes was issued by TransWestern.
In connection with the Recapitalization of our company in October 1997, we incurred significant debt. As of December 31, 1999 we had total outstanding long term indebtedness of $251 million, including: $140 million of TransWestern's Series D 9 5/8% Senior Subordinated Notes due 2007 (excluding unamortized premium), $66 million of outstanding borrowings under the senior credit facility, $40 million of outstanding borrowings under the revolving loan facility, $5 million in acquisition related debt, all of which rank senior to the Series D notes. As of December 31, 1999 we had $48.7 million of additional borrowing availability under the Senior Credit Facility, none of which was outstanding.
Our principal sources of funds are cash flows from operating activities and $29.9 million of available funds under our revolving credit facility. Based upon the successful implementation of management's business and operating strategy, we believe that these funds will provide us with sufficient liquidity and capital resources to meet our current and future financial obligations for the next twelve months, including the payment of principal and interest on our notes, as well as to provide funds for our working capital, capital expenditures and other needs. Our future operating performance will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. There can be no assurance that such sources of funds will be adequate and that we will not require additional capital from borrowings or securities offerings to satisfy such requirements. In addition, we may require additional capital to fund future acquisitions and there can be no assurance that such capital will be available.
In connection with our strategy of growing revenues from existing directories, we have increased our sales force from 296 employees at April 30, 1995 to 978 at December 31, 1999 and from 456 in the year ended December 31, 1998. We seek to continue to increase the absolute size of our sales force, however, exclusive of the effect of the increase in the sales force due to acquisitions, we currently do not believe that our sales force will increase at a rate equal to the percentage increase from 1995 to 1999. We do not believe that increases in the number of sales personnel will materially impact our liquidity.
The senior credit facility and the indentures governing TransWestern's notes significantly restrict the distribution of funds by TransWestern and the other indirect subsidiaries of Holdings. We cannot assure you that the agreements governing the 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 Holdings' Discount Notes when the same becomes due, whether at maturity, upon acceleration or redemption or otherwise. Holdings' 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 TransWestern's notes and trade creditors.
YEAR 2000
Our Year 2000 ("Y2K") project team focused on four key readiness areas:
- business computer systems -- addressed hardware and software used in our core operations;
- computing infrastructure -- addressed network servers, operating software, voice networks, and phones;
- end user computing -- addressed hardware and software used in our ancillary operations; and
- vendors/ suppliers -- addressed the preparedness of our key suppliers.
For each readiness area, we performed risk assessment, conducted testing, and remediation, either retirement, replacement or conversion, developed contingency plans to mitigate known risk, and communicated with employees, suppliers, and other third parties to raise awareness of the Y2K problem.
Our total Y2K costs were approximately $0.7 million. Although management believes Y2K costs related to the readiness areas described herein to be substantially complete, there can be no assurance that there will not be unforeseen additional costs.
Although we have not experienced any Y2K problems to date, we cannot assure that unforeseen complications will not arise or that third parties on which the Company relies in its day to day operations will have adequately remedied against potential Y2K complications. If computer systems used by us or our suppliers, the performance of products provided to us by our suppliers, or the software applications we use to produce our products fail or experience significant difficulties related to Y2K, our results of operations and financial condition could be materially adversely affected.
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 our management as well as on assumptions made by and information currently available to us 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 our 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 our results include, but are not limited to, (i) our high level of indebtedness; (ii) the restrictions imposed by the terms of our indebtedness; (iii) the turnover rate amongst our account executives; (iv) the variation in our quarterly results; (v) risks related to the fact that a large portion of our sales are to small, local businesses; (vi) our dependence on certain key personnel; (vii) risks related to the acquisition and start-up of directories; (viii) risks related to substantial competition in our markets; (ix) risks related to changing technology and new product developments; (x) the effect of fluctuations in paper costs; and (xi) the sensitivity of our business to general economic conditions.
