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 SEPTEMBER 30, 2000.
[ ] 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 [ ]
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2
TRANSWESTERN HOLDINGS L.P.
FORM 10-Q INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000 (unaudited)
and December 31, 1999 3
Unaudited Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 2000 and 1999 4
Unaudited Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 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 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
3
TRANSWESTERN HOLDINGS L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands)
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 1,815 $ 1,167
Trade receivables, (less allowance for doubtful accounts of
$8,426 at Sept. 30, 2000 and $10,394 at December 31, 1999) 40,201 36,188
Deferred directory costs 13,500 10,037
Other current assets 1,300 1,198
--------- ---------
Total current assets 56,816 48,590
Non-current assets:
Property, equipment and leasehold improvements, net 4,344 3,423
Acquired intangibles, net 97,243 85,879
Other assets, primarily debt issuance costs, net 9,246 9,454
--------- ---------
Total non-current assets 110,833 98,756
--------- ---------
Total assets $ 167,649 $ 147,346
========= =========
LIABILITIES AND PARTNERSHIP DEFICIT
Current liabilities:
Accounts payable $ 8,846 $ 8,323
Salaries and benefits payable 4,906 5,735
Accrued acquisition costs 2,892 4,915
Accrued interest 6,161 2,131
Other accrued liabilities 1,059 1,011
Customer deposits 22,184 16,313
Current portion, long-term debt 1,941 1,741
--------- ---------
Total current liabilities 47,989 40,169
Long-term debt:
Series D 9 5/8% Senior Subordinated Notes 141,431 141,583
Series B 11 7/8% Senior Discount Notes 45,339 41,588
Senior credit facility 63,114 64,422
Term B loan 39,800 -0-
Revolving loan 24,200 40,100
Acquisition payables 1,595 4,910
--------- ---------
Total long-term debt 315,479 292,603
--------- ---------
Partnership deficit (195,819) (185,426)
--------- ---------
Total liabilities and partner deficit $ 167,649 $ 147,346
========= =========
See accompanying notes.
4
TRANSWESTERN HOLDINGS L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net revenue $ 43,117 $ 38,231 $116,611 $103,880
Cost of revenue 8,436 7,232 22,490 19,313
-------- -------- -------- --------
Gross profit 34,681 30,999 94,121 84,567
Operating expenses:
Sales and marketing 18,155 15,409 49,718 43,060
General and administrative 11,428 8,817 32,100 24,609
-------- -------- -------- --------
Total operating expenses 29,583 24,226 81,818 67,669
-------- -------- -------- --------
Income from operations 5,098 6,773 12,303 16,898
Other income, net 251 97 529 305
Interest expense (8,051) (6,771) (22,945) (20,279)
-------- -------- -------- --------
Net income (loss) before taxes $ (2,702) $ 99 $(10,113) $ (3,076)
Tax Expense 129 225 241 233
-------- -------- -------- --------
Net Income (loss) $ (2,831) $ (126) $(10,354) $ (3,309)
======== ======== ======== ========
Net income (loss) allocated
to General Partner units $ (49) $ (2) $ (178) $ (57)
======== ======== ======== ========
Net income (loss) allocated
to Limited Partner units $ (2,782) $ (124) $(10,176) $ (3,252)
======== ======== ======== ========
Net income (loss) per
General Partner unit $ (5.0) $ (0.2) $ (18.2) $ (5.8)
======== ======== ======== ========
Net income (loss) per
Limited Partner unit $ (1.5) $ (0.1) $ (5.4) $ (1.7)
======== ======== ======== ========
See accompanying notes.
