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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
JUNE 30, 2002 333-46957
LIBERTY GROUP OPERATING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-4197635
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
3000 DUNDEE ROAD, SUITE 203 NORTHBROOK, ILLINOIS 60062
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (847) 272-2244
Indicate by check mark whether the 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 |_|
As of August 14, 2002, there were 100 shares outstanding of the
Company's common stock, par value $0.01 per share.
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TABLE OF CONTENTS
PAGE
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PART I -- FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets at June 30, 2002 (unaudited)
and December 31, 2001.................................. 1
Unaudited Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2002............... 2
Unaudited Consolidated Condensed Statements of Cash Flows
for the Six Months Ended June 30, 2002 and 2001........ 3
Notes to the Unaudited Interim Consolidated Financial
Statements............................................. 4
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................. 6
Item 3 Quantitative and Qualitative Disclosures about Market Risk . 10
PART II - OTHER INFORMATION
Item 1 Legal Proceedings.......................................... 11
Item 2 Changes in Securities and Use of Proceeds.................. 11
Item 3 Defaults Upon Senior Securities............................ 11
Item 4 Submission of Matters to a Vote of Security Holders........ 11
Item 5 Other Information.......................................... 11
Item 6 Exhibits and Reports on Form 8-K........................... 11
Signature Page............................................................... 12
ITEM 1. FINANCIAL STATEMENTS
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
2002 2001
---- ----
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 1,991 $ 1,474
Accounts receivable, net of allowance for doubtful accounts of $1,414
and $1,458 at June 30, 2002 and December 31, 2001, respectively ........ 20,837 21,398
Inventory ................................................................. 2,328 2,824
Prepaid expenses .......................................................... 2,381 1,602
Other current assets ...................................................... 65 25
--------- ---------
Total current assets ......................................................... 27,602 27,323
Property, plant and equipment, net ........................................ 50,230 52,536
Goodwill, net ............................................................. 396,810 196,061
Intangible assets, net .................................................... 19,969 256,357
Deferred financing costs, net ............................................. 5,721 6,364
Other assets .............................................................. 533 336
--------- ---------
Total assets ................................................................. $ 500,865 $ 538,977
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of Term Loan B ............................................ $ 1,000 $ 1,000
Current portion of long-term liabilities .................................. 890 981
Accounts payable .......................................................... 1,992 2,243
Accrued expenses .......................................................... 13,705 13,394
Deferred revenue .......................................................... 8,753 9,217
--------- ---------
Total current liabilities .................................................... 26,340 26,835
Long-Term Liabilities:
Borrowings under revolving credit facility ................................ 7,440 42,950
Term loan B, less current portion ......................................... 97,000 97,500
Long-term liabilities, less current portion ............................... 1,284 1,518
Senior subordinated notes ................................................. 180,000 180,000
Deferred income taxes ..................................................... 16,792 25,484
--------- ---------
Total liabilities ............................................................ 328,856 374,287
STOCKHOLDER'S EQUITY:
Common stock, $0.01 par value, 1,000 shares authorized, 100 shares
issued and outstanding at June 30, 2002 and December 31, 2001 ............. -- --
Additional paid in capital ................................................ 176,897 176,845
Accumulated deficit ....................................................... (4,888) (12,155)
--------- ---------
Total stockholders' equity ................................................... 172,009 164,690
--------- ---------
Total liabilities and stockholders' equity ................................... $ 500,865 $ 538,977
========= =========
See accompanying notes to unaudited interim consolidated financial statements.
