<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, 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 333-42117
TRANSWESTERN HOLDINGS L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0560667
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
----------------
8344 CLAIREMONT MESA BOULEVARD
SAN DIEGO, CALIFORNIA 92111
(Address of principal executive offices) (Zip Code)
(858) 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 [ ]
==============================================================================
<PAGE> 2
TRANSWESTERN HOLDINGS L.P.
FORM 10-Q INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999 (unaudited) and
December 31, 1998 3
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 1999 (unaudited) and 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
<PAGE> 3
TRANSWESTERN HOLDINGS L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,206 $ 14,067
Trade receivables, (less allowance for doubtful accounts of
$9,314 at September 30 and $9,608 at December 31) 32,005 20,931
Deferred directory costs 9,287 8,935
Other current assets 1,263 625
--------- ---------
Total current assets 43,761 44,558
Non-current assets:
Property, equipment and leasehold improvements, net 2,774 2,977
Acquired intangibles, net 70,606 34,486
Other assets, primarily debt issuance costs, net 8,948 9,746
--------- ---------
Total non-current assets 82,328 47,209
--------- ---------
Total assets $ 126,089 $ 91,767
========= =========
LIABILITIES AND PARTNERSHIP DEFICIT
Current liabilities:
Accounts payable $ 7,047 $ 4,241
Salaries and benefits payable 5,123 3,980
Accrued acquisition costs 4,464 916
Accrued interest 5,377 1,470
Other accrued liabilities 1,174 1,068
Customer deposits 16,508 16,139
Current portion, long-term debt 1,741 1,741
--------- ---------
Total current liabilities 41,434 29,555
Long-term debt:
Series D 9 5/8% Senior Subordinated Notes 141,633 141,784
Series B 11 7/8% Senior Discount Notes, net 40,399 37,060
Senior Credit Facility 64,858 66,165
Revolving loan 23,000 --
Acquisition debt 2,810 2,000
--------- ---------
Total long-term debt 272,700 247,009
Partnership deficit:
General Partner (3,196) (3,141)
Limited Partner (184,849) (181,656)
--------- ---------
Total Partner deficit: (188,045) (184,797)
--------- ---------
Total liabilities and partner deficit $ 126,089 $ 91,767
========= =========
</TABLE>
See accompanying notes.
<PAGE> 4
TRANSWESTERN HOLDINGS L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue $ 38,231 $ 28,995 $103,880 $ 84,545
Cost of revenue 7,232 5,557 19,313 15,927
-------- -------- -------- --------
Gross profit 30,999 23,438 84,567 68,618
Operating expenses:
Sales and marketing 15,409 12,188 43,060 34,127
General and administrative 8,817 4,358 24,609 12,862
-------- -------- -------- --------
Total operating expenses 24,226 16,546 67,669 46,989
-------- -------- -------- --------
Income from operations 6,773 6,892 16,898 21,629
Other income, net 97 75 305 244
Interest expense (6,771) (5,623) (20,279) (16,695)
-------- -------- -------- --------
Net income (loss) before taxes $ 99 $ 1,344 $ (3,076) $ 5,178
Tax Expense 225 - 233 -
-------- -------- -------- --------
Net Income (loss) $ (126) $ 1,344 $ (3,309) $ 5,178
======== ======== ======== ========
Net income (loss) allocated
to General Partner units $ (2) $ 23 $ (56) $ 88
======== ======== ======== ========
Net income (loss) allocated
to Limited Partner units $ (124) $ 1,321 $ (3,253) $ 5,090
======== ======== ======== ========
Net income (loss) per
General Partner unit $ (0.2) $ 2.4 $ (5.7) $ 9.0
======== ======== ======== ========
Net income (loss) per
Limited Partner unit $ (0.0) $ 0.5 $ (1.3) $ 2.0
======== ======== ======== ========
</TABLE>
See accompanying notes.
