<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
[ ] 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 333-42085
TRANSWESTERN PUBLISHING COMPANY LLC
(Exact name of registrant as specified in its charter)
DELAWARE 33-0778740
(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)
(619) 467-2800
(Registrant's telephone number, including area code)
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.
TRANSWESTERN PUBLISHING COMPANY LLC YES NO
AS OF NOVEMBER 6, 1998, TWP CAPITAL CORP. II HAS 1,000 SHARES OF COMMON
STOCK OUTSTANDING, ALL OF WHICH ARE OWNED BY TRANSWESTERN PUBLISHING COMPANY LLC
================================================================================
<PAGE> 2
TRANSWESTERN PUBLISHING COMPANY LLC
FORM 10-Q INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 1998 (unaudited) and April 30, 1998 1
Statements of Income for the Nine Months Ended
September 30, 1998 (unaudited) and 1997 (unaudited) 2
Statements of Cash Flows for the Nine
Months Ended September 30, 1998 (unaudited) and 1997 (unaudited) 3
Notes to Unaudited Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
<PAGE> 3
TRANSWESTERN PUBLISHING COMPANY LLC
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, APRIL 30,
1998 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 2,102 $ 1,512
Trade receivable, (less allowance for doubtful accounts of $9,155
in September 1998 and $9,532 in April 1998)
21,458 26,127
Deferred directory costs 7,292 6,226
Other current assets 807 950
--------- ---------
Total current assets 31,659 34,815
Property, equipment and leasehold improvements, net 2,712 2,694
Acquired intangibles, net 18,772 14,326
Other assets, primarily debt issuance costs, net 8,603 8,969
--------- ---------
Total assets $ 61,746 $ 60,804
========= =========
LIABILITIES AND MEMBER DEFICIT
Current liabilities:
Accounts payable $ 4,020 $ 4,373
Salaries and benefits payable 3,424 3,075
Accrued acquisition costs 316 504
Accrued Equity Compensation Plan contribution 3,004 2,900
Accrued interest 3,996 4,841
Other accrued liabilities 781 1,124
Customer deposits 13,370 10,164
Current portion, long-term debt 2,391 2,391
--------- ---------
Total current liabilities 31,302 433,350
Long-term debt:
Revolving loan 1,500 --
Senior Credit Facility 76,813 77,344
Series B 9 5/8% Senior Subordinated Notes 100,000 100,000
Member deficit: (147,869) (145,912)
--------- ---------
Total liabilities and member deficit $ 61,746 $ 60,804
========= =========
</TABLE>
See accompanying notes.
1
<PAGE> 4
TRANSWESTERN PUBLISHING COMPANY LLC
STATEMENTS OF INCOME
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue $ 28,995 $ 25,539 $ 84,545 $ 73,292
Cost of revenues 5,557 5,606 15,927 15,410
-------- -------- -------- --------
Gross profit 23,438 19,933 68,618 57,882
Operating expenses:
Sales and marketing 12,188 10,442 34,127 30,037
General and administrative 4,355 3,893 12,853 12,272
-------- -------- -------- --------
Total operating expenses 16,543 14,335 46,980 42,309
-------- -------- -------- --------
Income from operations 6,895 5,598 21,638 15,573
Other income (expense), net 75 104 244 300
Interest expense (4,571) (1,479) (13,634) (5,197)
-------- -------- -------- --------
Net income $ 2,399 $ 4,223 $ 8,248 $ 10,676
======== ======== ======== ========
Net income per Member unit $ 2,399 $ 4,223 $ 8,248 $ 10,676
======== ======== ======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 5
TRANSWESTERN PUBLISHING COMPANY LLC
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
-------- --------
<S> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES
Net income $ 8,248 $ 10,676
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 5,093 4,932
Amortization of deferred debt issuance costs 865 505
Provision for doubtful accounts 8,018 7,195
Changes in operating assets and liabilities, net of effects of
purchased directories:
Trade receivables (5,625) (2,406)
Write-off of doubtful accounts (7,251) (5,547)
Recoveries of doubtful accounts 402 451
Deferred directory costs 1,533 929
Other current assets (253) 193
Accounts payable 739 (149)
Accrued liabilities 1,477 (3,823)
Accrued interest 1,740 9
Customer deposits (1,725) (501)
-------- --------
Net cash provided by operating activities 13,261 12,454
INVESTING ACTIVITIES
Purchase of property, equipment and leasehold improvements (702) (1,133)
Payment for purchase of directories (15,468) --
-------- --------
Net cash used for investing activities (16,170) (1,133)
FINANCING ACTIVITIES
Borrowings under long-term debt agreements:
Revolving credit facility 24,866 14,500
Repayments of long-term debt
Revolving credit facility (23,175) (16,200)
Other long-term debt (430) (505)
Senior Term Loan (3,062) (6,500)
Distributions to member -- (3,700)
-------- --------
Net cash used for financing activities (1,801) (12,405)
-------- --------
Net decrease in cash (4,710) (1,084)
Cash at beginning of period 6,812 3,053
-------- --------
Cash at end of period $ 2,102 $ 1,969
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 11,029 $ 3,977
</TABLE>
See accompanying notes.