1
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES:
Advertising .......................................... $ 38,686 $ 38,839 $ 72,527 $ 73,481
Circulation .......................................... 8,357 8,158 16,538 16,334
Job printing and other ............................... 3,114 3,787 6,117 7,409
-------- -------- -------- --------
Total revenues .......................................... 50,157 50,784 95,182 97,224
OPERATING COSTS AND EXPENSES:
Operating costs ...................................... 22,490 24,952 43,952 49,289
Selling, general and administrative .................. 13,873 13,757 26,772 27,631
Depreciation and amortization ........................ 2,219 5,256 4,336 10,486
-------- -------- -------- --------
Income from operations .................................. 11,575 6,819 20,122 9,818
Interest expense ........................................ 6,000 7,773 12,173 15,737
Amortization of deferred financing costs ................ 316 357 643 676
-------- -------- -------- --------
Income (loss) from continuing operations before income
taxes and cumulative effect of change in accounting
principle ............................................ 5,259 (1,311) 7,306 (6,595)
Income tax expense ...................................... 1,853 268 2,733 349
-------- -------- -------- --------
Income (loss) from continuing operations before
cumulative effect of change in accounting principle .. 3,406 (1,579) 4,573 (6,944)
Income from discontinued operations, net of tax ......... -- 438 4,342 748
-------- -------- -------- --------
Income (loss) before cumulative effect of change in
accounting principle ................................. 3,406 (1,141) 8,915 (6,196)
Cumulative effect of change in accounting principle,
net of tax ........................................... -- -- (1,648) --
-------- -------- -------- --------
Net income (loss) ....................................... $ 3,406 $ (1,141) $ 7,267 $ (6,196)
======== ======== ======== ========
See accompanying notes to unaudited interim consolidated financial statements.
2
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------
2002 2001
----------------------
Cash flows from operating activities:
Net income (loss) ................................................................... $ 7,267 $ (6,196)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization ....................................................... 4,336 10,822
Amortization of deferred financing costs ............................................ 643 676
Non-cash compensation ............................................................... 53 51
Income from discontinued operations, net of tax ..................................... (4,342) (748)
Cumulative effect of change in accounting principle, net of tax ..................... 1,648 --
Changes in assets and liabilities, net of acquisitions and dispositions:
Working capital-net ................................................................. 1,883 (1,391)
Other assets ........................................................................ (197) --
-------- --------
Net cash provided by operating activities .............................................. 11,291 3,217
Cash flows from investing activities:
Purchases of property, plant, and equipment ......................................... (949) (1,730)
Proceeds from sale of publications .................................................. 26,510 --
Acquisitions, net of cash acquired .................................................. -- (469)
-------- --------
Net cash provided by (used in) investing activities .................................... 25,561 (2,199)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) under revolving amended credit facility ................. (35,510) 730
Payments on long term debt and liabilities .......................................... (825) (787)
-------- --------
Net cash used in financing activities .................................................. (36,335) (57)
-------- --------
Net increase in cash and cash equivalents ........................................... 517 961
Cash and cash equivalents, at beginning of period ................................... 1,474 1,036
-------- --------
Cash and cash equivalents, at end of period ......................................... $ 1,991 $ 1,997
======== ========
See accompanying notes to unaudited interim consolidated financial statements.
3
LIBERTY GROUP OPERATING, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) THE COMPANY, BASIS OF PRESENTATION AND ACQUISITION
Liberty Group Operating, Inc. ("LGO") is a leading publisher of community
newspapers and related publications that are the dominant source of news, print
advertising, and other local content in their communities. LGO is a wholly-owned
subsidiary of Liberty Group Publishing, Inc. ("LGP"). The unaudited interim
consolidated financial statements include the accounts of LGO and its
consolidated subsidiaries (the "Company").
The accompanying unaudited interim consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and note disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations. These unaudited interim
consolidated financial statements reflect all adjustments which are, in the
opinion of management, of a normal recurring nature and are necessary to present
a fair statement of the results of the interim periods presented. The
accompanying interim consolidated financial statements as of June 30, 2002 and
for the three months and six months ended June 30, 2002 and June 30, 2001 should
be read in conjunction with the audited consolidated financial statements of the
Company included in the Company's Form 10-K for the year ended December 31,
2001, filed with the Securities and Exchange Commission. The Company's results
for the interim periods are not necessarily indicative of the results to be
expected for the fiscal year.
(2) RECLASSIFICATIONS
Certain amounts in prior year's consolidated financial statements have
been reclassified to conform to the 2002 presentation, which include the effect
of discontinued operations and the transfer of inserting expense and certain
postage and delivery costs from selling, general and administrative to operating
costs.