<PAGE> 5
TRANSWESTERN HOLDINGS L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (3,309) $ 5,178
Adjustments to reconcile net (loss) income to cash provided by
operating activities:
Depreciation and amortization 13,995 5,093
Amortization of deferred debt issuance costs 1,029 950
Amortization of Senior Note discount 3,339 2,975
Amortization of Premium (151) 0
Provision for doubtful accounts 9,154 8,018
Changes in operating assets and liabilities, excluding the effects of
acquisitions:
Trade receivables (8,940) (5,497)
Write-off of doubtful accounts (10,348) (7,275)
Recoveries of doubtful accounts 654 403
Deferred directory costs 442 2,264
Other current assets (589) 56
Accounts payable 2,812 452
Accrued liabilities (3,416) 532
Accrued interest 3,906 1,740
Customer deposits (965) (3,295)
-------- --------
Cash provided by operating activities 7,613 11,594
INVESTING ACTIVITIES
Purchase of property, equipment and leasehold improvements (576) (611)
Acquisition of directories (39,454) (7,807)
Increase in other assets (233) (5,856)
-------- --------
Cash used for investing activities (40,263) (14,274)
FINANCING ACTIVITIES
Borrowings under long-term debt agreements:
Revolving credit facility 47,700 24,600
Repayments of long-term debt
Revolving credit facility (24,700) (23,100)
External Debt Payments (1,965) (430)
Senior Term Loan (1,307) (3,062)
Partnership contribution 61 (38)
-------- --------
Cash provided by (used for) financing activities 19,789 (2,030)
-------- --------
Net decrease in cash (12,861) (4,710)
Cash at beginning of period 14,067 6,812
-------- --------
Cash at end of period $ 1,206 $ 2,102
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 12,156 $ 11,029
</TABLE>
See accompanying notes.
<PAGE> 6
TRANSWESTERN HOLDINGS L.P.
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 Holdings L.P. ("Holdings") and its wholly owned
subsidiary, TransWestern Publishing Company, LLC ("TransWestern"). All
significant inter-company transactions have been eliminated. Holdings' only
assets consist of TransWestern's Member Units (as defined). 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. Target Directories of Michigan, Inc. is a wholly owned subsidiary
of TransWestern.
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 Holdings' 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 HOLDINGS L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS ARE IN THOUSANDS)
2. FINANCIAL STATEMENT DETAILS
Property, Equipment and Leasehold Improvements
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Computer and office equipment.................... $ 6,502 $ 6,122
Furniture and fixtures........................... 1,723 1,636
Leasehold improvements........................... 419 310
----------- -----------
8,644 8,068
Less accumulated depreciation and amortization... (5,870) (5,091)
----------- -----------
$ 2,774 $ 2,977
=========== ===========
</TABLE>
Acquired Intangibles
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Customer Base.................................. $ 109,368 $ 60,031
Less accumulated amortization.................. (38,762) (25,545)
----------- -----------
$ 70,606 $ 34,486
=========== ===========
</TABLE>
Other Assets
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Debt issuance costs............................... $ 11,599 $ 11,367
Less accumulated amortization..................... (2,651) (1,621)
----------- -----------
$ 8,948 $ 9,746
=========== ===========
</TABLE>
3. DIRECTORY ACQUISITIONS
United. On January 5, 1999, TransWestern 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 HOLDINGS L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS ARE IN THOUSANDS)
3. DIRECTORY ACQUISITIONS (CONTINUED)
Lambert. On January 8, 1999, TransWestern 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, TransWestern 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, TransWestern purchased four directories
from Call It, Inc. (DBA Orange Line) 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, TransWestern 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, TransWestern purchased certain tangible
and intangible assets of Golden State Directory, Corp. ("Golden State") for a
total of approximately $5.5 million. Golden State published six directories
in northern California.
Pioneer. On August 30, 1999 TransWestern purchased certain tangible and
intangible assets from Pioneer Telephone Directories Corp. ("Pioneer") for $2.4
million in cash. Pioneer published three directories in southeastern Alabama.