5
TRANSWESTERN HOLDINGS L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
-------- --------
OPERATING ACTIVITIES
Net (loss) $(10,354) $ (3,309)
Adjustments to reconcile net (loss) to cash provided by
operating activities:
Depreciation and amortization 20,627 13,995
Amortization of deferred debt issuance costs 868 1,029
Amortization of premium (152) (151)
Amortization of senior note discount 3,751 3,339
Provision for doubtful accounts 11,434 9,154
Changes in operating assets and liabilities,
Trade receivables (2,934) (8,940)
Write-off of doubtful accounts (13,402) (10,348)
Recoveries of doubtful accounts 888 654
Deferred directory costs (3,463) 442
Other current assets (102) (589)
Accounts payable (306) 2,812
Accrued liabilities (1,975) (3,416)
Accrued interest 4,030 3,906
Customer deposits 5,871 (965)
-------- --------
Cash provided by operating activities 14,781 7,613
INVESTING ACTIVITIES
Purchase of property, equipment and leasehold improvements (1,826) (576)
Acquisition of directories (30,626) (39,454)
Increase in other assets (1,121) (233)
-------- --------
Cash used for investing activities (33,573) (40,263)
FINANCING ACTIVITIES
Borrowings under long-term debt agreements:
Revolving credit facility 49,500 47,700
Term B loan 40,000 -0-
Repayments of long-term debt
Revolving credit facility (65,400) (24,700)
External debt payments (3,315) (1,965)
Senior term loan (1,308) (1,307)
Partnership contribution (37) 61
-------- --------
Cash provided by (used for) financing activities 19,440 19,789
-------- --------
Net increase (decrease) in cas 648 (12,861)
Cash at beginning of period 1,167 14,067
-------- --------
Cash at end of period $ 1,815 $ 1,206
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 14,211 $ 12,156
======== ========
See accompanying notes.
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) and the stock of
TWP Capital Corp. ("Capital"), a wholly-owned subsidiary. 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 is the only other 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 the Company's Form 10-K for the fiscal year ended
December 31, 1999. The 10-K is available on the Internet at http://www.sec.gov.
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
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -----------
Computer and office equipment $ 8,880 $ 7,342
Furniture and fixtures 1,879 1,789
Leasehold improvements 445 430
Building 183 -0-
----------- -----------
11,387 9,561
Less accumulated depreciation and amortization... (7,043) (6,138)
----------- -----------
Net property, equipment, and leasehold $ 4,344 $ 3,423
=========== ===========
Acquired Intangibles
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -----------
Customer Base $ 155,565 $ 128,074
Non-compete and licensing agreements 5,519 2,160
----------- -----------
161,084 130,234
Less accumulated amortization (63,841) (44,355)
----------- -----------
Acquired intangibles, net $ 97,253 $ 85,879
=========== ===========
Other Assets
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -----------
Debt issuance costs $ 12,892 $ 11,994
Less accumulated amortization (4,146) (3,040)
----------- -----------
Debt issuance costs, net $ 8,746 $ 8,954
Investment in Eversave, carried at cost 500 500
----------- -----------
Other assets, net $ 9,246 $ 9,454
=========== ===========
8
TRANSWESTERN HOLDINGS L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS ARE IN THOUSANDS)
3. DIRECTORY ACQUISITIONS
Desert Pages. On January 14, 2000 we purchased certain tangible and
intangible assets of Desert Pages, Inc. for a total of $8.0 million.
The purchase price consists of $7.2 million in cash and a promissory
note of $0.8 million due eighteen months from the date of purchase, subject
to adjustment based upon the actual collections of accounts receivable
outstanding as of the closing during such period. Desert Pages published one
directory in Palm Springs, California. As part of the acquisition, we acquired
the rights to publish a second, new directory that has not yet been published.
Direct Media Corp. On February 15, 2000 we purchased certain tangible
and intangible assets of Direct Media Corp. for a total of $3.4 million in
cash. Direct media publishes eight directories serving southeastern Georgia
and the northeastern Florida area. As part of the acquisition, we acquired
the rights to publish a new directory in Georgia that has not yet been
published.
Coastal Pages. On June 15, 2000 we purchased certain tangible and
intangible assets of Coastal Pages, LLC. for a total of $3.5 million.
The purchase price consists of $3.2 million in cash and $0.3 million
non-interest promissory note due in approximately 7 months from the date of
purchase subject to achieving a net revenue target with respect to the December
2000 San Luis Obispo edition. Coastal Pages published three directories in
the Central California Coast area.
E&L Han Publishing. On July 7, 2000, we purchased certain tangible and
intangible assets of E&L Han Publishing for a total of $0.3 million. E&L Han
published one directory in Central California.
New York Times. On July 18, 2000, we purchased certain tangible and
intangible assets of The New York Times Company for a total of $16.6 million.
The New York Times Company publishes 9 directories in Florida and Louisiana.
As part of the acquisition, we assumed certain liabilities of The New York
Times Company totaling approximately $0.3 million.
America West Publishing. On July 18, 2000, we purchased certain
tangible and intangible assets of America West Publishing for a total of $1.3
million. We acquired 2 directories published by America West Publishing in
the Central California area.
American Directories. On September 1, 2000, we purchased certain
tangible and intangible assets of America Directories for a total of $2.5
million. We acquired 5 directories published by American Directories in
the Central California area.