(3) INTANGIBLE ASSETS
As of January 1, 2002, the Company implemented Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets,"
which replaces the requirement to amortize intangible assets with indefinite
lives and goodwill with a requirement for an annual impairment test. SFAS No.
142 also establishes requirements for identifiable intangible assets. As a
result, the Company reclassified $233,793 of intangible assets into goodwill.
The Company also ceased amortizing $16,694 of mastheads as the Company has
determined that the useful life of these assets is indefinite. Operating income
for the quarter and six months ended June 30, 2001 includes $3,134 and $6,268,
respectively, of amortization of goodwill and other intangible assets that are
not included in results for the quarter and six months ended June 30, 2002 due
to the implementation of SFAS No. 142.
The effect on the Company's net income (loss) as a result of the
adoption of SFAS No. 142 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) ....................................... $ 3,406 $(1,141) $ 7,267 $(6,196)
Add back: Goodwill amortization ......................... -- 1,344 -- 2,688
Add back: Advertiser list amortization .................. -- 1,264 -- 2,528
Add back: Subscriber list amortization .................. -- 417 -- 834
Add back: Masthead amortization (change in useful life) . -- 109 -- 218
------- ------- ------- -------
Adjusted net income (loss) .............................. $ 3,406 $ 1,993 $ 7,267 $ 72
======= ======= ======= =======
4
LIBERTY GROUP OPERATING, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
AS OF JUNE 30, 2002
-------------------
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
Amortized Intangible Assets:
Non-compete agreements...................................... $ 17,536 $ 14,261 $ 3,275
============= ============= =============
Non-amortized Intangible Assets:
Goodwill................................................. $ 396,810
Mastheads................................................ 16,694
-------------
Total....................................................... $ 413,504
=============
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
------------- -------------
Aggregate Amortization Expense:............................. $ 843 $ 1,685
============= =============
Estimated Amortization Expense:
For the six months ending December 31, 2002.............. $ 1,685
For the year ending December 31, 2003.................... 752
For the year ending December 31, 2004.................... 61
For the year ending December 31, 2005.................... 61
For the year ending December 31, 2006.................... 61
Thereafter .............................................. 655
The changes in the carrying amount of goodwill for the six months ended
June 30, 2002 are as follows:
Balance as of January 1, 2002 .............................. $429,854
Impairment losses .......................................... (2,701)
Goodwill related to sale of property ....................... (17,446)
Goodwill related to deferred taxes reversal due to adoption
of SFAS No. 142 .......................................... (12,897)
--------
Balance as of June 30, 2002 ................................ $396,810
========
Properties will be tested for impairment in the fourth quarter of 2002
after the Company's annual budgeting process. After the Company's initial
impairment test, it was determined that operating profits and cash flows for six
properties were lower in the first quarter of 2002 than what the Company had
forecasted when the properties were acquired. In the first quarter of 2002, a
pre-tax goodwill impairment loss of $2,701 was recognized. The loss, which was
$1,648, net of tax, was reported in the Company's consolidated statement of
operations as a cumulative effect of change in accounting principle. The fair
values of the properties were determined based on acquisition multiples
consistent with industry standards.
(4) DISCONTINUED OPERATIONS
The Company disposed of six publications and related assets on
January 7, 2002 for $26,510. The net book value of the assets was $19,393,
resulting in a pre-tax gain of $7,117, or a gain of $4,342, net of the tax
effect of $2,775. As a result of the sale, the disposition of the assets has
been accounted for as a discontinued operation, and, accordingly, amounts in the
consolidated statements of operations for all periods presented have been
reclassified to reflect the disposition as a discontinued operation.
Discontinued operations, shown on the consolidated statements of operations, for
the six months ended June 30, 2002, consisted of the gain on sale of
the publications. For the quarter and six months ended June 30, 2001, income
from discontinued operations, net of zero income taxes, was $438 and $748,
respectively, and represented the operating results of the publications sold.