Stafford. On August 24, 1999 TransWestern purchased certain tangible and
intangible assets from Greenville News, Inc. (Stafford Communications) for $2.5
million in cash. Greenville News published two directories in western central
Michigan.
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 $ 46,146
Deferred directory costs 1,457
Other current and non-current assets 2,361
</TABLE>
<PAGE> 9
TRANSWESTERN HOLDINGS L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS ARE IN THOUSANDS)
3. DIRECTORY ACQUISITIONS (CONTINUED)
Assuming that the above acquisitions had occurred on January 1, 1998, the
unaudited pro forma results of operations would be as follows:
<TABLE>
<CAPTION>
Nine months ended September 30,
-----------------------------
1999 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Net revenues....................................... $107,834 $98,095
Net loss ....................................... (3,170) (1,453)
</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.
4. GUARANTEE
Target Directories of Michigan, Inc. ("Target"), which is a direct,
wholly-owned subsidiary of TransWestern, fully and unconditionally guaranteed
TransWestern's Series D 9 5/8% Senior Subordinated Notes due 2007 that were
outstanding as of September 30, 1999 on an unsecured senior subordinated basis.
Target is TransWestern's only direct or indirect subsidiary, other than an
inconsequential subsidiary which is a co-issuer of the notes, 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 nine months ended and as of September 30, 1999
(unaudited):
Statement of Operations Data:
Net revenues $ 2,710
Gross profit 1,921
Operating income 313
Net income 88
Balance Sheet:
Current assets $ 1,257
Non-current assets 4,784
Current liabilities 722
Non-current liabilities --
5. SUBSEQUENT EVENTS
ACQUISITIONS
United Multimedia (American Media). On October 15, 1999 TransWestern
purchased certain tangible and intangible assets of United Multimedia (American
Media) for a total of $16.0 million. The purchase price consists of $14.4
million in cash and a note payable of $1.6 million due in 18 months subject to
adjustment based on actual account receivable collections. TransWestern will
pay a $0.5 million production fee on January 1, 2000 for completion of certain
in-process directories. United Multimedia published six directories in
Riverside County and northern San Diego County, California.
Medina. On November 1, 1999 TransWestern purchased certain tangible and
intangible assets of Great Lakes Telephone Directories ("Medina") for
approximately $1.5 million in cash. We also paid $0.3 million for a non-compete
agreement in the region. Medina published one directory in Northern Ohio.
<PAGE> 10
TRANSWESTERN HOLDINGS L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS ARE IN THOUSANDS)
5. SUBSEQUENT EVENTS (CONTINUED)
ACQUISITIONS (CONTINUED)
Superior. On November 12, 1999 TransWestern purchased certain tangible and
intangible assets of Superior Telephone Directories II ("Superior") for
approximately $1.2 million. Superior publishes one directory in Oklahoma.
SENIOR CREDIT FACILITY AMENDMENT
In November 1997, in conjunction with the Recapitalization of Holdings
and TransWestern, TransWestern entered into an Assumption Agreement and
Amended and Restated Credit Agreement with CIBC and First Union and other
lenders, pursuant to which TransWestern could borrow up to $125.0 million
consisting of a revolving credit facility of up to $40.0 million (the
"Revolving Credit Facility") and a Senior Term Loan in an aggregate principal
amount of $85.0 million (the "Senior Term Loan"). Principal payments on the
Senior Term Loans are due quarterly through maturity, October 1, 2004. The
revolving credit agreement expires on October 1, 2003. Borrowings under this
agreement rank senior to all other indebtedness of TransWestern and are Secured
by all the assets of TransWestern.
In October 1999 the Amended and Restated Credit Agreement (the "Credit
Agreement") was amended to increase the Revolving Credit Facility to $70.0
million, increase to $4.0 million the allowable amount of annual lease
commitments, increase to $0.25 million the amount of permitted loans to Officers
and employees, increase to $50.0 million the permitted annual amount of
pre-approved acquisitions, and change the step-down schedule of borrowing
availability. The Revolving Credit commitments shall automatically be
permanently reduced according to the following schedule, commencing on
January 1, 2002, by the amount set forth opposite each date.