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 dates
of acquisition, as follows (in thousands):
Customer List $ 27,491
Non-compete 3,135
Deferred directory costs 971
Other current and non-current assets 3,554
Assuming that the above acquisitions had occurred on the first day of
Holdings's nine month periods ended September 30, 2000 and September 30,
1999, the unaudited pro forma results of operations would be as follows:
9
TRANSWESTERN PUBLISHING COMPANY LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS ARE IN THOUSANDS)
Nine months ended Sept 30,
-----------------------------
2000 1999
------------ -----------
(Unaudited)
Net revenues................... $121,887 $110,151
Net (loss) (8,147) (4,851)
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 wholly-owned
by TransWestern, fully and unconditionally guaranteed TransWestern's
outstanding 9 5/8% Series D Senior Subordinated Notes due 2007 on an unsecured
senior subordinated basis. Target is TransWestern's only consolidated operating
subsidiary, other than an inconsequential subsidiary which is a co-issuer of
such notes, and 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 or
meaningful to investors. Target was acquired in July, 1998. Following is
summarized financial information concerning Target as of September 30, 2000
and for the nine months ended September 30, 2000:
Statement of Operations Data:
Net revenues $ 2,919
Gross profit 2,571
Operating income 1,202
Net income 30
Balance Sheet:
Current assets $ 1,682
Non-current assets 3,503
Current liabilities 641
Non-current liabilities -
5. Senior Credit Facility
On July 3, 2000 TransWestern and its lenders agreed to amend our
November 6, 1997 credit agreement to allow TransWestern to obtain a $40
million Tranche B Term Loan due in April 2005. The proceeds of the loan were
used to pay down our existing revolving credit loan in order to provide
TransWestern with additional funds for acquisitions. The total amount
outstanding under this agreement at September 30, 2000 is $40.0 million.
10
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 the number of directories that we publish
increases, the publication schedule is periodically adjusted to accommodate
new books. In addition, changes in distribution dates are caused by market and
competitive conditions and the staffing level required to achieve the
individual directory revenue goals. As a result, our directories may be
published in a month earlier or later than the previous year which may
move recognition of related revenues from one fiscal quarter or year to
another. Year to year results depend on both timing and performance factors.
Notwithstanding significant monthly fluctuation in net revenues and EBITDA
recognized based on actual distribution dates of individual directories,
quarterly recognition of net revenues and EBITDA generally occurs at a steadier
pace throughout the year and typically increase at a slower rate than bookings,
advance payments, and total cash receipts when TransWestern is growing. This is
primarily the result of the fact that revenues and the associated EBITDA
related to a directory are recognized when a directory is distributed. Our
bookings and cash collection activities generally occur at a steady pace
throughout the year and reflect the growth of our portfolio of directories and
business more rapidly as we add additional account executives from acquired
companies as a result of recognizing bookings and cash activities as they
occur. The table below demonstrates that quarterly bookings, collection of
advance payments and total cash receipts have grown at a higher rate than
net revenues and EBITDA from the 3rd quarter of 1999 to the 3rd quarter of
2000.
------------------------------------------------------------------------------
1999 1999 2000 2000 2000 % Change
------------------------------------------------------------------------------
3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 2Q-99 to
2Q-00
------------ ----------- ----------- ----------- ----------- -----------
Net revenues ............... $ 38.2 $ 42.6 $ 34.9 $ 38.6 $ 43.1 12.8%
EBITDA (a) ................. $ 12.0 $ 15.5 $ 8.5 $ 12.0 $ 12.8 6.7%
Bookings (b) ............... $ 37.8 $ 35.1 $ 34.9 $ 43.7 $ 44.1 16.7%
Advance payments ........... $ 17.6 $ 18.7 $ 17.0 $ 19.7 $ 21.4 21.6%
Total cash receipts (c) .... $ 32.6 $ 34.6 $ 34.3 $ 38.7 $ 39.8 22.1%
(a) "EBITDA" is defined as income (loss) plus interest expense, and
depreciation and amortization and is consistent
with the definition of EBITDA in the indentures relating to
TransWestern's notes and in TransWestern's 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. TransWestern's definition
of EBITDA may not be comparable to that of other companies.
11
(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. Bookings generated by predecessor owners of acquired
directories are excluded.
(c) "Total cash receipts" includes both advance payments and collections of
accounts receivable.
