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, 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 [ ] ============================================================================== 2 TRANSWESTERN HOLDINGS L.P. FORM 10-Q INDEX

PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of ~~June~~September 30, 2000 (unaudited) and December 31, 1999 3 Unaudited Consolidated Statements of Operations for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2000 ~~(unaudited)~~ and 1999 ~~(unaudited)~~ 4 Unaudited Consolidated Statements of Cash Flows for the ~~Six~~Nine Months Ended ~~June~~September 30, 2000 ~~(unaudited)~~ and 1999 ~~(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 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)

~~JUNE~~SEPTEMBER 30, DECEMBER 31, 2000 1999 --------- --------- (UNAUDITED) ASSETS Current assets: Cash $ 41,~~226~~815 $ 1,167 Trade receivables, (less allowance for doubtful accounts of $8,~~489~~426 at ~~June~~Sept. 30, 2000 and $10,394 at December 31, 1999) 3540,~~742~~201 36,188 Deferred directory costs 1213,~~196~~500 10,037 Other current assets 21,~~098~~300 1,198 --------- --------- Total current assets 5456,~~262~~816 48,590 Non-current assets: Property, equipment and leasehold improvements, net 34,~~521~~344 3,423 Acquired intangibles, net 8797,~~353~~243 85,879 Other assets, primarily debt issuance costs, net 89,~~748~~246 9,454 --------- --------- Total non-current assets 99110,~~622~~833 98,756 --------- --------- Total assets $ ~~153~~167,~~884~~649 $ 147,346 ========= ========= LIABILITIES AND PARTNERSHIP DEFICIT Current liabilities: Accounts payable $ 78,~~450~~846 $ 8,323 Salaries and benefits payable 4,~~536~~906 5,735 Accrued acquisition costs 42,~~611~~892 4,915 Accrued interest 26,~~920~~161 2,131 Other accrued liabilities ~~823~~1,059 1,011 Customer deposits 2022,~~778~~184 16,313 Current portion, long-term debt 1,~~741~~941 1,741 --------- --------- Total current liabilities 4247,~~859~~989 40,169 Long-term debt: Series D 9 5/8% Senior Subordinated Notes 141,~~482~~431 141,583 Series B 11 7/8% Senior Discount, Notes 4445,~~050~~339 41,588 Senior ~~Credit~~credit ~~Facility~~facility 63,~~550~~114 64,422 Term B loan 39,800 -0- Revolving loan 5224,~~500~~200 40,100 Acquisition payables 21,~~394~~595 4,910 --------- --------- Total long-term debt ~~303~~315,~~976~~479 292,603 --------- --------- Partnership deficit (~~192~~195,~~951~~819) (185,426) --------- --------- Total liabilities and partner deficit $ ~~153~~167,~~884~~649 $ 147,346 ========= =========

See accompanying notes. 4 TRANSWESTERN HOLDINGS L.P. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands)

THREE MONTHS ENDED ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~JUNE~~SEPTEMBER 30, --------------------- --------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Net revenue $ 3843,~~558~~117 $ 3438,~~136~~231 $ 73116,~~494~~611 $ 65103,~~649~~880 Cost of revenue 78,~~050~~436 57,~~975~~232 1422,~~055~~490 1219,~~081~~313 -------- -------- -------- -------- Gross profit 3134,~~508~~681 2830,~~161~~999 5994,~~439~~121 5384,~~568~~567 Operating expenses: Sales and marketing 1518,~~854~~155 1315,~~866~~409 3149,~~562~~718 2743,~~651~~060 General and administrative 1011,~~337~~428 8,~~061~~817 2032,~~673~~100 1524,~~792~~609 -------- -------- -------- -------- Total operating expenses 2629,~~191~~583 2124,~~927~~226 5281,~~235~~818 4367,~~443~~669 -------- -------- -------- -------- Income from operations 5,~~317~~098 6,~~234~~773 712,~~204~~303 1016,~~125~~898 Other income, net ~~153~~251 9897 ~~277~~529 ~~208~~305 Interest expense (78,~~478~~051) (76,~~076~~771) (1422,~~894~~945) (1320,~~508~~279) -------- -------- -------- -------- Net income (loss) before taxes $ (2,~~008~~702) $ ~~(744)~~99 $ (710,~~413~~113) $ (3,~~175~~076) Tax Expense -129 8225 ~~112~~241 8233 -------- -------- -------- -------- Net Income (loss) $ (2,~~008~~831) $ (~~752~~126) $ (710,~~525~~354) $ (3,~~183~~309) ======== ======== ======== ======== Net income (loss) allocated to General Partner units $ (3549) $ (132) $ (~~129~~178) $ (5457) ======== ======== ======== ======== Net income (loss) allocated to Limited Partner units $ (12,~~973~~782) $ (~~739~~124) $ (710,~~396~~176) $ (3,~~129~~252) ======== ======== ======== ======== Net income (loss) per General Partner unit $ (35.60) $ (10.32) $ (1318.2) $ (5.58) ======== ======== ======== ======== Net income (loss) per Limited Partner unit $ (1.15) $ (0.41) $ (45.04) $ (1.7) ======== ======== ======== ========

See accompanying notes. 5 TRANSWESTERN HOLDINGS L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands)