<TABLE>
<S> <C>
January 1, 2002............................... $ 5,250
April 1, 2002............................... 5,250
July 1, 2002............................... 5,250
October 1, 2002............................... 5,250
January 1, 2003............................... 12,250
April 1, 2003............................... 12,250
July 1, 2003............................... 12,250
October 1, 2003............................... 12,250
The terms of the Senior Term Loan were not affected by this amendment.
</TABLE>
<PAGE> 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (UNAUDITED)
As used in this item and throughout this Quarterly Report on form 10-Q,
"we," "us," and "our" each refer to Holdings and TransWestern collectively.
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 TransWestern continues 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 periods different 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 1999 1999 1999
----------------------------------------------------------------
3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net revenues ............... $ 29.0 $ 24.4 $ 31.5 $ 34.1 $ 38.2
EBITDA (a) ................. $ 8.5 $ 5.5 $ 8.2 $ 11.0 $ 12.0
Bookings (b) ............... $ 26.8 $ 29.3 $ 30.7 $ 34.6 $ 37.8
Advance payments ........... $ 13.3 $ 13.9 $ 14.4 $ 15.4 $ 17.6
Total cash receipts (c) .... $ 25.9 $ 26.0 $ 25.4 $ 28.3 $ 32.6
</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) "Total Cash Receipts" includes both advance payments and collections of
accounts receivable.
<PAGE> 12
RESULTS OF OPERATIONS
The following table summarizes our results of operations as a percentage
of revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- -------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues .................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues .............. 18.9 19.2 18.6 18.8
--------- --------- --------- ---------
Gross profit .................. 81.1 80.8 81.4 81.2
Sales and marketing ........... 40.3 42.0 41.4 40.4
General and administrative .... 23.1 15.0 23.7 15.2
--------- --------- --------- ---------
Income from operations ........ 17.7% 23.8% 16.3% 25.6%
========= ========= ========= =========
EBITDA Margin (a), (b) ........ 31.5% 29.5% 30.0% 31.9%
========= ========= ========= =========
</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 SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net revenues increased $9.2 million, or 31.9%, from $29.0 million in the
three months ended September 30, 1998 to $38.2 million in the same period in
1999. We published 48 directories in the three months ended September 30, 1999
compared to 37 in the same period in 1998. The net revenue growth of $9.2
million was due to $7.6 million from twelve new directories, $8.1 million from
eleven directories for which the publication date moved into the period and
growth in the same 25 directories published during both periods of $1.5
million; offset by $8.0 million of net revenues associated with twelve
directories published in the three months ended September 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 25
directories published in both periods was 7.2%.
<PAGE> 13
Cost of revenues increased $1.6 million, or 30.1%, from $5.6 million in
the three months ended September 30, 1998 to $7.2 million in the same period
in 1999. The increase was the result of $1.6 million of costs associated with
twelve new directories published in the three months ended September 30, 1999
and $1.3 million in costs associated with eleven directories published in the
three months ended September 30, 1999, but not in the same period in 1998;
offset by $1.2 million of costs associated with twelve directories published
during the three months ended September 30, 1998, but not in the same period in
1999 and $0.3 million in reductions from the same 25 books published in both
periods. Indirect production support costs increased $0.2 million in the three
months ended September 30, 1999 due to the new directories published in the
third quarter of 1999.
As a result of the above, gross profit increased $7.6 million, or
32.3%, from $23.4 million in the three months ended September 30, 1998 to $31.0
million in the same period in 1999. Gross margin increased from 80.8% in the
three months ended September 30, 1998 to 81.1% in the same period in 1999 as a
result of lower direct costs on directories published in both periods.