RESULTS OF OPERATIONS
The following table summarizes our results of operations as a percentage
of revenue for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Net revenues .................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues .............. 19.6 18.9 19.3 18.6
--------- --------- --------- ---------
Gross profit .................. 80.4 81.1 80.7 81.4
Sales and marketing ........... 42.1 40.3 42.6 41.4
General and administrative .... 26.5 23.1 27.5 23.7
--------- --------- --------- ---------
Income from operations ........ 11.8% 17.7% 10.6% 16.3%
========= ========= ========= =========
EBITDA Margin (a), (b) ........ 29.7% 31.5% 28.6% 29.5
========= ========= ========= =========
(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 provides a valuable indication
of TransWestern's ability to generate cash flows available for debt
service.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net revenues increased $4.9 million, or 12.8%, from $38.2 million in the
three months ended September 30, 1999 to $43.1 million in the same period in
2000. We published 58 directories in the three months ended September 30, 2000
compared to 48 in the same period in 1999. The net revenue growth was due to
$5.4 million from sixteen new directories, $5.8 million from seven directories
for which the publication date moved into the period and growth in the same 35
directories published during both periods of $2.2 million; offset by $8.5
million of net revenues associated with thirteen directories published in the
three months ended September 30, 1999 but not in the same period in 2000.
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 additional ad sizes and additional
headings, our same book revenue growth for the 35 directories published in both
periods was 7.3%.
Cost of revenues increased $1.2 million, or 16.6%, from $7.2 million in
the three months ended September 30, 1999 to $8.4 million in the same period
in 2000. The increase was the result of $1.6 million of costs associated with
sixteen new directories published in the three months ended September 30, 2000,
and $1.0 million in costs associated with seven directories published in the
three months ended September 30, 2000, but not in the same period in 1999;
offset by $1.6 million of costs associated with thirteen directories published
12
during the three months ended September 30, 1999, but not in the same period
in 2000. Production support costs increased $0.2 million in the three months
ended September 30, 2000 due to the directories acquired since the second
quarter of 1999.
As a result of the above, gross profit increased $3.7 million, or
11.9%, from $31.0 million in the three months ended September 30, 1999 to $34.7
million in the same period in 2000. Gross margin decreased from 81.1% in the
three months ended September 30, 1999 to 80.4% in the same period in 2000 as a
result of higher direct costs on new directories published during the 2000
quarter.
Sales and marketing expenses increased $2.8 million, or 17.8%, from
$15.4 million in the three months ended September 30, 1999 to $18.2 million in
the same period in 2000. The increase was attributable to increases of $0.7
million in sales support costs, $1.0 million in direct sales costs and $1.1
million in the provision for bad debt (which was consistent with the increase
in net revenues).
The increase in sales support costs of $0.7 million was due to $0.6
million in higher sales costs incurred by offices acquired and established
for new directories since the third quarter of 1999 and $0.1 million due to
increased costs of running existing sales offices. The increase in direct
sales costs of $1.0 million was as follows: $1.8 million of additional costs
related to sixteen new directories, $1.1 million related to seven directories
moving into the period, and $0.1 million of higher costs associated with the 35
same directories published in both periods, offset by $2.0 million of costs
associated with thirteen directories that were published in the three months
ended September 30, 1999 but not in the same period in 2000. Direct sales costs
as a percentage of revenue for the same 35 directories published during both
periods decreased from 20.9% to 19.9% for the three months ended September 30,
2000 compared to the same period in 1999.
General and administrative expenses increased $2.6 million, or 29.6%,
from $8.8 million for the three months ended September 30, 1999 to $11.4
million for the same period in 2000. The increase was due to: amortization of
acquired customer base and other intangibles of $2.3 million and other
increases in costs totaling $0.3 million.
As a result of the above factors, income from operations decreased $1.7
million, or 24.7%, from $6.8 million in the three months ended September 30,
1999 to $5.1 million in the same period in 2000. Income from operations as a
percentage of net revenues decreased from 17.7% in the three months ended
September 30, 1999 to 11.8% in the same period in 2000.
Interest expense increased $1.3 million, or 18.9%, from $6.8 million in
the three months ended September 30, 1999 to $8.1 million in the same period
in 2000 due to higher levels of debt to fund acquisitions and increased rates.
As a result of the above factors, net income decreased $2.7 million, or
2,146%, from net loss of ($0.1) million in the three months ended September 30,
1999 to a net loss of ($2.8) million in the same period in 2000.