5
(5) RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and for the associated asset retirement costs. SFAS No. 143 must be
applied starting with fiscal years beginning after June 15, 2002. Management is
currently evaluating the impact that the adoption of SFAS No. 143 will have on
its consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 requires that gains and losses from extinguishment of
debt be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30. Applying the provisions of Opinion
No. 30 will distinguish transactions that are part of an entity's recurring
operations from those that are unusual and infrequent and meet the criteria for
classification as an extraordinary item. SFAS No. 145 is effective beginning
January 1, 2003. Management is currently evaluating the impact that the adoption
of SFAS No. 145 will have on the Company's consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This standard requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. This
standard will be applied prospectively to exit or disposal activities initiated
after December 15, 2002. Management does not believe the adoption of SFAS No.
146 will have a significant impact on the Company's consolidated financial
statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Liberty Group Operating, Inc. ("LGO") is a Delaware corporation formed
on January 27, 1998 for the purpose of acquiring a portion of the daily and
weekly newspapers owned by American Publishing Company or its subsidiaries, a
wholly-owned subsidiary of Hollinger International Inc. LGO is a wholly-owned
subsidiary of Liberty Group Publishing, Inc. ("LGP"). The unaudited interim
consolidated financial statements include the accounts of LGO and its
consolidated subsidiaries (the "Company").
The Company is a leading U.S. publisher of local newspapers and related
publications that are the dominant source of local news and print advertising in
their markets. At June 30, 2002, the Company owned and operated 330 publications
in 17 states. The majority of the Company's paid daily newspapers have been
published for more than 100 years and are typically the only paid daily
newspapers of general circulation in their respective non-metropolitan markets.
The Company's newspapers generally face limited competition as a result of
operating in markets that are distantly located from large metropolitan areas
and that can typically support only one primary newspaper.
The Company's portfolio of publications is comprised of 67 paid daily
newspapers and 140 paid non-daily newspapers. In addition, the Company publishes
123 free circulation and "total market coverage" ("TMC") publications with
limited or no news or editorial content that the Company distributes free of
charge and that generally provide 100% penetration in their areas of
distribution. The Company generates revenues from advertising, circulation and
job printing. Advertising revenue is recognized upon publication of the
advertisements. Circulation revenue, which is billed to customers at the
beginning of the subscription period, is recognized on a straight-line basis
over the term of the related subscription. The revenue for job printing is
recognized upon delivery. The Company's operating costs consist primarily of
newsprint, labor and delivery costs. The Company's selling, general and
administrative expenses consist primarily of labor costs.
6
On January 7, 2002, the Company disposed of the assets of six related
publications that were acquired in 1999 in one transaction for proceeds of $26.5
million (the "Disposition"). Accordingly, amounts in the consolidated statements
of operations for all periods presented have been reclassified to reflect the
Disposition as a discontinued operation.
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO
THREE AND SIX MONTHS ENDED JUNE 30, 2001
Total Revenues. Total revenues for the quarter ended June 30, 2002
decreased by $0.6 million, or 1.2%, to $50.2 million from $50.8 million for the
quarter ended June 30, 2001. The decrease in total revenues was comprised of a
$0.1 million decrease in advertising revenue, a $0.2 million increase in
circulation revenue and a $0.7 million decrease in job printing and other
revenue. The advertising and printing revenue decrease was primarily driven by
lower classified recruitment and printing revenues in the Chicago suburban
market, as well as the discontinuation of two lower margin print jobs in the
Company's community markets. The classified advertising decrease was partially
offset by an increase in preprint and display revenues. Total revenues for the
six months ended June 30, 2002 decreased by $2.0 million, or 2.1%, to $95.2
million from $97.2 million for the six months ended June 30, 2001. The decrease
in total revenues was comprised of a $1.0 million decrease in advertising
revenue, a $0.2 million increase in circulation revenue and a $1.3 million
decrease in job printing and other revenue. The advertising and printing revenue
decrease was primarily driven by lower classified recruitment and printing
revenues in the Chicago suburban market, as well as the discontinuation of two
lower margin print jobs in the Company's community markets.