ITEM 7A
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to interest rate risk in connection with the term loan and the revolving loans outstanding under our senior credit facility, which bear interest at floating rates based on LIBOR or the prime rate plus an applicable borrowing margin. As of December 31, 1999, there was approximately $64.4 million outstanding under the term loan (at an interest rate of 7.8% at such time) and $40.1 million outstanding under the revolving loans (at the LIBOR rate of 7.5% at such time). Based on such balances, an immediate increase of one percentage point in the applicable interest rate would cause an increase in interest expense of approximately $0.9 million on an annual basis. We do not attempt to mitigate this risk through hedging transactions. All of our sales are denominated in U.S. dollars, thus we are not subject to any foreign currency exchange risks.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the Index on Page of the Financial Report included herein.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the persons who are members of the Board of Directors (the "Board") of TCC, the manager of our company, or executive officers or key employees of our company. TCC controls the policies and operations of our company. The ages listed below are as of January 31, 2000.
Laurence H. Bloch is Chairman and Secretary of TransWestern and Holdings and has been a Director of TCC since 1993. Prior to October 1997, 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.
Ricardo Puente has been President of TransWestern and Holdings and a Director of TCC since 1993 and became Chief Executive Officer in October 1997. Previously, he held the positions of Vice President of Sales and Controller of TransWestern's predecessor which he joined in 1988. Before joining TransWestern's predecessor, 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 October 1997 was Vice President and Controller. Ms. Fiorito joined TransWestern's predecessor in 1989 as Manager, Financial Planning & Analysis and subsequently was promoted to Controller. Prior to joining TransWestern's predecessor, 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 TransWestern's Vice President of Operations since its formation in 1993. Ms. Brennan joined TransWestern's predecessor 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.
Cynthia M. Hardesty was promoted to Vice President, Human Resources of TransWestern effective January 1, 1999. Ms. Hardesty is responsible for all human resource activities within TransWestern. Ms. Hardesty had served as Director, Human Resources for the prior five years. She joined TransWestern's predecessor in March, 1991 as a Senior Human Resources Associate. Prior to joining TransWestern's predecessor, she was Manager of Employment and Training with Emerald Systems. Ms. Hardesty has a BS in Business Administration from National University.
Joseph L. Wazny has been the Vice President, Management Information Systems of TransWestern 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.
Richard L. Larkin was hired in 1999 as Vice President, Internet Business Development. Prior to joining TransWestern, he was Vice President of Professional Sales for RSI Home Products. Mr. Larkin held the position of Vice President of Sales and Marketing for GTE Interactive Media, and was the National Sales Manager and later Vice President of Hudson Soft USA. He was employed at Deloitte and Touche and Touche Ross & Co. Mr. Larkin holds a BBA in Finance from the University of Notre Dame and is a licensed CPA.
Richard E. Beck was promoted to Executive Vice President of TransWestern effective November 1, 1998. Mr. Beck is responsible for negotiating with companies regarding potential mergers and acquisitions as well as integrating completed acquisitions into TransWestern. Mr. Beck has served as a District Sales Manager for both Louisville and Houston. Most recently, Mr. Beck has been serving as the Regional Vice President for the Cleveland Ohio/Alabama/ Georgia/Connecticut/New York (Midstate and Downstate) Region. Mr. Beck joined TransWestern's predecessor as District Sales Manager when it acquired Metro Publishing in 1986.
Michael Bynum was promoted to Executive Vice President of TransWestern effective May 1, 1998. His responsibilities include the management of the Oklahoma/Kansas Region, North Texas Region, Tennessee Region, and Ohio/Kentucky/Indiana/Michigan Region. Since 1993, Mr. Bynum was Regional Vice President overseeing the Kentucky/Indiana/Tennessee/Oklahoma/Kansas/ North Texas Region. Mr. Bynum joined TransWestern's predecessor in 1985 as a sales associate and holds a BA in Management from Cameron University.
Ita Shea-Oglesby was promoted to Executive Vice President of TransWestern effective May 1, 1998. Her responsibilities include the management of the South Texas, Louisiana Region and the Northern and Southern California Regions. Since 1993, Ms. Shea-Oglesby was Regional Vice President overseeing the South Texas, Louisiana Region and the Northern California Region. Ms. Shea-Oglesby joined TransWestern's predecessor 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.
