<PAGE> 1
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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 JUNE 30, 1999.
[ ] 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
SAN DIEGO, CALIFORNIA 92111
(Address of principal executive offices) (Zip Code)
(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. Yes [X] No [ ]
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TRANSWESTERN PUBLISHING COMPANY LLC
FORM 10-Q INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999 (unaudited) and
December 31, 1998 3
Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 1999 (unaudited) and 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 (unaudited) and 1998 (unaudited) 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
<PAGE> 3
TRANSWESTERN PUBLISHING COMPANY LLC
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 3,719 $ 14,067
Trade receivables, (less allowance for doubtful accounts of $9,517
at June 30, 1999 and $9,608 at December 31, 1998) 29,038 20,931
Deferred directory costs 9,963 8,935
Other current assets 1,014 805
--------- ---------
Total current assets 43,734 44,738
Non-current assets:
Property, equipment and leasehold improvements, net 2,853 2,977
Acquired intangibles, net 69,956 34,486
Other assets, primarily debt issuance costs, net 8,226 8,629
--------- ---------
Total non-current assets 81,035 46,092
--------- ---------
Total assets $ 124,769 $ 90,830
========= =========
LIABILITIES AND MEMBER DEFICIT
Current liabilities:
Accounts payable $ 6,063 $ 4,241
Salaries and benefits payable 4,899 3,980
Accrued acquisition costs 4,964 450
Accrued interest 2,199 1,470
Other accrued liabilities 707 1,063
Customer deposits 17,067 16,139
Current portion, long-term debt 1,741 2,207
--------- ---------
Total current liabilities 37,640 29,550
Long-term debt:
Series D 9 5/8% Senior Subordinated Notes 141,684 141,784
Senior Credit Facility 65,293 66,165
Revolving loan 24,800 --
Acquisition debt 4,950 2,000
--------- ---------
Total long-term debt 236,727 209,949
--------- ---------
Member deficit (149,598) (148,669)
--------- ---------
Total liabilities and member deficit $ 124,769 $ 90,830
========= =========
</TABLE>
See accompanying notes.
<PAGE> 4
TRANSWESTERN PUBLISHING COMPANY LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue $ 34,136 $ 28,789 $ 65,649 $ 55,550
Cost of revenue 5,975 5,441 12,081 10,370
-------- -------- -------- --------
Gross profit 28,161 23,348 53,568 45,180
Operating expenses:
Sales and marketing 13,866 11,483 27,651 21,939
General and administrative 8,058 3,954 15,786 8,498
-------- -------- -------- --------
Total operating expenses 21,924 15,437 43,437 30,437
-------- -------- -------- --------
Income from operations 6,237 7,911 10,131 14,743
Other income, net 98 90 208 169
Interest expense (5,935) (4,543) (11,261) (9,063)
-------- -------- -------- --------
Net income (loss) before taxes $ 400 $ 3,458 $ (922) $ 5,849
Tax expense 7 - 7 -
-------- -------- -------- --------
Net income (loss) $ 393 $ 3,458 $ (929) $ 5,849
======== ======== ======== ========
Net income (loss) per Member unit $ 393 $ 3,458 $ (929) $ 5,849
======== ======== ======== ========
</TABLE>
See accompanying notes.
<PAGE> 5
TRANSWESTERN PUBLISHING COMPANY LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (929) $ 5,849
Adjustments to reconcile net (loss) income to cash provided by
operating activities:
Depreciation and amortization 8,733 3,522
Amortization of deferred debt issuance costs 631 574
Provision for doubtful accounts 5,811 5,008
Changes in operating assets and liabilities, excluding the
effects of acquisitions:
Trade receivables (6,176) (4,348)
Write-off of doubtful accounts (6,391) (4,438)
Recoveries of doubtful accounts 243 251
Deferred directory costs (234) 1,432
Other current assets (160) 226
Accounts payable 1,420 (559)
Accrued liabilities (2,251) 13
Accrued interest 728 (657)
Customer deposits (406) (2,423)
-------- --------
Cash provided by operating activities 1,019 4,450
INVESTING ACTIVITIES
Purchase of property, equipment and leasehold improvements (386) (363)
Acquisition of directories (34,554) (7,807)
Increase in other assets (356) (323)
-------- --------
Cash used for investing activities (35,296) (8,493)
FINANCING ACTIVITIES
Borrowings under long-term debt agreements:
Revolving credit facility 38,100 14,400
Repayments of long-term debt:
Revolving credit facility (13,300) (12,400)
Senior Term Loan (871) (2,961)
-------- --------
Cash provided by (used for) financing activities 23,929 (961)
-------- --------
Net decrease in cash (10,348) (5,004)
Cash at beginning of period 14,067 6,812
-------- --------
Cash at end of period $ 3,719 $ 1,808
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 10,002 $ 9,146
</TABLE>
See accompanying notes.