Operating Costs. Operating costs for the quarter ended June 30, 2002
decreased $2.5 million, or 9.9%, to $22.5 million from $25.0 million for the
quarter ended June 30, 2001. This decrease was primarily due to lower newsprint,
labor and delivery costs. The decrease in labor was primarily due to a reduction
in operating staff. As a percentage of total revenues for the quarter ended June
30, 2002, operating costs decreased to 44.8% from 49.1% for the quarter ended
June 30, 2001. Operating costs for the six months ended June 30, 2002 decreased
by $5.3 million to $44.0 million from $49.3 million for the six months ended
June 30, 2001. This decrease was primarily due to lower newsprint, labor and
delivery costs. The decrease in labor was primarily due to a reduction in
operating staff. As a percentage of total revenues for the six months ended June
30, 2002, operating costs decreased to 46.2% from 50.7% for the six months ended
June 30, 2001.
Selling, General and Administrative. Selling, general and
administrative expenses for the quarter ended June 30, 2002 remained constant at
$13.8 million compared to the quarter ended June 30, 2001, primarily due to
higher insurance and performance based incentive costs, partially offset by
lower labor costs resulting from reductions in administrative staff. As a
percentage of revenue, selling, general and administrative expenses increased
from 27.1% for the quarter ended June 30, 2001 to 27.7% for the quarter ended
June 30, 2002. For the six months ended June 30, 2002, selling, general and
administrative expenses decreased by $0.8 million to $26.8 million from $27.6
million for the six months ended June 30, 2001, primarily due to lower labor
costs resulting from reductions in administrative staff. As a percentage of
revenue, selling, general and administrative expenses decreased from 28.4% for
the six months ended June 30, 2001 to 28.1% for the six months ended June 30,
2002.
Depreciation and Amortization. Depreciation and amortization expense
for the quarter ended June 30, 2002 decreased by $3.1 million to $2.2 million
from $5.3 million for the quarter ended June 30, 2001 as a result of the
adoption of SFAS No. 142, "Goodwill and Other Intangible Assets." The Company
recorded $0.9 million in amortization of intangible assets for the quarter ended
June 30, 2002, compared with $3.9 million for the quarter ended June 30, 2001.
For the six months ended June 30, 2002, the Company recorded $1.7 million in
amortization of intangible assets, compared with $7.9 million for the six months
ended June 30, 2001. On January 1, 2002, the Company implemented SFAS No. 142,
which replaces the requirement to amortize intangible assets with indefinite
lives and goodwill with a requirement for an annual impairment test. The Company
also ceased amortization on $16.7 million of mastheads because the Company has
determined that the useful life of these assets is indefinite. Operating income
for the quarter ended June 30, 2001 includes $3.1 million of amortization of
goodwill and other intangible assets that are not included in 2002 results
because of the implementation of SFAS No. 142. For the six months ended June 30,
2002, depreciation and amortization expense decreased by $6.2 million to $4.3
million from $10.5 million for the six months ended June 30, 2001 as a result of
the adoption of SFAS No. 142.
Interest Expense. Interest expense for the quarter ended June 30, 2002
decreased by $1.8 million to $6.3 million from $8.1 million for the quarter
ended June 30, 2001. The decrease in interest expense was due to the reduction
of indebtedness resulting from the application of proceeds from the Disposition,
increased cash flow from operations and lower interest rates. For the six
months ended June 30, 2002, interest expense decreased $3.6 million to $12.8
million from $16.4 million for the six
7
months ended June 30, 2001. The decrease in interest expense was due to the
reduction of indebtedness resulting from the application of proceeds from the
Disposition, increased cash flow from operations and lower interest rates.
Income Tax Expense. Income tax expense for the quarter ended June 30,
2002 increased by $1.6 million to $1.9 million from $0.3 million for the quarter
ended June 30, 2001. For the six months ended June 30, 2002, income tax expense
increased $2.4 million to $2.7 million from $0.3 million for the six months
ended June 30, 2001. The increase in income tax expense was due to higher state
and local income taxes and an increase in the Company's deferred tax
liabilities.