Sales and marketing expenses increased $3.2 million, or 26.4%, from
$12.2 million in the three months ended September 30, 1998 to $15.4 million in
the same period in 1999. The increase was attributable to increases of $0.7
million in sales support costs, $2.4 million in direct sales costs and $0.1
million in the provision for bad debt.
The increase in sales support costs of $0.7 million was due to sales
offices acquired since the third quarter of 1998. The increase in direct sales
costs of $2.4 million was as follows: $2.0 million of additional costs were for
the twelve new directories, $1.8 million for eleven directories moving into the
period, and $0.3 million of higher costs associated with the 25 same
directories; offset by $1.7 million of costs associated with twelve directories
that published in the three months ended September 30, 1998 but not in the same
period in 1999. Direct sales costs as a percentage of revenue for the same 25
directories published during both periods decreased from 20.0% to 19.8% in the
three months ended September 30, 1998 compared to the same period in 1999. The
increase in the provision for bad debt of $0.1 million was at a lower rate than
the increase in net revenue due to higher recovered revenue from accounts
previously written off and lower provision rates from new directory titles.
General and administrative expenses increased $4.4 million, or 102.4%,
from $4.4 million for the three months ended September 30, 1998 to $8.8 million
for the same period in 1999. The increase was due to: amortization of acquired
customer base and other intangibles of $3.6 million and an increase in
incentive compensation costs and increases in other professional service costs
totaling $0.8 million.
As a result of the above factors, income from operations decreased $0.1
million, or 1.7%, from $6.9 million in the three months ended September 30,
1998 to $6.8 million in the same period in 1999. Income from operations as a
percentage of net revenues decreased from 23.8% in the three months ended
September 30, 1998 to 17.7% in the same period in 1999.
Interest expense increased $1.0 million, or 20.4%, from $5.6 million in
the three months ended September 30, 1998 to $6.7 million in the same period
in 1999 due to higher levels of debt.
As a result of the above factors, net income decreased $1.4 million, or
109.4%, from income of $1.3 million in the three months ended September 30,
1998 to a loss of ($0.1) million in the same period in 1999.
<PAGE> 14
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
Net revenue increased $19.3 million, or 22.9%, from $84.5 million in the
nine months ended September 30, 1998 to $103.9 million in the same period in
1999. We published 133 directories in the nine months ended September 30, 1999
compared to 112 in the same period in 1998. The net revenue growth was due to
$17.8 million from 28 new directories, $4.8 million from seven directories
for which the publication date moved into the period and growth in the same 98
directories published during both periods of $5.9 million; offset by $9.2
million of net revenues associated with 14 directories published in the
nine months ended September 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 98
directories published in both periods was 7.8%.
Cost of revenues increased $3.4 million, or 21.3%, from $15.9 million in
the nine months ended September 30, 1998 to $19.3 million in the same period
in 1999. The increase was the result of $3.9 million of costs associated with
28 new directories published in the nine months ended September 30, 1999, and
$0.8 million in costs associated with seven directories published in the nine
months ended September 30, 1999, but not in the same period in 1998; offset by
$1.5 million of costs associated with 14 directories published during the nine
months ended September 30, 1998, but not in the same period in 1999. Costs for
the same 98 books decreased $0.4 million compared to the prior year. Production
support costs increased $0.6 million in the nine months ended September 30,
1999 due to the new directories published during the period.
As a result of the above, gross profit increased $16.0 million, or
23.2%, from $68.6 million in the nine months ended September 30, 1998 to $84.6
million in the same period in 1999. Gross margin increased from 81.2% in the
nine months ended September 30, 1998 to 81.4% in the same period in 1999 as a
result of lower direct costs as a percentage of revenue on the directories
published in both periods and directories moving into the period.
Sales and marketing expenses increased $9.0 million, or 26.2%, from
$34.1 million in the nine months ended September 30, 1998 to $43.1 million in
the same period in 1999. The increase was attributable to increases of $3.3
million in sales support costs, $4.8 million in direct sales costs and $0.9
million in the provision for bad debt.