Dennis Reimert rejoined the company as Executive Vice President with TransWestern's acquisition of American Media in October, 1999. Mr. Reimert began his yellow pages career with the telephone company in 1975. In 1980 he co-founded TransWestern Publishing and served as Vice President until 1989 when he left to co-found American Media. His management responsibilities include certain newly acquired directories in the Western region.
Jim Durance was promoted to Executive Vice President of TransWestern Publishing in August 1999. His responsibilities include the management of the Michigan, Ohio and Upstate New York Region. Mr. Durance has been in the directory publishing business since 1987. Mr. Durance held the positions of Account Executive with Southwestern Bell, General Manager with Consumer Yellow Pages, and Division Sales Manager with Mast Advertising (prior to TransWestern's acquisition of Mast). He also held the positions of Area Sales Manager and District Sales Manager with TransWestern. Mr. Durance holds an Associates degree in Business with Macomb College.
C. Hunter Boll became a Director of TCC upon the consummation of the recapitalization completed in October 1997. Mr. Boll is a Managing Director of Thomas H. Lee Company where he has been employed since 1986. From 1984 through 1986, Mr. Boll was with the Boston Consulting Group. From 1977 through 1982, he served as an Assistant Vice President, Energy and Minerals Division of Chemical Bank. Mr. Boll is a director of Big V Supermarkets, Inc., Cott Corp., Freedom Securities Corporation, Metris Companies, Inc., The Smith & Wollensky Restaurant Group, Inc., and United Industries Corporation. Mr. Boll received a B.A. in Economics from Middlebury College and an M.B.A. from the Stanford Graduate School of Business.
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 General Roofing Services, 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 Director of TCC upon consummation of the recapitalization completed in October 1997. Mr. Schoen is a Managing Director of the Thomas H. Lee company where he has been employed since 1986. Prior to joining the Firm, Mr. Schoen was in the Private Finance Department of Goldman, Sachs & Co. Mr. Schoen is a director of ARC Holdings, LLC, Rayovac Corporation, Syratech Corp., United Industries Corporation, and Wyndham International Inc. Mr. Schoen received a B.A. in History of Yale University, a J.D. from Harvard Law School and an M.B.A. 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., General Roofing Services and Precision Tube Technology, Inc. Mr. Wedner holds a BA from the University of California at Los Angeles and received an MBA from the Harvard Graduate School of Business Administration.
Terrence M. Mullen resigned as director on March 30, 2000 in connection with his leaving Thomas H. Lee Company.
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.
TCC's Board of directors has two committees, an audit committee and a compensation committee. Messrs. Boll, and Perry serve on the audit committee and Messrs. Boll, Schoen and Wedner serve on the compensation committee.
The audit committee is responsible for making recommendations to TCC's Board regarding the selection of independent auditors, reviewing the results and scope of the audit and other services provided by the company's independent auditors accountants and reviewing and evaluating the company's audit and control functions. The compensation committee is responsible for determining salaries and incentive compensation for executive officers and key employees of the company.
TCC's Board may establish other committees from time to time to facilitate the management of the company.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The compensation of executive officers of TransWestern is determined by the Compensation Committee of the Board of TCC. The following Summary Compensation Table includes individual compensation information for the Chairman, the President and Chief Executive Officer and each of the four other most highly compensated executive officers of the company (collectively, the "Named Executive Officers") for services rendered in all capacities to the company during the periods set forth below. There were no stock options exercised during our last fiscal year nor were there any options outstanding at the end of our last fiscal year.
SUMMARY COMPENSATION TABLE
- - -------------------------- (a) 1 -- refers to the fiscal year ended December 31, 1999 2 -- On May 1, 1998, we changed our fiscal year from a fiscal year ending April 30 to a fiscal year ending December 31. Accordingly, this refers to the eight month period beginning May 1, 1998 and ending December 31, 1998. 3 -- refers to the fiscal year ended April 30, 1998 4 -- refers to the fiscal year ended April 30, 1997
(b) 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.