EBITDA. EBITDA (which is defined as earnings before interest, taxes,
depreciation and amortization, which for the Company is income from operations
plus depreciation and amortization) for the quarter ended June 30, 2002
increased by $1.7 million to $13.8 million from $12.1 million for the quarter
ended June 30, 2001. The increase in EBITDA during the quarter ended June 30,
2002 was primarily due to lower newsprint, delivery, and labor from reduced
headcount partially offset by lower revenues. For the six months ended June 30,
2002, EBITDA increased $4.2 million to $24.5 million from $20.3 million for the
six months ended June 30, 2001. The increase in EBITDA for the six months ended
June 30, 2002 was primarily due to lower newsprint, delivery, and labor from
reduced headcount partially offset by lower revenues. EBITDA is not a
measurement of financial performance under accounting principles generally
accepted in the United States of America, or GAAP, and should not be considered
as an alternative to income from operations, net income (loss), cash flows from
operating activities or any other measure of performance or liquidity derived in
accordance with GAAP. The Company believes that EBITDA is a standard measure
commonly reported and widely used by analysts, investors and other interested
parties in its industry. Accordingly, this information has been disclosed herein
to permit a more complete comparative analysis of the Company's operating
performance relative to other companies in its industry. However, not all
companies calculate EBITDA using the same methods; therefore, the EBITDA figures
set forth above may not be comparable to EBITDA reported by other companies. A
substantial portion of the Company's EBITDA must be dedicated to the payment of
interest on its outstanding indebtedness and to service other commitments,
thereby reducing the funds available to the Company for other purposes.
Accordingly, EBITDA does not represent an amount of funds that is available for
management's discretionary use.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Income from operations .................................. $ 11,575 $ 6,819 $ 20,122 $ 9,818
Depreciation and amortization ........................... 2,219 5,256 4,336 10,486
EBITDA................................................ 13,794 12,075 24,458 20,304
Cumulative Effect of Change in Accounting Principle. Pursuant to the
adoption of SFAS No. 142, the Company performed an initial impairment test of
its properties. As a result of this test, the Company determined that operating
profits and cash flows for six of its properties were lower in the first quarter
of 2002 than what the Company had forecasted when the properties were first
acquired. As a result, an after tax goodwill impairment loss of $1.6 million, or
$2.7 million pre-tax, was recorded in the quarter ended March 31, 2002.
Impairment will be tested again in the fourth quarter after the Company's annual
budgeting process.
Discontinued Operations. For the six months ended June 30, 2002, the
Company recorded an after tax gain of $4.3 million as a result of the
Disposition in which the Company sold assets with a net book value of $19.4
million for a pre-tax gain of $7.1 million. The Company's income from
discontinued operations for the quarter and six months ended June 30, 2001 was
$0.4 million and $0.7 million, respectively.
Net Income (Loss). The Company recorded net income of $3.4 million for
the quarter ended June 30, 2002, compared to a net loss of $1.1 million for the
quarter ended June 30, 2001. The $4.5 million increase in net income was
primarily attributable to lower amortization expense resulting from the adoption
of SFAS No. 142 and lower newsprint, labor, delivery and interest costs,
partially offset by lower revenues and increased income taxes. For the six
months ended June 30, 2002, the Company recorded net income of $7.3 million
compared to a net loss of $6.2 million for the six months ended June 30, 2001.
The $13.5 million increase in net income was primarily attributable to an after
tax gain of $4.3 million on the Disposition and lower amortization expense
resulting from the adoption of SFAS No. 142, partially offset by lower revenue,
higher income taxes and the
8
cumulative effect of change in accounting principle related to goodwill
impairment losses in the amount of $1.6 million discussed above. The increase in
net income was also attributable to lower newsprint, labor, delivery and
interest costs.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating Activities. Cash provided by operating
activities for the six months ended June 30, 2002 increased by $8.1 million to
$11.3 million, compared with $3.2 million for the six months ended June 30,
2001. The increase was primarily due to increased EBITDA and a decrease in
interest rates and borrowing levels.
Cash Flows from Investing Activities. Cash provided by investing
activities for the six months ended June 30, 2002 primarily reflects the
Disposition of six publications partially offset by capital expenditures. The
Company's capital expenditures consisted of the purchase of machinery,
equipment, furniture and fixtures relating to its publishing operations. The
Company has no material commitments for capital expenditures. The Company
intends to continue to pursue its strategy of opportunistically purchasing
community newspapers in contiguous markets and clusters of community newspapers
in new markets.