3
<PAGE> 6
TRANSWESTERN PUBLISHING COMPANY LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS ARE IN THOUSANDS)
1. BASIS OF PRESENTATION, ORGANIZATION AND BUSINESS ACTIVITIES
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine-month periods ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. For further information, refer
to the consolidated financial statements and footnotes thereto included in
Holdings' Form 10-K (SEC File No. 333-42085), for the fiscal year ended April
30, 1998.
In November 1997, TransWestern Publishing Company L.P. (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 consist
of TransWestern's Member Units (as defined) and all of Capital's (as defined)
capital stock. All of the operations that were previously conducted by the
Partnership are now being conducted by TransWestern. Holdings has formed TWP
Capital Corp. ("Capital") as a wholly-owned subsidiary and 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. In October
1997, the Partnership completed a $312 million recapitalization transaction (the
"Recapitalization").
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 issued and outstanding
Member Units.
The accompanying consolidated financial statements give retroactive effect
to the formation of the Company and the contribution of assets and liabilities
by Holdings as if these events had occurred on the date of the Partnership's
formation. The accompanying financial statements present the historical
financial position and results of operations of TransWestern.
TransWestern publishes and distributes local yellow page directories in
thirteen states.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
4
<PAGE> 7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of Credit Risk
Credit is extended based upon customer collection history and generally a
deposit is required. The Company is not subject to a concentration of credit
risk due to the geographic and economic diversity of its customer base, 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. 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
advertising for the following year's directory.
3. FINANCIAL STATEMENT DETAILS
<TABLE>
<CAPTION>
SEPTEMBER 30, APRIL 30,
1998 1998
------- -------
(UNAUDITED)
<S> <C> <C>
Computer and office equipment ..................... $ 5,649 $ 5,148
Furniture and fixtures ............................ 1,602 1,508
Leasehold improvements ............................ 291 278
------- -------
7,542 6,934
Less accumulated depreciation and amortization .... (4,830) (4,240)
------- -------
$ 2,712 $ 2,694
======= =======
</TABLE>
Acquired Intangibles (in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, APRIL 30,
1998 1998
------------- ----------
(UNAUDITED)
<S> <C> <C>
Customer Base.......................................$ 42,176 $ 35,791
Less accumulated amortization....................... (23,404) (21,465)
-------- --------
$ 18,772 $ 14,326
======== ========
</TABLE>
Other Assets (in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, APRIL 30,
1998 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Debt issuance costs .............................. $ 9,124 $ 10,304
Other ............................................ 829 729
-------- --------
9,953 9,783
Less accumulated amortization .................... (1,350) (814)
-------- --------
$ 8,603 $ 8,969
======== ========
</TABLE>
4. DIRECTORY ACQUISITION
On July 16, 1998, the Company purchased all of the outstanding common stock
of Target Directories of Michigan ("Target") for cash of approximately $5.4
million. In connection with the acquisition, the Company also assumed certain
liabilities of Target totaling approximately $1.6 million. The acquisition
has been accounted for as a purchase and accordingly the purchase price has been
allocated to the tangible and intangible assets acquired based on their
respective fair values at the date of acquisition, as follows (in thousands):
<TABLE>
<S> <C>
Customer List $6,300
Deferred directory costs 1,009
Other current and non-current assets 691
</TABLE>
5
<PAGE> 8
4. DIRECTORY ACQUISITION (CONTINUED)
Assuming that the acquisition of Target had occurred on the first day of
the Company's nine month period ended September 30, 1998 and fiscal year ended
April 30, 1997, respectively, the unaudited pro forma results of operations
would be as follows:
<TABLE>
<CAPTION>
September 30, April 30,
1998 1998
(Unaudited)
<S> <C> <C>
Net revenues....................................... $85,333 $102,240
Net income (loss).................................. 6,503 (1,800)
</TABLE>
The above pro forma results give effect to pro forma adjustments for the
amortization of acquired intangibles.