<PAGE> 6
TRANSWESTERN PUBLISHING COMPANY LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS ARE IN THOUSANDS)
1. GENERAL
The accompanying unaudited consolidated financial statements include the
accounts of TransWestern Publishing Company LLC (the "Company," "we," or "us")
and its wholly owned subsidiary, Target Directories of Michigan, Inc. All
significant inter-company transactions have been eliminated. The Company is an
independent yellow page directory publisher and is a wholly owned subsidiary of
TransWestern Holdings L.P. (the "Partnership").
These financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and, in the
opinion of management, reflect all adjustments necessary to present fairly the
financial position, results of operations and cash flows for the periods
presented in conformity with generally accepted accounting principles. All
adjustments were of a normal recurring nature. These financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Form 10-K for the eight months ended
December 31, 1998. The 10-K is available at the SEC's website on the Internet
at http://www.sec.gov.
<PAGE> 7
TRANSWESTERN PUBLISHING COMPANY LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS ARE IN THOUSANDS)
2. FINANCIAL STATEMENT DETAILS
<TABLE>
<CAPTION>
Property, Equipment and Leasehold Improvements
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Computer and office equipment.................... $ 6,401 $ 6,122
Furniture and fixtures........................... 1,675 1,636
Leasehold improvements........................... 379 310
----------- -----------
8,455 8,068
Less accumulated depreciation and amortization... (5,602) (5,091)
----------- -----------
$ 2,853 $ 2,977
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Acquired Intangibles
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Customer Base.................................. $ 103,825 $ 60,031
Less accumulated amortization.................. (33,869) (25,545)
----------- -----------
$ 69,956 $ 34,486
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Other Assets
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Debt issuance costs............................... $ 10,345 $ 10,117
Less accumulated amortization..................... (2,119) (1,488)
----------- -----------
$ 8,226 $ 8,629
=========== ===========
</TABLE>
3. DIRECTORY ACQUISITIONS
United. On January 5, 1999, we purchased 14 directories from United
Directory Services, Inc. for approximately $17.0 million. The purchase price
consisted of $12.3 million in cash, a promissory note for $2.0 million, due in
eighteen months, subject to adjustment based upon the actual collections of
accounts receivable outstanding as of the closing during such period, and
contingent payments paid over a period of three years not to exceed an
additional $2.7 million based upon the contribution margin of a prototype
directory acquired in Austin, Texas. The acquired directories serve the
greater Ft. Worth, San Antonio and Austin, Texas areas.
<PAGE> 8
TRANSWESTERN PUBLISHING COMPANY LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS ARE IN THOUSANDS)
3. DIRECTORY ACQUISITIONS (CONTINUED)
Lambert. On January 8, 1999, we purchased eight directories from Lambert
Publishing for approximately $11.0 million. The purchase price consisted of
$9.5 million in cash, a promissory note of $1.0 million due in eighteen
months, subject to adjustment based upon the actual collections of accounts
receivable outstanding as of the consummation of the acquisition, and a $0.5
million contingent payment based upon the performance of the subsequent years
directories exceeding a specific revenue forecast. The acquired directories
serve the central Georgia area and central eastern Alabama.
Southern. On January 15, 1999, we purchased seven directories from
Southern Directories Publishing, Inc. for approximately $5.2 million in cash.
The acquired directories serve the central Georgia area. One area sales
manager and approximately five account executives associated with the acquired
directories were retained.
Orange Line. On February 15, 1999, we purchased four directories from
Call It, Inc. (DBA) for approximately $1.1 million in cash and $0.2 million in
cash held in escrow for six months to be released upon the expiration of the
representation and warranty period of the purchase agreement. The acquired
directories serve the northern Ohio area.
YPTexas. On April 1, 1999, we purchased certain tangible and intangible
assets of Yellow Pages of Texas, Inc. ("YPTexas") for a total of approximately
$2.2 million. YPTexas publishes one directory near Ft Worth, Texas.