The increase in sales support costs of $3.3 million was due to $2.8
million in higher sales costs incurred by offices acquired since the third
quarter of 1998 and $0.5 million due to the reorganization of the sales
management structure in 1998. The increase in direct sales costs of $4.8
million was as follows: $4.5 million of additional costs were for the 28 new
directories, $1.0 million for seven directories moving into the period, and
$1.3 million of higher costs associated with the 98 same directories; offset by
$2.0 million of costs associated with 14 directories that published in the
nine months ended September 30, 1998 but not in the same period in 1999. Direct
sales costs as a percentage of revenue for the same 98 directories published
during both periods increased from 20.1% to 20.3% in the nine months ended
September 30, 1998 compared to the same period in 1999.
General and administrative expenses increased $11.7 million, or 91.4%,
from $12.9 million for the nine months ended September 30, 1998 to $24.6
million for the same period in 1999. The increase was due to: amortization of
acquired customer base and other intangibles of $8.9 million and an increase in
incentive compensation costs and increases in other professional service costs
totaling $2.8 million.
As a result of the above factors, income from operations decreased $4.7
million, or 21.9%, from $21.6 million in the nine months ended September 30,
1998 to $16.9 million in the same period in 1999. Income from operations as a
percentage of net revenues decreased from 25.6% in the nine months ended
September 30, 1998 to 16.3% in the same period in 1999.
<PAGE> 15
Interest expense increased $3.6 million, or 21.5%, from $16.7 million in
the nine months ended September 30, 1998 to $20.3 million in the same period
in 1999 due to higher levels of debt.
As a result of the above factors, net income decreased $8.5 million, or
163.9%, from income of $5.2 million in the nine months ended September 30, 1998
to a loss of $3.3 million in the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $7.6 million in the nine
months ended September 30, 1999 compared to $11.6 million in the same
period in 1998, The decrease in cash provided by operations resulted primarily
from an increase in trade receivables and the write-off rate of doubtful
accounts in the nine months ended September 30, 1999 compared to the same
period in the prior year.
Customer deposits (advance payments) have improved compared to the prior
year due to higher volume of net revenues and our efforts to collect more cash
at contract closing to reduce our exposure to uncollectable accounts. Advance
payments were $38.0 million in the nine months ended September 30, 1999 and
$34.7 million in the same period in 1998 for an increase of $3.3 million or
9.5%.
Net cash used for investing activities was $40.3 million in the nine
months ended September 30, 1999 as compared to $14.3 million in the same period
in 1998. Investing activities consist primarily of cash used to acquire
directories. In the nine months ended September 30, 1999, $39.5 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. ($8.4
million) and Target Directories of Michigan, Inc. ($5.4 million). Acquisitions
made in the nine months ended September 30, 1999 are discussed in note 3 of the
financial statements included in this Form 10-Q.
Net cash provided by financing activities was $19.8 million in the nine
months ended September 30, 1999 as compared to $2.0 million used for the same
period in 1998. These borrowings were undertaken to aid in the funding of
acquisitions during the quarters.
In connection with the recapitalization of our company in October 1997,
we incurred significant debt. As of September 30, 1999 Holdings had total
outstanding long term indebtedness of $272.7 million, including TransWestern's
$141.6 million (including unamortized premium) of Series D 9 5/8% Senior
Subordinated Notes due 2007, $40.4 million of Holdings' 11 7/8% Senior Discount
Notes due 2008 and $64.9 million of outstanding borrowings under TransWestern's
senior credit facility, which ranks senior to the Series D notes.
As of September 30, 1999 the borrowing capacity under TransWestern's
revolving loan agreement under its senior credit facility was $40 million and
$23 million was borrowed and $17 million was available under the agreement. In
October 1999, the senior credit facility was amended to provide TransWestern
with $30 million in additional borrowing capacity on its revolving loan
agreement and to make certain other changes to the senior credit facility. In
October 1999, TransWestern purchased certain tangible and intangible assets of
United Multimedia (American Media) for a total of $16.0 million. See footnote
5 of the consolidated financial statements, subsequent events, for additional
information on the amendments to the senior credit facility and the American
Media acquisition.