13
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
Net revenues increased $12.7 million, or 12.3%, from $103.9 million in the
nine months ended September 30, 1999 to $116.6 million in the same period in
2000. We published 159 directories in the nine months ended September 30, 2000
compared to 133 in the same period in 1999. The net revenue growth was due to
$10.8 million from 33 new directories, $7.7 million from twelve directories
for which the publication date moved into the period and growth in the same 114
directories published during both periods of $6.4 million; offset by $12.2
million of net revenues associated with nineteen directories published in the
nine months ended September 30, 1999 but not in the same period in 2000.
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 additional ad sizes and additional
headings, our same book revenue growth for the 114 directories published in
both periods was 6.9%.
Cost of revenues increased $3.2 million, or 16.5%, from $19.3 million in
the nine months ended September 30, 1999 to $22.5 million in the same period
in 2000. The increase was the result of $3.1 million of costs associated with
33 new directories published in the nine months ended September 30, 2000, and
$1.6 million in costs associated with twelve directories published in the nine
months ended September 30, 2000, but not in the same period in 1999; offset by
$2.0 million of costs associated with nineteen directories published during the
nine months ended September 30, 1999, but not in the same period in 2000. Costs
for the same 114 directories published in both periods decreased $0.2 million
for the 2000 period compared to the prior year. Production support costs
increased $0.7 million in the nine months period ended September 30, 2000 due
to the directories acquired since the third quarter of 1999.
As a result of the above, gross profit increased $9.5 million, or
11.3%, from $84.6 million in the nine months ended September 30, 1999 to $94.1
million in the same period in 2000. Gross margin decreased from 81.4% in the
nine months ended September 30, 1999 to 80.7% in the same period in 2000 as a
result of higher direct costs on new directories and lower margin
directories moving into the period.
Sales and marketing expenses increased $6.6 million, or 15.5%, from
$43.1 million in the nine months ended September 30, 1999 to $49.7 million in
the same period in 2000. The increase was attributable to increases of $2.0
million in sales support costs, $2.6 million in direct sales costs and $2.0
million in the provision for bad debt (which was consistent with the increase
in net revenues).
The increase in sales support costs of $2.0 million was due to $1.2
million in higher sales costs incurred by offices acquired since the third
quarter of 1999 and $0.8 million due to increased costs of running existing
sales offices. The increase in direct sales costs of $2.6 million was as
follows: $3.2 million of additional costs were for the 33 new directories,
$1.7 million for twelve directories moving into the period, and $0.4
million of higher costs associated with the 114 same directories published in
both periods, offset by $2.7 million of costs associated with nineteen
directories that were published in the nine months ended September 30, 1999
but not in the same period in 2000. Direct sales costs as a percentage of
revenue for the same 114 directories published during both periods decreased
from 20.9% to 20.0% in the nine months ended September 30, 1999 compared to
the same period in 2000.
General and administrative expenses increased $7.5 million, or 30.4%, from
$24.6 million for the nine months ended September 30, 1999 to $32.1 million
for the same period in 2000. The increase was due to increased amortization of
acquired customer base and other intangibles of $6.5 million and other
increases in costs totaling $1.0 million.
14
As a result of the above factors, income from operations decreased $4.6
million, or 27.2%, from $16.9 million in the nine months ended September 30,
1999 to $12.4 million in the same period in 2000. Income from operations as a
percentage of net revenues decreased from 16.3% in the nine months ended
September 30, 1999 to 10.6% in the same period in 2000.
Interest expense increased $2.7 million, or 13.1%, from $20.3 million in
the nine months ended September 30, 1999 to $22.9 million in the same period
in 2000 due to higher levels of debt to fund acquisitions and increased rates.
As a result of the above factors, net income decreased $7.0 million from
a net loss of ($3.3) million in the nine months ended September 30, 1999 to a
net loss of ($10.4) million in the same period in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $14.8 million in the nine
months ended September 30, 2000 compared to $7.6 million in the same period in
1999. The increase in cash provided by operations resulted primarily from
an increase in customer deposits compared to the same period in the prior year.
Customer deposits (advance payments) increased $5.9 million in the nine
months ended September 30, 2000 compared to the same period in the prior year.
The increase is primarily related to the increased size of our directory
portfolio.