Golden State. On April 2, 1999, we purchased certain tangible and
intangible assets of Golden State Directory, Corp. ("Golden State") for a
total of approximately $5.5 million. Golden State publishes six directories
in northern California.
The acquisitions have been accounted for as asset purchases and
accordingly the purchase prices have been allocated to the tangible and
intangible assets acquired based on their respective fair values at the date of
acquisition, as follows:
<TABLE>
<S> <C>
Customer List $ 41,266
Deferred directory costs 1,457
Other current and non-current assets 2,341
</TABLE>
Assuming that the above acquisitions had occurred on the first day of
the Company's six month period ended June 30, 1998, the unaudited pro forma
results of operations would be as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------------
1999 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Net revenues....................................... $65,649 $59,803
Net income (loss).................................. (929) 4,428
</TABLE>
The above pro forma results give effect to pro forma adjustments for the
amortization of acquired intangibles and interest expense on borrowings that
would have been required to fund the acquisitions.
<PAGE> 9
TRANSWESTERN PUBLISHING COMPANY LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS ARE IN THOUSANDS)
4. GUARANTEE
Target Directories of Michigan, Inc. ("Target"), which is a direct,
wholly-owned subsidiary of the Company, fully and unconditionally guaranteed
the Company's Series D 9 5/8% Senior Subordinated Notes due 2007 that were
outstanding as of June 30, 1999 on an unsecured senior subordinated basis.
Target is the Company's only direct or indirect subsidiary, other than an
inconsequential subsidiary, and Target has no debt senior to the Notes.
Separate full financial statements and other disclosures concerning Target have
not been presented because, in the opinion of management, such information is
not material to investors. Target was acquired in July, 1998. Following is
summarized financial information concerning Target for the six months ended and
as of June 30, 1999:
Statement of Operations Data:
Net revenues $ 933
Gross profit 602
Operating income (144)
Net loss (312)
Balance Sheet:
Current assets $ 1,856
Non-current assets 5,094
Current liabilities 2,220
Non-current liabilities --
<PAGE> 10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (UNAUDITED)
Overview
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 of our other operating costs are recognized
during the period when incurred. As we continue to acquire or produce more
directories, we adjust the publication schedule periodically 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, we may publish the directories
in a month earlier or later than the 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
based on actual distribution dates of individual directories, our bookings and
cash collection activities generally occur at a steady pace throughout the
year. As demonstrated in the following table, our quarterly bookings,
collection of advance payments and total cash receipts vary less than our net
revenues or EBITDA (in millions):
<TABLE>
<CAPTION>
-------------------------------------------------------------------
1998 1998 1998 1999 1999
-------------------------------------------------------------------
2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net revenues ............... $ 28.7 $ 29.0 $ 24.4 $ 31.5 $ 34.1
EBITDA (a) ................. $ 9.6 $ 8.5 $ 5.5 $ 8.2 $ 11.0
Bookings (b) ............... $ 22.8 $ 26.8 $ 29.3 $ 30.7 $ 34.6
Advance payments ........... $ 11.5 $ 13.3 $ 13.9 $ 14.4 $ 15.4
Total cash receipts (c) .... $ 25.8 $ 25.9 $ 26.0 $ 25.4 $ 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
indenture relating to our 9 5/8% Senior Subordinated notes and in our
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. Our 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.
<PAGE> 11
RESULTS OF OPERATIONS
The following table summarizes our results of operations as a percentage
of revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues .................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues .............. 17.5 18.9 18.4 18.7
--------- --------- --------- ---------
Gross profit .................. 82.5 81.1 81.6 81.3
Sales and marketing ........... 40.6 39.9 42.1 39.5
General and administrative .... 23.6 13.7 24.1 15.3
--------- --------- --------- ---------
Income from operations ........ 18.3% 27.5% 15.4% 26.5%
========= ========= ========= =========
EBITDA Margin (a), (b) ........ 32.1% 33.2% 29.2% 33.2%
========= ========= ========= =========
</TABLE>
(a) For a definition of "EBITDA" see the immediately preceding section.