~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2000 1999 -------- -------- OPERATING ACTIVITIES Net (loss) ~~income~~ $ (710,~~525~~354) $ (3,~~183~~309) Adjustments to reconcile net (loss) ~~income~~ to cash provided by operating activities: Depreciation and amortization 1220,~~851~~627 813,~~733~~995 Amortization of deferred debt issuance costs ~~706~~868 ~~687~~1,029 Amortization of ~~Senior~~premium ~~Note~~(152) (151) Amortization of senior note discount 23,~~462~~751 23,~~191~~339 Provision for doubtful accounts 711,~~125~~434 59,~~811~~154 Changes in operating assets and liabilities, ~~excluding the effects of acquisitions:~~ Trade receivables 1(2,~~756~~934) (68,~~176~~940) Write-off of doubtful accounts (913,~~030~~402) (610,~~391~~348) Recoveries of doubtful accounts ~~595~~888 ~~243~~654 Deferred directory costs (23,~~159~~463) ~~(234)~~442 Other current assets (~~900~~102) (~~160~~589) Accounts payable (~~4,588~~306) 12,~~424~~812 Accrued liabilities (~~492~~1,975) (23,~~327~~416) Accrued interest ~~789~~4,030 ~~728~~3,906 Customer deposits 45,~~465~~871 (~~406~~965) -------- -------- Cash provided by operating activities 614,~~055~~781 ~~940~~7,613 INVESTING ACTIVITIES Purchase of property, equipment and leasehold improvements (~~687~~1,826) (~~386~~576) Acquisition of directories (1330,~~837~~626) (3439,~~554~~454) Increase in other assets -(1,121) (~~356~~233) -------- -------- Cash used for investing activities (1433,~~524~~573) (3540,~~296~~263) FINANCING ACTIVITIES Borrowings under long-term debt agreements: Revolving credit facility 2549,~~900~~500 3847,~~100~~700 Term B loan 40,000 -0- Repayments of long-term debt Revolving credit facility (1365,~~500~~400) (1324,~~300~~700) External debt payments (3,315) (1,965) Senior ~~Term~~term ~~Loan~~loan (~~872~~1,308) (~~871~~1,307) Partnership contribution -(37) 7961 -------- -------- Cash provided by (used for) financing activities 1119,~~528~~440 2419,~~008~~789 -------- -------- Net increase (decrease) in ~~cash~~cas ~~(3,059)~~648 (1012,~~348~~861) Cash at beginning of period 1,167 14,067 -------- -------- Cash at end of period $ 41,~~226~~815 $ 31,~~719~~206 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 1114,~~005~~211 $ 1012,~~002~~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 ~~JUNE~~SEPTEMBER 30, DECEMBER 31, 2000 1999 ----------- ----------- Computer and office equipment~~....................~~ $ 78,~~965~~880 $ 7,342 Furniture and fixtures~~...........................~~ 1,~~850~~879 1,789 Leasehold improvements~~...........................~~ ~~433~~445 430 Building 183 -0- ----------- ----------- 1011,~~248~~387 9,561 Less accumulated depreciation and amortization... (67,~~727~~043) (6,138) ----------- ----------- Net property, equipment, and leasehold $ 34,~~521~~344 $ 3,423 =========== ===========

Acquired Intangibles ~~JUNE~~SEPTEMBER 30, DECEMBER 31, 2000 1999 ----------- ----------- Customer Base~~..................................~~ $ ~~138~~155,~~708~~565 $ 128,074 Non -compete and licensing agreements 5,~~364~~519 2,160 ----------- ----------- ~~144~~161,~~072~~084 130,234 Less accumulated amortization~~..................~~ (5663,~~719~~841) (44,355) ----------- ----------- Acquired intangibles, net $ 8797,~~353~~253 $ 85,879 =========== ===========

Other Assets ~~JUNE~~SEPTEMBER 30, DECEMBER 31, 2000 1999 ----------- ----------- Debt issuance costs~~...............................~~ $ 1112,~~994~~892 $ 11,994 Less accumulated amortization~~.....................~~ (34,~~746~~146) (3,040) ----------- ----------- Debt issuance costs, net $ 8,~~248~~746 $ 8,954 Investment in Eversave, carried at cost 500 500 ----------- ----------- Other assets, net $ 89,~~748~~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)

~~Six~~Nine months ended ~~June~~Sept 30, ----------------------------- 2000 1999 ------------ ----------- (Unaudited) Net revenues................... $74121,~~541~~887 $67110,~~909~~151 Net ~~income~~ (loss)~~...........~~ .. (58,~~411~~147) (24,~~526~~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 ~~1999~~2000 2000 2000 % Change ------------------------------------------------------------------------------ ~~2nd Quarter~~ 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 2Q-99 to 2Q-00 ------------ ----------- ----------- ----------- ----------- ----------- Net revenues ............... $ ~~34.1 $~~ 38.2 $ 42.6 $ 34.9 $ 38.6 13$ 43.01 12.8% EBITDA (a) ................. $ ~~11.0 $~~ 12.0 $ 15.5 $ 8.5 $ 12.0 9$ 12.58 6.7% Bookings (b) ............... $ ~~32.1 $~~ 37.8 $ 35.1 $ 34.9 $ 43.7 36$ 44.1 16.7% Advance payments ........... $ ~~15.7 $~~ 17.6 $ 18.7 $ 17.0 $ 19.7 25$ 21.54 21.6% Total cash receipts (c) .... $ ~~28.3 $~~ 32.6 $ 34.6 $ 34.3 $ 38.7 36$ 39.78 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 ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ENDED ~~JUNE~~SEPTEMBER 30, -------------------------- -------------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Net revenues .................. 100.0% 100.0% 100.0% 100.0% Cost of revenues .............. 1819.36 1718.59 19.13 18.46 --------- --------- --------- --------- Gross profit .................. 8180.74 8281.51 80.97 81.64 Sales and marketing ........... 4142.1 40.63 42.96 4241.14 General and administrative .... 26.85 23.61 2827.15 2423.17 --------- --------- --------- --------- Income from operations ........ 1311.8% 1817.37% 910.86% 1516.43% ========= ========= ========= ========= EBITDA Margin (a), (b) ........ 3129.27% 3231.15% 2728.96% 29.2%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)

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