(c) Represents distributions made pursuant to the company's Equity Compensation Plan. See "Equity Compensation Arrangements."
(d) All Other Compensation for twelve month period ended December 31, 1999 includes: (1) payments of $1,500 for tax preparation for each of the Named Executive Officers; (2) contributions to the 401(k) Profit Sharing Plan of: Puente ($7,968), Bloch ($7,087), Fiorito ($6,947), Brennan ($7,068) and, Bynum ($6,175) and (3) management fees paid in connection with the Recapitalization: Puente ($11,538), Bloch ($7,692), Fiorito ($2,115), Brennan ($2,115) and, Bynum ($2,115).
The salaries for Messrs. Puente and Bloch are established pursuant to their employment agreements and their bonuses are based on the achievement of certain EBITDA targets set forth in their employment agreements. See "-employment agreements." The compensation committee sets the salaries for the other executive officers in order to maintain such salaries at a level competitive with those paid by the Company's independent competitors, Bonuses for executive officers are paid based on the performance of the company, including the achievement of certain internal targets.
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 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, 7,827.65 of which have been issued to the company's senior managers and 2,172.35 of which have been issued to the Equity Compensation Plan as discussed below. See "Certain Relationships and Related Transactions."
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 certain senior executives, including Messrs. 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 was distributed in October 1998. 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. Distributions totaled $2.6 million, $2.8 million and $0.0 million in the years ended December 31, 1997, 1998 and 1999. As of December 31, 1999, there were no undistributed proceeds under the Equity Compensation Plan.
As a result of the Recapitalization, the existing Equity Compensation Plan was terminated. However, the company adopted a new Equity Compensation Plan which functions similarly to the old plan. As of December 31, 1999, 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 Holdings and Mr. Puente as the President and Chief Executive Officer of Holdings 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 an annual base salary of $222,167 and $235,500, respectively, subject to annual increases based on the consumer price index, and annual bonuses based on the achievement of certain EBITDA 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:
- 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;
- conduct tending to bring the company or any of its subsidiaries into substantial public disgrace or disrepute;
- the substantial and repeated failure to perform duties as reasonably directed by TCC or the company;
- gross negligence or willful misconduct with respect to the company or any subsidiary; or
- 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:
- a reduction by the company of the executive's annual base salary by more than 20%;
- 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;
- 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
- 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 Holdings. See "Certain Relationships and Related Transactions -- Executive Agreements."
401(K) AND PROFIT SHARING PLAN
The company has a 401(k) and profit-sharing retirement plan 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 401(k) and profit-sharing plan for the years ended April 30, 1997 and 1998 and December 31, and 1999 were approximately $0.8 million, $1.1 million, and $0.8 million, respectively. On May 12, 1998, the company elected to change its fiscal year from April 30 to December 31 as reported on Form 8-K. The company amended the plan year of the TransWestern Publishing 401(k) and Profit Sharing Plan from April 30 to December 31 on December 31, 1997.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the membership interests in TransWestern are owned by Holdings. The following table sets forth certain information regarding the beneficial ownership of the equity securities of Holdings by:
- each of the directors of TCC and the executive officers of the company;
- all directors of TCC and executive officers of the company as a group; and
- each owner of more than 5% of any class of equity securities of Holdings.
Unless otherwise noted, the address for each executive officer of the company and the directors of TCC is c/o TransWestern, 8344 Clairemont Mesa Boulevard, San Diego, California 92111.
- - ------------------------------------ * Represents less than one percent.
(a) Holders of Class A Units are entitled to share in any distribution on a pro rata basis, but only if the holders of the Preferred Units have received a certain preference amount set forth in Holdings' Third Amended and Restated Agreement of Limited Partnership, as amended. Holdings has also issued Class B Units to the members of the company's senior management. 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 842 Class B Units which are subject to vesting in equal installments over a five year period.
(c) Does not include 2,542 Class B Units which are subject to vesting in equal installments over a five year period.
(d) Does not include 394 Class B Units which are subject to vesting in equal installments over a five year period.