Cash Flows from Financing Activities. Cash used in financing activities
for the six months ended June 30, 2002 reflects the reduction of indebtedness
under the Company's Amended Credit Facility. The Company is subject to certain
covenants that limit its ability to pay cash dividends and make other restricted
payments and does not expect to pay cash dividends in the foreseeable future.
Liquidity. The Company's principal sources of funds have been, and are
expected to continue to be, cash provided by operating activities and borrowings
under the Amended and Restated Credit Agreement, dated as of April 18, 2000, as
further amended, with a syndicate of financial institutions led by Citibank,
N.A., with Citicorp USA, Inc. as administrative agent (the "Amended Credit
Facility"). The Amended Credit Facility provides for a $100.0 million principal
amount Term Loan B that matures in March 2007; a revolving credit facility with
a $135.0 million aggregate commitment amount available that matures in March
2005; and a $10.0 million sub-facility for letters of credit. The Amended Credit
Facility is secured by a first-priority security interest in substantially all
of the tangible and intangible assets of LGO, LGP and all of
LGP's other present and future direct and indirect subsidiaries.
Additionally, the loans under the Amended Credit Facility are guaranteed,
subject to specified limitations, by LGP and all of the future direct
and indirect subsidiaries of LGO and LGP. The Company believes that
these sources will provide sufficient liquidity and capital resources to meet
its financial obligations for the foreseeable future.
On May 10, 2001, the Company entered into the First Amendment to its
Amended Credit Facility (the "Amendment"). The Amendment decreased the aggregate
commitment available under the revolving credit facility from $175.0 million to
$135.0 million and amended the Cash Interest Coverage Ratio and Senior Leverage
Ratio. Under the terms of the Amended Credit Facility, the Company is required
to permanently reduce the Term Loan B and/or the revolving commitment amount
with Disposition proceeds in excess of $1.5 million if the proceeds are not
reinvested in Permitted Acquisitions (as defined under the Amended Credit
Facility) within 300 days of receipt of such proceeds.
The Company is highly leveraged and has indebtedness that is
substantial in relation to its stockholders' deficit, tangible equity and cash
flow. Total interest expense for the six months ended June 30, 2002 was $12.8
million, including non-cash interest of $0.6 million. The degree to which the
Company is leveraged could have important consequences, including the following:
(i) for the fiscal year ending December 31, 2002, a substantial portion of the
Company's cash flow from operations must be dedicated to the payment of interest
on the 9.375% Senior Subordinated Notes and interest on its other indebtedness,
thereby reducing the funds available to the Company for other purposes; (ii)
indebtedness under the Amended Credit Facility is at variable rates of interest,
which causes the Company to be vulnerable to increases in interest rates; (iii)
the Company is more leveraged than certain competitors in its industry, which
might place the Company at a competitive disadvantage; (iv) the Company may be
hindered in its ability to adjust rapidly to changing market conditions; (v) the
Company's substantial degree of leverage could make it more vulnerable in the
event of a downturn in general economic conditions or other adverse events in
its business; and (vi) the Company's ability to obtain additional financing for
working capital, capital expenditures, acquisitions or general corporate
purposes may be impaired.
9
As of June 30, 2002, the aggregate outstanding principal amount of the
Company's senior subordinated notes was $180.0 million.
On June 3, 2002, LGP filed a registration statement with the
Securities and Exchange Commission on Form S-2 (as amended, the "Registration
Statement") with respect to an initial public offering of its common stock.
Reference is made to the Registration Statement for information concerning the
offering and transactions contemplated by the Registration Statement, including
LGP's intended use of proceeds from the initial public offering and the impact
of such intended use on LGP's capital structure and indebtedness. There can be
no assurance that LGP will consummate the initial public offering of its common
stock.
Safe Harbor Provision. This Form 10-Q contains certain "forward-looking
statements" (as defined in Section 21E of the Securities Exchange Act of 1934,
as amended) that reflect the Company's expectations regarding its future growth,
results of operations, performance and business prospects and opportunities.