Net cash used for investing activities was $33.6 million in the nine
months ended September 30, 2000 as compared to $40.3 million in the same period
in 1999. Investing activities consist primarily of cash used to acquire
directories. In the nine months ended September 30, 2000, $30.6 million was
spent compared to $39.5 million in the same period in the prior year. The prior
year's acquisitions are discussed in note 3 of our Quarterly Report on Form
10-Q for the quarter ended September 30, 1999 which is available on the
Internet at http:www.sec.gov. Acquisitions made in the nine months ended
September 30, 2000 are discussed in note 3 to the financial statements included
in this Form 10-Q.
Net cash provided by financing activities was $19.4 million in the nine
months ended September 30, 2000 as compared to $19.8 million used in the same
period in 1999. These amounts are borrowings for acquisitions during the
quarters, and decreased as a result of fewer acquisitions during the nine
months ended September 30, 2000.
On July 3, 2000 TransWestern and its lenders agreed to amend
TransWestern's November 6, 1997 credit agreement to allow TransWestern to
obtain a $40 million Tranche B Term Loan due in April 2005. The proceeds
of the loan were used to pay down TransWestern's existing revolving credit
facility in order to provide TransWestern with additional funds for
acquisitions.
In connection with the recapitalization of our Company in October 1997,
we incurred significant debt. As of September 30, 2000 we had total outstanding
long term indebtedness of $315.5 million, including $140 million of Series D
9 5/8% Senior Subordinated Notes due 2007, (excluding unamortized premium of
$1.4 million), $45.3 million of Holdings's 11 7/8% Senior Discount Notes due
2008, ("Discount Notes"), $63.1 million of outstanding borrowings under
TransWestern's senior credit facility, $39.8 million of outstanding borrowings
under TransWestern's Term B Loan, $24.2 million of outstanding borrowings under
TransWestern's revolving credit facility, and $1.6 million in acquisition
related debt, all of which ranks senior to the Series D notes. As of
September 30, 2000 TransWestern had $45.8 million of additional borrowing
availability under its senior credit facility.
Our principal sources of funds are cash flows from operating activities
and available funds under our revolving credit facility. Assuming the
successful implementation of management's business and operating strategy, we
believe that these funds will provide us with sufficient liquidity and capital
resources to meet our current and future financial obligations for the next
15
twelve months, including the payment of principal and interest on our notes,
as well as to provide funds for our working capital, capital expenditures
and other operating 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 that the agreements
governing the indebtedness of Holdings's subsidiaries will permit such
subsidiaries to distribute funds to Holdings in amounts sufficient to pay the
accreted value or principal or interest on Holdings's Discount Notes when the
same becomes due, whether at maturity, upon acceleration or redemption or
otherwise. Holdings's 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.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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 10-Q, the words
"anticipate," "believe," "estimate," "expect," "intends" and similar
expressions, as they relate to TransWestern or Holdings are intended to
identify forward-looking statements. Actual results could differ materially
from those projected in the forward-looking statements. Important factors that
could affect our results include, but are not limited to, (i) our high level
of indebtedness; (ii) the restrictions imposed by the terms of our
indebtedness; (iii) the turnover rate amongst our account executives;
(iv) the variation in our quarterly results; (v) risks related to the fact
that a large portion of our sales are to small, local businesses; (vi) our
dependence on certain key personnel; (vii) risks related to the acquisition
and start-up of directories; (viii) risks related to substantial competition
in our markets; (ix) risks related to changing technology and new product
developments; (x) the effect of fluctuations in paper costs; and (xi) the
sensitivity of our business to general economic conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk in connection with the term
loan and the revolving loans outstanding under our senior credit facility,
which bear interest at floating rates based on LIBOR or the prime rate plus an
applicable borrowing margin. As of September 30, 2000, there was approximately
$64.8 million outstanding under the term loan (at an interest rate of 8.5% at
such time) and $40.0 million outstanding under our Term B loan (at an interest
rate of 10.1% at such time) and $24.2 million outstanding under the revolving
loans (at an interest rate of 8.3% 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 $1.3 million on an
annual basis. We do not attempt to mitigate this risk through hedging
transactions. All of our sales are denominated in U.S. dollars, thus we are not
subject to any foreign currency exchange risks.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to various litigation matters incidental to the conduct
of our business. Management does not believe that the outcome of any of
these matters in which we are currently involved will have a material adverse
effect on our financial condition or the results of our operations.
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
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on October 31, 2000 on
its behalf by the undersigned thereunto duly authorized.
TRANSWESTERN HOLDINGS L.P.
(Registrant)
BY: TransWestern Communications Company, Inc.
(General Partner)
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)