(e) Includes 739,545 Class A Units and 377,766 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 125,104 Preferred Units owned by Continental Illinois Venture Corporation 43,220 Class A Units and 22,077 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 20,054 Preferred Units owned by TW Interest Holdings Corp. and 65,815 Class A Units and 33,618 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 324,093 Preferred Units owned by Thomas H. Lee Equity Fund III, L.P. and 65,815 Class A Units and 33,618 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 324,093 Preferred Units owned by Thomas H. Lee Equity Fund III, L.P. and 39,259 Class A Units and 20,054 Preferred Units owned by TW Interest Holdings Corp. 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 22,077 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 125,104 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
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership completed a $312 million Recapitalization in October 1997 (the "Recapitalization"). 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 were used to consummate the Recapitalization.
The senior subordinated financing facility was subsequently repaid with a portion of the net proceeds from the company's issuance of its 9 5/8% Series A Senior Subordinated Notes due 2007.
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 us not to own, control, participate or engage in any yellow pages directory publishing directory business or any business competing for the same customers as our businesses as such businesses exist or are in process during such period in any markets, or markets contiguous thereto, in which we engage or plan 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 us in the geographic areas in which we 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.
MANAGEMENT AGREEMENT
Effective upon the Recapitalization, we entered into a Management Agreement with Thomas H. Lee Company ("THL Co.") pursuant to which THL Co. agreed to provide:
- general executive and management services;
- identification, negotiation and analysis of financial and strategic alternatives; and
- other services agreed upon by us and THL Co.
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 had an initial term of one year, subject to automatic one-year extensions, unless we or THL Co. provide 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 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 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, together with CIVC III, the "CIVC Parties"), and CIVC III (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:
- 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;
- 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;
- grants the New Partners certain participation rights in connection with certain transfers made by THL;
- 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;
- 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
- 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 Holdings 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:
- October 1, 2007; - a Qualified Public Offering; - the transfer in a public sale of such security; - with respect to equity securities of Holdings, upon the sale of the Holdings; and - 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 of 1933, as amended (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. 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.
ITEM 14
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Index to Financial Statements
The financial statements required by this item are submitted in a separate section beginning on page of this Annual Report on Form 10-K.
(a) (2) Index to Financial Statement Schedules
All schedules have been omitted since they are either not required, not applicable or because the information required is included in the financial statements or the notes thereto.
(a) (3) Index to Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this report;
(1) Incorporated herein by reference to the same numbered exhibit to the company's Registration Statement on Form S-4 (Registration No. 333-42085), originally filed with the SEC on December 12, 1997.
(2) Incorporated by reference to the same numbered exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed with the SEC on November 15, 1999.
(b) Reports on Form 8-K.
(1) On January 14, 1999, TransWestern filed a report on Form 8-K reporting pursuant to Item 2 thereof that on January 5,1999, TransWestern acquired 14 directories from United Directory Services, Inc.
(2) On February 16, 1999, TransWestern filed a report on Form 8-K/A filing pursuant to Item 7 thereof the required financial statements and pro forma financial statements relating to its acquisition of 4 telephone directories in Michigan from Universal Phone Books, Inc.and Universal Phone Books of Jackson, Inc. on November 30, 1998.
(3) On March 9, 1999, TransWestern filed a report on Form 8-K/A filing pursuant to Item 7 thereof the required financial statements and pro forma financial statements relating to its acquisition of 14 directories from United Directory Services, Inc. on January 5, 1999.
(4) On November 8, 1999, TransWestern filed a report on Form 8-K reporting pursuant to Item 2 thereof that on October 15, 1999, TransWestern acquired certain tangible and intangible assets from United Multimedia.
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act
No annual report relating to TransWestern's last fiscal year or proxy materials relating to a meeting of TransWestern's securityholders has been or will be sent by TransWestern to its securityholders.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TRANSWESTERN PUBLISHING COMPANY LLC (Registrant)
BY: /s/ JOAN M. FIORITO March 30, 2000 ------------------------------------------------- Name: Joan M. Fiorito Title: Vice President, Chief Financial Officer
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.