6
<PAGE> 9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Partnership was originally 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 TransWestern Publishing
Company LLC, TransWestern 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 TransWestern.
TransWestern 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 TransWestern continues to acquire or produce more
directories, 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 previous year and related
revenues may be recognized in different fiscal quarters from one year to the
next. Year to year results depend on both timing and performance factors.
Notwithstanding significant monthly fluctuation in net revenues recognized
with repsect to any one directory 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. As demonstrated in the
following table, quarterly bookings, collection of advance payments and total
cash receipts vary less than the Company's net revenues or EBITDA:
<TABLE>
<CAPTION>
Year Ending December 31, 1998
-------------------------------------
1st Quarter 2nd Quarter 3rd Quarter
------- ------- -------
<S> <C> <C> <C>
Net revenues ............... $ 26.8 $ 28.7 $ 29.0
EBITDA (a) ................. $ 8.9 $ 9.6 $ 8.5
Bookings (b) ............... $ 25.0 $ 22.8 $ 26.8
Advance payments ........... $ 11.5 $ 11.5 $ 13.3
Total cash receipts (c) .... $ 21.7 $ 25.8 $ 25.9
</TABLE>
(a) "EBITDA" is defined as net income 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
Discount Notes Indenture and in the Senior Credit Facility. 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.
(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.
7
<PAGE> 10
RESULTS OF OPERATIONS
The following table summarizes the Company's results of operations as a
percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ --------------------------
1998 1997 1998 1997
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues .................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues .............. 19.2 22.0 18.8 21.0
-------- -------- --------- ---------
Gross profit .................. 80.8 78.0 81.2 79.0
Sales and marketing ........... 42.0 40.9 40.4 41.0
General and administrative .... 15.0 15.2 15.2 16.7
-------- -------- --------- ---------
Income from operations ........ 23.8% 21.9% 25.6% 21.2%
======== ======== ========= =========
EBITDA data (a):
Net Income .................. $2399 $ 4,223 $ 8,248 $ 10,676
Interest expense ............ 4571 1,479 13,634 5,197
Depreciation and amortization 1,571 1,625 5,094 4,932
-------- -------- --------- ---------
EBITDA (a) .................... $ 8,541 $ 7,327 $ 26,976 $ 20,805
======== ======== ========= =========
EBITDA Margin (b) ............. 29.4% 28.6% 31.9% 28.3%
</TABLE>
(a) "EBITDA" is defined as net income 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
Discount Note 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) "EBITDA Margin" is defined as EBITDA as a percentage of net revenues.
Management believes that EBITDA margin also provides a valuable indication
of the Company's ability to generate cash flows available for debt service.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net revenue increased $3.5 million, from $25.5 million for the three months
ended September 30, 1997 to $29.0 million during the same three month period of
1998. The Company published 37 directories during both such three month periods
of fiscal 1997 and fiscal 1998, 31 of which were the same directories, three of
which were newly acquired titles. In addition, changes in the publication
schedule resulted in six directories moving out of the 1998 period and three
directories moving into the period. Revenue for the same 31 directories
increased $1.6 million or 6.8%, from $24.0 million for the three month period
ended September 30, 1997 to $25.6 million for the three month period ended
September 30, 1998.