Words such as "anticipates," "believes," "plans," "expects," "estimates" and
similar expressions have been used to identify these forward-looking statements,
but are not the exclusive means of identifying these statements. These
statements reflect the Company's current beliefs and expectations and are based
on information currently available to us. Accordingly, these statements are
subject to known and unknown risks, uncertainties and other factors that could
cause the Company's actual growth, results, performance and business prospects
and opportunities to differ from those expressed in, or implied by, these
statements. As a result, no assurance can be given that the Company's future
results, performance and business prospects and opportunities covered by such
forward-looking statements will be achieved. Such factors include, among others:
(i) the Company's dependence on local economies and vulnerability to general
economic conditions; (ii) the Company's substantial indebtedness; (iii) the
Company's ability to implement its acquisition strategy; (iv) the Company's
competitive business environment conditions which may reduce demand for
advertising; and (v) the Company's ability to attract and retain key employees.
For purposes of this Form 10-Q, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Except to the extent required by the federal securities laws and rules and
regulations of the Securities and Exchange Commission, the Company has no
intention or obligation to update or revise these forward-looking statements to
reflect new events, information or circumstances.
SUMMARY DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table reflects a summary of the Company's contractual
cash obligations as of June 30, 2002:
2002 2003 2004 2005 2006 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
(IN THOUSANDS)
Senior Subordinated 9 3/8% Notes $ -- $ -- $ -- $ -- $ -- $180,000 $180,000
Term Loan B .................... 500 1,000 1,000 36,125 47,500 11,875 98,000
Revolving Credit Facility ...... -- -- -- 7,440 -- -- 7,440
Non-compete payments ........... 121 382 282 282 177 256 1,500
Real estate lease payments ..... 260 326 244 199 139 84 1,252
Finder fee payments ............ 350 125 -- -- -- -- 475
Other .......................... 90 4 4 -- -- -- 98
-------- -------- -------- -------- -------- -------- --------
$ 1,321 $ 1,837 $ 1,530 $ 44,046 $ 47,816 $192,215 $288,765
======== ======== ======== ======== ======== ======== ========
RELATED PARTY TRANSACTIONS
For each of the quarters ended June 30, 2002 and 2001, the Company paid
$370,000 in management fees to LGP's majority common stockholder. The Company is
obligated to pay other fees to its majority common stockholder of $475,000, of
which $350,000 will be paid this year and the remaining $125,000 will be paid in
2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has a $135.0 million revolving credit facility and a
separate Term Loan B that mature in March 2005 and 2007, respectively.
Borrowings under the revolving credit facility and the Term Loan B bear interest
at an annual rate, at the Company's option, equal to the Alternate Base Rate (as
defined in the Amended Credit Facility) or the Adjusted LIBO Rate (as defined in
the Amended Credit Facility) plus a margin that varies based upon a ratio set
forth in the Amended Credit Facility. As a result, the Company's interest
expense will be affected by changes in the Alternate Base Rate or in the
Adjusted LIBO Rate. At June 30, 2002, the Company had borrowings outstanding of
$7.4 million under the Revolving Credit Facility and $98.0 million under the
Term Loan B. A hypothetical 100 basis point change in interest rates would
impact interest expense by approximately $0.3 million for the quarter ended June
30, 2002.
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PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved from time to time in legal proceedings relating
to claims arising out of its operations in the ordinary course of business. As
of the date of the filing of this quarterly report on Form 10-Q, the Company is
not party to any legal proceedings that, in the opinion of its management, are
reasonably expected to have a material adverse effect on its business, results
of operations, consolidated financial condition or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIBERTY GROUP OPERATING, INC.
/s/ KENNETH L. SEROTA
- --------------------------------------------
Kenneth L. Serota
President, Chief Executive Officer and
Chairman of the Board of Directors
(principal executive officer)
/s/ DANIEL LEWIS
- --------------------------------------------
Daniel Lewis
Chief Financial Officer
(principal financial and accounting officer)
Date: August 14, 2002
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