(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 JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1998
Net revenues increased $5.3 million, or 18.6%, from $28.8 million in the
three months ended June 30, 1998 to $34.1 million in the same period in
1999. We published 42 directories in the three months ended June 30, 1999
compared to 36 in the same period in 1998. The net revenue growth was due to
$4.9 million from eight new directories, $4.1 million from seven directories
for which the publication date moved into the period and growth in the same 27
directories published during both periods of $2.2 million; offset by $5.9
million of net revenues associated with nine directories published in the
three months ended June 30, 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, our same book revenue growth for the 27
directories published in both periods was 9.8%.
<PAGE> 12
Cost of revenues increased $0.6 million, or 9.8%, from $5.4 million in
the three months ended June 30, 1998 to $6.0 million in the same period
in 1999. The increase was the result of $0.8 million of costs associated with
eight new directories published in the three months ended June 30, 1999, and
$0.7 million in costs associated with seven directories published in the three
months ended June 30, 1999, but not in the same period in 1998; offset by $1.1
million of costs associated with nine directories published during the three
months ended June 30, 1998, but not in the same period in 1999. Production
support costs increased $0.2 million in the three months ended June 30, 1999
due to the directories acquired since the second quarter of 1998.
As a result of the above, gross profit increased $4.9 million, or
20.6%, from $23.3 million in the three months ended June 30, 1998 to $28.2
million in the same period in 1999. Gross margin increased from 81.1% in the
three months ended June 30, 1998 to 82.5% in the same period in 1999 as a
result of lower direct costs on both existing directories published in both
periods and newly acquired directories.
Sales and marketing expenses increased $2.4 million, or 20.8%, from
$11.5 million in the three months ended June 30, 1998 to $13.9 million in
the same period in 1999. The increase was attributable to increases of $0.9
million in sales support costs, $1.1 million in direct sales costs and $0.4
million in the provision for bad debt (which was consistent with the increase
in net revenues).
The increase in sales support costs of $0.9 million was due to sales
offices acquired since the second quarter of 1998. The increase in direct sales
costs of $1.1 million was as follows: $1.2 million of additional costs were for
the eight new directories, $1.0 million for seven directories moving into the
period, and $0.4 million of higher costs associated with the 27 same
directories; offset by $1.5 million of costs associated with nine directories
that published in the three months ended June 30, 1998 but not in the same
period in 1999. Direct sales costs as a percentage of revenue for the same 27
directories published during both periods decreased from 19.6% to 19.2% in the
three months ended June 30, 1998 compared to the same period in 1999.
General and administrative expenses increased $4.1 million, or 103.8%,
from $4.0 million for the three months ended June 30, 1998 to $8.1 million
for the same period in 1999. The increase was due to: amortization of acquired
customer base and other intangibles of $3.1 million and an increase in
incentive compensation costs and increases in other professional service costs
totaling $1.0 million.
As a result of the above factors, income from operations decreased $1.7
million, or 21.2%, from $7.9 million in the three months ended June 30,
1998 to $6.2 million in the same period in 1999. Income from operations as a
percentage of net revenues decreased from 27.5% in the three months ended
June 30, 1998 to 18.3% in the same period in 1999.
Interest expense increased $1.4 million, or 30.6%, from $4.5 million in
the three months ended June 30, 1998 to $5.9 million in the same period
in 1999 due to higher levels of debt to fund acquisitions.
As a result of the above factors, net income decreased $3.1 million, or
88.6%, from income of $3.5 million in the three months ended June 30, 1998 to
$0.4 million in the same period in 1999.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1998
Net revenues increased $10.0 million, or 18.2%, from $55.6 million in the
six months ended June 30, 1998 to $65.6 million in the same period in
1999. We published 85 directories in the six months ended June 30, 1999
compared to 75 in the same period in 1998. The net revenue growth was due to
$10.1 million from 16 new directories, $3.5 million from six directories
for which the publication date moved into the period and growth in the same 63
directories published during both periods of $4.1 million; offset by $7.7
million of net revenues associated with 12 directories published in the
six months ended June 30, 1998 but not in the same period in 1999.
<PAGE> 13
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, our same book revenue growth for the 63
directories published in both periods was 8.6%.
Cost of revenues increased $1.7 million, or 16.5%, from $10.4 million in
the six months ended June 30, 1998 to $12.1 million in the same period
in 1999. The increase was the result of $2.3 million of costs associated with
16 new directories published in the six months ended June 30, 1999, and
$0.6 million in costs associated with six directories published in the six
months ended June 30, 1999, but not in the same period in 1998; offset by $1.5
million of costs associated with 12 directories published during the six
months ended June 30, 1998, but not in the same period in 1999. Costs for the
same 63 books decreased $0.1 million compared to the prior year. Production
support costs increased $0.4 million in the six months ended June 30, 1999
due to the directories acquired since the second quarter of 1998.