Cost of revenues for the three month period ended September 30, 1998
decreased by $50,000 to $5.5 million from $5.6 million for the same three month
period in 1997 primarily due to lower costs for the same 31 directories. Cost of
revenues for the 31 directories published in both three month periods decreased
$272,000, from $4.3 million to $4.0 million and was attributable to a reduction
in the cost of paper.
Gross profit for the three month period ended September 30, 1998 increased
$3.5 million, to $23.4 million from $19.9 million for the same period in 1997
due to solid year over year growth in revenue and cost savings from the same 31
directories, the addition of three new directories and changes in the
publication schedule. Gross profit for the same 31 directories increased $1.9
million, or 9.9%, from $18.8 million for the three month period ended September
30, 1997 to $20.7 million for the three month period ended September 30, 1998.
The three newly acquired directories added $2.2 million of gross profit and
timing changes in the publication schedule caused six directories to move out of
the period and three directories to move in, with a resulting net decrease in
gross profit of
8
<PAGE> 11
$0.6 million. Gross margin increased from 78.0% during the three months ended
September 30, 1997 to 80.8% during the same period in 1998.
Sales and marketing expense increased by $1.7 million, from $10.4 million
for the three months ended September 30, 1997 to $12.2 million for the same
period in 1998. This increase was attributable to increased costs associated
with the same 31 directories of $0.9 million, costs for the three new
directories of $0.6 million, increased sales management costs of $0.7 million
offset by $0.5 million of lower costs associated with the change in the mix of
directories published as a result of publication schedule changes. Sales and
marketing expense as a percentage of net revenues increased from 40.9% during
the three months ended September 30, 1997 to 42.0% during the same period in
fiscal 1998 primarily due to an increase in the number of sales representatives
selling advertising for the same 31 books and an increase in sales management
costs.
General and administrative expense increased $462,000 from $3.9 million in
the three months ended September 30, 1997 to $4.4 million in the same period of
fiscal 1998 as a result of increases in salaries and benefits and general
operating cost increases. General and administrative expense as a percentage of
net revenues decreased from 15.2% for the three months ended September 30, 1997
to 15.0% during the same period in fiscal 1998.
As a result of the above factors, income from operations increased $1.3
million, from $5.6 million for the three months ended September 30, 1997 to $6.9
million for the same period in fiscal 1998. Income from operations as a
percentage of net revenues increased from 21.9% during the three months ended
September 30, 1997 to 23.8% during the same period of fiscal 1998.
Interest expense increased $3.1 million from $1.5 million for the three
months ended September 30, 1997 to $4.6 million in fiscal 1998 due to the higher
debt levels resulting from the Recapitalization.
As a result of the increased interest expense, net income decreased $1.8
million from $4.2 million for the three month period ended September 30, 1997 to
$2.4 million in 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
The Company's financial results were affected by changes in the publishing
schedule during the first nine months of 1998 compared to the same period in
1997, resulting in differences in the number and mix of directories published.
As a result, interim results are not indicative of results that may be expected
for the entire year.
Net revenue increased $11.3 million, from $73.3 million for the first nine
months of 1997 to $84.5 million during the first nine months of 1998. The
Company published 112 directories during the first nine months of 1998 and 109
directories during the first nine months of 1997. The increase in net revenues
was due to $1.9 million from publication timing changes resulting in the
publication dates for six directories moving into the period and the publication
dates for nine directories moving out of the period, plus $4.5 million of net
revenue attributable to six newly acquired directories added in the nine months
ended September 30, 1998 and $4.9 million year to year net revenue growth of the
same 100 directories published during both periods.
Same book revenue growth for the 100 directories published in both periods
was 6.9% and the average revenue per account grew 5.2%.
Cost of revenues for the first nine months of fiscal 1998 of $15.9 million
increased by $0.5 million, from $15.4 million for the same period in fiscal
1997, due to book publication changes and the addition of six new directories.