In May, 1999 TransWestern was required to make a semiannual interest
payment of $6.7 million on its Series D 9 5/8% Senior Subordinated Notes.
Another, similar payment is due in November of 1999.
<PAGE> 16
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.
The senior credit facility and the indentures governing TransWestern's
notes significantly restrict the distribution of funds by TransWestern and the
other 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 READINESS STATEMENT
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.
Business Computer Systems, Computing Infrastructure, and End User
Computing Readiness Programs. We, with the assistance of third parties,
conducted an assessment of our internal applications and computer hardware.
Some software applications already were or have been made year 2000 compliant
and resources were assigned to address other applications based on their
importance and the time required to make them Y2K compliant. All of our
software remediation, Y2K compliance evaluation of hardware, including routers,
telecommunication equipment, workstations and other items are substantially
complete.
In addition to applications and information technology hardware, we have
developed remediation/contingency plans for certain business critical systems
such as: embedded systems, facilities and other operations, such as financial
and banking systems. Business critical systems were tested for Y2K compliance
and service agreements for those systems were reviewed to confirm we will have
vendor support for such systems in Y2K.
<PAGE> 17
Vendors/Suppliers Readiness Program. This program focuses on minimizing
the risks associated with key suppliers. We have identified key suppliers and
have contacted them to solicit information on their Y2K readiness. To date, we
have received most responses, which indicate that the suppliers are either in
compliance or are in the process of developing remediation plans. We have also
developed supplier action lists and contingency plans for key suppliers,
including identification of alternative vendors and documentation of plans to
aid in minimizing any impact from the Y2K problem.
We estimate that total Y2K costs will be approximately $0.7 million. Y2K
costs incurred by the end of the third quarter of 1999 were approximately $0.65
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 our Y2K remediation efforts are largely complete, we cannot
assure you that unforseen complications will not arise or that third parties
on which we rely in our 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 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 September 30, 1999, there was approximately
$64.9 million outstanding under the term loan (at an interest rate of 7.8% at
such time) and $23.0 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.
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.
<PAGE> 18
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"), with a complaint filed in the
United States District Court for the Southern District of California. On
October 5, 1999 the complaint was settled for an amount that is not material
to the Company's consolidated financial statements.
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
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on November 10, 1999 on
its behalf by the undersigned thereunto duly authorized.
TRANSWESTERN HOLDINGS L.P.
(Registrant)
BY: TransWestern Communications Company, Inc.
(General Partner)
BY: /s/ Laurence H. Bloch
--------------------------------------------
Name: Laurence H. Bloch
Title: Chairman, Secretary and Director
BY: /s/ Joan Fiorito
--------------------------------------------
Name: Joan Fiorito
Title: Vice President, Chief Financial
Officer and Assistant Secretary
(Principal Financial and Accounting
Officer)
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-1-1999
<PERIOD-END> SEP-30-1999
<CASH> 1206
<SECURITIES> 0
<RECEIVABLES> 41319
<ALLOWANCES> (9314)
<INVENTORY> 0
<CURRENT-ASSETS> 43761
<PP&E> 8644
<DEPRECIATION> (5870)
<TOTAL-ASSETS> 126089
<CURRENT-LIABILITIES> (41434)
<BONDS> (182032)
0
0
<COMMON> 0
<OTHER-SE> 188045
<TOTAL-LIABILITY-AND-EQUITY> (126089)
<SALES> 38231
<TOTAL-REVENUES> 38231
<CGS> 7232
<TOTAL-COSTS> 31458
<OTHER-EXPENSES> (99)
<LOSS-PROVISION> 2932
<INTEREST-EXPENSE> 6771
<INCOME-PRETAX> 99
<INCOME-TAX> 225
<INCOME-CONTINUING> (126)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (126)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