As a result of the above, gross profit increased $8.4 million, or
18.6%, from $45.2 million in the six months ended June 30, 1998 to $53.6
million in the same period in 1999. Gross margin increased from 81.3% in the
six months ended June 30, 1998 to 81.6% in the same period in 1999 as a
result of lower direct costs on the directories published in both periods and
directories moving into the period.
Sales and marketing expenses increased $5.8 million, or 26.0%, from
$21.9 million in the six months ended June 30, 1998 to $27.7 million in
the same period in 1999. The increase was attributable to increases of $2.6
million in sales support costs, $2.3 million in direct sales costs and $0.8
million in the provision for bad debt (which was consistent with the increase
in net revenues).
The increase in sales support costs of $2.6 million was due to $1.8
million in higher sales costs incurred by offices acquired since the second
quarter of 1998 and $0.8 million due to the reorganization of the sales
management structure in 1998. The increase in direct sales costs of $2.3
million was as follows: $2.5 million of additional costs were for the 16 new
directories, $0.8 million for six directories moving into the period, and $1.0
million of higher costs associated with the 63 same directories; offset by
$2.0 million of costs associated with twelve directories that published in the
six months ended June 30, 1998 but not in the same period in 1999. Direct
sales costs as a percentage of revenue for the same 63 directories published
during both periods increased from 19.4% to 19.9% in the six months ended
June 30, 1998 compared to the same period in 1999.
General and administrative expenses increased $7.3 million, or 85.8%, from
$8.5 million for the six months ended June 30, 1998 to $15.8 million
for the same period in 1999. The increase was due to: amortization of acquired
customer base and other intangibles of $5.3 million and an increase in
incentive compensation costs and increases in other professional service costs
totaling $2.0 million.
As a result of the above factors, income from operations decreased $4.6
million, or 31.3%, from $14.7 million in the six months ended June 30,
1998 to $10.1 million in the same period in 1999. Income from operations as a
percentage of net revenues decreased from 26.5% in the six months ended
June 30, 1998 to 15.4% in the same period in 1999.
Interest expense increased $2.2 million, or 24.2%, from $9.1 million in
the six months ended June 30, 1998 to $11.3 million in the same period
in 1999 due to higher levels of debt to fund acquisitions.
As a result of the above factors, net income decreased $6.8 million, or
115.9%, from income of $5.8 million in the six months ended June 30, 1998 to a
loss of ($0.9) million in the same period in 1999.
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.0 million in the six
months ended June 30, 1999 compared to $4.5 million provided in the same
period in 1998, exclusive of the effects of acquired directories. The decrease
in cash provided by operations resulted primarily due to net uses of cash due
to changes in operating assets and liabilities in the six months ended June 30,
1999 compared to the same period in the prior year.
Customer deposits (advance payments) have continued to improve over the
past five quarters. This was attributed to both higher volume of net revenues
and our efforts to collect more cash at contract closing to reduce our exposure
to uncollectable accounts.
Net cash used by investing activities was $35.3 million in the six
months ended June 30, 1999 as compared to $8.5 million in the same period in
1998. Investing activities consist primarily of cash used to acquire
directories. In the six months ended June 30, 1999, $34.6 million was spent
compared to $7.8 million in the same period in the prior year. The prior year's
acquisition consisted of Mast Advertising and Publishing, Inc. which was
acquired for total consideration of $8.4 million. The Mast directories serve
Nashville, Tennessee and the surrounding area, Northern Ohio and Southern
Michigan. Acquisitions made in the six months ended June 30, 1999 are
discussed in note 3 of the financial statements included in this Form 10-Q.
Net cash provided by financing activities was $23.9 million in the six
months ended June 30, 1999 as compared to $1.0 million used in the same period
in 1998. The increase in borrowings in 1999 is attributed to the funding of
acquisitions during the six months ended June 30, 1999.
In connection with the recapitalization of our company in October 1997,
we incurred significant debt. As of June 30, 1999 we had total outstanding
long term indebtedness of $236.7 million, including $142 million of Series D
9 5/8% Senior Subordinated Notes due 2007, and $65.3 million of outstanding
borrowings under the senior credit facility, which ranks senior to the Series D
notes. In addition, of the $40.0 million revolving loan under the senior credit
facility, $24.8 million was borrowed and $15.2 million was available at June
30, 1999.