Cost of revenues for the same 100 directories published in both periods
decreased $151,000, from $12.0 million to $11.8 million attributable to a
reduction in paper costs.
Gross profit for the nine months ended September 30, 1998 increased $10.7
million, to $68.6 million from $57.9 million for the same period in 1997 due to
growth in the same directories of $5.0 million, six new directories contributing
$3.6 million and book publication changes contributing $2.1 million. Gross
margin increased from 79.0% during the first nine months of 1997 to 81.2% during
the same period in 1998.
9
<PAGE> 12
Sales and marketing expense increased $4.1 million from $30.0 million for
the first nine months of 1997 to $34.1 million for the same period in 1998. This
increase was attributable to increased selling costs of $1.8 million for the
same 100 directories published in both periods, $1.2 million for the six new
directories and $1.1 million of increased sales management costs. The provision
for bad debt as a percentage of net revenues decreased from 9.2% to 9.0% due to
the change in the mix of directories published. Sales and marketing expense as a
percentage of net revenues decreased from 41.0% during the first nine months of
1997 to 40.4% during the same period in 1998.
General and administrative expense increased $0.6 million, from $12.3
million in the first nine months of 1997 to $12.9 million in the same period of
1998 as a result of increased travel costs and professional fees associated with
public debt reporting. General and administrative expense as a percentage of net
revenues decreased from 16.7% in the nine month period ending September 30, 1997
to 15.2% in the same period in 1998.
As a result of the above factors, income from operations increased $6.1
million, from $15.5 million for the first nine months of 1997 to $21.6 million
for the same period in 1998. Income from operations as a percentage of net
revenues increased from 21.2% during the first nine months of 1997 to 25.6%
during the same period of 1998.
Interest expense increased $11.5 million from $5.2 million for the first
nine months of 1997 to $13.6 million in the same period of 1998 due to the
higher debt levels resulting from the Recapitalization.
As a result of the increased interest expense, net income decreased $2.4
million from $10.7 million for the first nine months of 1997 to $8.2 million in
1998.
YEAR 2000 READINESS STATEMENT
The Company has a Year 2000 (Y2K) project team focusing on four key
readiness areas: 1) Business Computer Systems, addressing hardware and software
used in the Company's core operations; 2) Computing Infrastructure, addressing
network servers, operating software, voice networks, and phones; 3) End User
Computing, addressing hardware and software used in the Company's ancillary
operations and 4) Vendors/Suppliers, addressing the preparedness of the
Company's key suppliers.
For each readiness area, the Company is performing risk assessment,
conducting testing, and remediation (retirement, replacement or conversion),
developing contingency plans to mitigate unknown risk, and communicating with
employees, suppliers, and other third parties to raise awareness of the Y2k
problem.
Business Computer Systems, Computing Infrastructure, and End User Computing
readiness programs: The Company, assisted by third parties, is conducting an
assessment of internal applications and computer hardware. Some software
applications already are or have been made year 2000 compliant and resources
have been assigned to address other applications based on their importance and
the time required to make them Y2K compliant. All software remediation, Y2k
compliance evaluation of hardware, including routers, telecommunication
equipment, workstations and other items is expected to be completed by August
1999.
In addition to applications and information technology hardware, the
Company is developing remediation/contingency plans for embedded systems,
facilities and other operations, such as financial and banking systems.
Vendors/Suppliers readiness program: This program focuses on minimizing the
risks associated with key suppliers. The Company has identified key suppliers
and is in the process of contacting them to solicit information on their Y2K
readiness. To date, the Company has received some responses, most of which
indicate that the suppliers are in the process of developing remediation plans.
The Company is also developing supplier action lists and contingency plans for
key suppliers.
The Company estimates that total Y2k costs will be less than $1 million
with the majority of these costs to be incurred during the next four quarters.
Management intends to periodically refine this estimate over time as it
10
<PAGE> 13
continues to assess and develop alternatives. There can be no assurance,
however, that there will not be a delay in or increased costs associated with,
the programs described in this section.