In May, 1999 we were required to make a semiannual interest payment of
$6.7 million on our Series D 9 5/8% Senior Subordinated Notes. Another similar
payment is due in the fourth quarter.
Our principal sources of funds are cash flows from operating activities
and 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, 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.
<PAGE> 15
YEAR 2000 READINESS STATEMENT
We have a Year 2000 ("Y2K") project team focusing on four key readiness
areas:
- business computer systems -- addressing hardware and software used in
our core operations;
- computing infrastructure -- addressing network servers, operating
software, voice networks, and phones;
- end user computing -- addressing hardware and software used in our
ancillary operations; and
- vendors/ suppliers -- addressing the preparedness of our key
suppliers.
For each readiness area, we are performing risk assessment, conducting
testing, and remediation, either retirement, replacement or conversion,
developing contingency plans to mitigate known 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. We, with the assistance of third parties, are
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 September 1999.
In addition to applications and information technology hardware, we are
developing remediation/contingency plans for certain business critical systems
such as: 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. We have identified key suppliers and
are in the process of contacting them to solicit information on their Y2K
readiness. To date, we have received some responses, most of which indicate
that the suppliers are in the process of developing remediation plans. We are
also developing supplier action lists and contingency plans for key
suppliers.
We estimate that total Y2K costs will be approximately $0.7 million. Y2K
costs incurred by the end of the second quarter of 1999 were approximately $0.5
million. Management intends to periodically refine these estimates over time as
it 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 our financial condition and results of
operations cannot be determined at this time. 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.
<PAGE> 16
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10Q 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 Quarterly Report on Form 10Q, 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;(xi) the
sensitivity of our business to general economic conditions; and
(xii) risks related to the success of our Year 2000 remediation efforts.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
TransWestern is exposed to interest rate risk in connection with the term
loan and the revolving loans outstanding under its Senior Credit Facility,
which bear interest at floating rates based on LIBOR or the prime rate plus an
applicable borrowing margin. As of June 30, 1999, there was approximately $65.3
million outstanding under the term loan (at an interest rate of 7.4% at such
time) and $24.8 million outstanding under the revolving loans (at an interest
rate of 7.2% 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 $7.5 million on an annual basis.
[TransWestern does not attempt to mitigate this risk through hedging
transactions.] All of TransWestern's sales are denominated in U.S. dollars,
thus TransWestern is not subject to any foreign currency exchange risks.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to various other litigation matters incidental to the
conduct of our business. Management does not believe that the outcome of any of
these matters in which we are currently involved will have a material adverse
effect on our financial condition or the results of our operations.
On June 15, 1999, TransWestern Holdings, L.P. and TransWestern
Communications Company, Inc. were sued by Lisa McDonnel, Inc. (d/b/a Image
One), a California corporation ("Image One"), by a complaint filed in the
United States District Court for the Southern District of California alleging
(i) infringement of copyright, (ii) injunctive relief, (iii) unfair
competition, (iv) false light, (v) intentional interference with economic
relations, (vi) negligent interference with economic relations, (vii)
intentional interference with contractual relations and (viii) negligent
interference with contractual relations. The complaint relates to supposed
unauthorized use by TransWestern Publishing of advertisements in certain of
its telephone directories in violation of its rights. The Complaint claims
statutory damages of $8.8 million dollars, actual damages of $299,450 and
reimbursement of attorney's fees and expenses, as well as injunctive relief.
On August 6, 1999, the district court denied Image One's request for a
temporary restraining order, finding that Image One had not established a
likelihood of success on its claims. The court has scheduled a hearing on a
motion for preliminary injunction for October 8, 1999.
<PAGE> 17
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on August 13, 1999 on
its behalf by the undersigned thereunto duly authorized.
TRANSWESTERN PUBLISHING COMPANY LLC
(Registrant)
BY: TransWestern Communications Company, Inc.
(Manager)
BY: /s/ Ricardo Puente
--------------------------------------------
Name: Ricardo Puente
Title: President, Chief Executive Officer
and Director
BY: /s/ Joan Fiorito
--------------------------------------------
Name: Joan Fiorito
Title: Vice President, Chief Financial
Officer and Assistant Secretary
(Principal Financial and Accounting
Officer)
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