Since the programs described in this section are ongoing, management has
not yet identified all potential Y2K complications. Therefore, the potential
impact of these complications on the Company's financial condition and the
results of operations cannot be determined at this time. If computer systems
used by The Company or its suppliers, the performance of products provided to
The Company by suppliers, or the software applications used to produce products
sold by The Company fail or experience significant difficulties related to Y2K,
The Company's results of operations and financial condition could be materially
adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled approximately $13.3
million in the nine months ended September 30, 1998 as compared to approximately
$12.5 million in the same period in 1997. The $0.8 million increase in operating
cash flow resulted primarily from an increase in non-cash charges and accrued
expenses more than offsetting decreased net income of $2.4 million and an
increase in the use of cash related to net receivables.
The primary factors affecting accrued expenses were contingent payments for
acquisitions made in 1997 with no corresponding amount in 1998 and the amount
and timing of bonus and equity trust payments made in the first nine months of
1997 compared to the same period in 1998. The change in accrued interest is
associated with the Recapitalization which caused substantially changed in the
amount and timing of interest payments related to the Senior Subordinated Debt.
The $2.4 million decrease in net income reflects the net impact of increased
operating income for the first nine months of 1998 arising from favorable
differences in the mix, timing and results of directories published (including
acquisitions) being offset by substantially higher interest expense from the
higher debt levels following the Recapitalization. The increased use of funds
related to receivables was primarily related to increased receivable balances
and higher write-offs of bad debts associated with the overall growth in
revenue.
Net cash used by investing activities was approximately $16.2 million in
the nine months ended September 30, 1998 as compared to approximately $1.1
million in the same period in 1997. This $15.0 million increase in use of funds
was primarily the result of increased cash paid for directory acquisitions in
the 1998 period.
Net cash used for financing activities was approximately $1.8 million in
the first nine months of fiscal 1998 as compared to approximately $12.4 million
in the same period in 1997. This $10.6 million increase was primarily the result
of a higher net draw of funds against the revolving credit facility, a reduction
in term loan payments and a discontinuation of member tax distributions
following the recapitalization due to a change in the tax position of the
company.
The Company's principal sources of funds following the Recapitalization are
anticipated to be cash flows from operating activities and borrowings under the
$40 million (maximum) Revolving Credit Facility. The Company believes that these
sources of funds will provide it with sufficient liquidity and capital resources
to meet current and future financial obligations, including the payment of debt
principal and interest on the Senior Subordinated Notes and Senior Discount
Notes, as well as to provide funds for the Company's working capital, capital
expenditures and other needs for the next twelve months. The Company's future
operating performance and ability to service or refinance the Senior
Subordinated Notes, Senior Discount Notes and to repay, extend or refinance the
Senior Credit Facility will be subject to future economic conditions and to
financial, business 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 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. As of September 30, 1998 the
Company's total indebtedness was $180.7 million. The indebtedness consisted of
$78.9 million on the Senior Term Loan, $1.5 million on the Revolving Credit
Facility, $100.0 million of the 9 5/8% Senior Subordinated Notes and $0.3
million of Seller Notes related to directory acquisitions.
As of September 30, 1998 the Company had cash and cash equivalents totaling
approximately $2.1 million and an available balance on the Revolving Credit
Facility of $38.5 million.
11
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During August 1998 the Company entered into a Comprehensive
Settlement Agreement Release and Covenant Not to Sue with a former
employee in settlement of a lawsuit filed against the Company in
June 1998. The terms of the settlement were not significant.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit Index
27.1 Consolidated Financial Data Schedule
(B) No reports on Form 8-K were filed during the nine months ending
September 30, 1998
---------
* Holdings agrees to furnish supplementally to the Commission a
copy of any omitted schedule or exhibit to such agreement upon
request by the Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on November 14, 1998 on
their behalf by the undersigned thereunto duly authorized.
TRANSWESTERN PUBLISHING COMPANY LLC
(Registrant)
BY: TransWestern Communications Company, Inc.
(General Partner)
BY: /s/ RICARDO PUENTE
--------------------------------------------
Name: Ricardo Puente
Title: Chief Executive Officer, President
(Principal Financial and Accounting Officer)
12
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