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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
SEPTEMBER 30, 2002 333-46959
LIBERTY GROUP OPERATING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-4197636
(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 November 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
PART I -- FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets at September 30, 2002 (Unaudited) and December 31, 2001......... 3
Unaudited Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2002 and 2001.................................................. 4
Unaudited Consolidated Condensed Statements of Cash Flows for the Nine Months
Ended September 30, 2002 and 2001......................................................... 5
Notes to the Unaudited Interim Consolidated Financial Statements............................ 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations....... 8
Item 3 Quantitative and Qualitative Disclosures about Market Risk.................................. 13
Item 4 Controls and Procedures..................................................................... 13
PART II -- OTHER INFORMATION
Item 1 Legal Proceedings........................................................................... 14
Item 2 Changes in Securities and Use of Proceeds................................................... 14
Item 3 Defaults Upon Senior Securities............................................................. 14
Item 4 Submission of Matters to a Vote of Security Holders......................................... 14
Item 5 Other Information........................................................................... 14
Item 6 Exhibits and Reports on Form 8-K............................................................ 14
Signature Page........................................................................................................ 15
Certifications........................................................................................................ 16
2
ITEM 1. FINANCIAL STATEMENTS
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30 DECEMBER 31,
2002 2001
------------- -------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 4,733 $ 1,474
Accounts receivable, net of allowance for doubtful accounts of $1,518
and $1,458 at September 30, 2002 and December 31, 2001, respectively ... 19,946 21,398
Inventory ................................................................. 2,373 2,824
Prepaid expenses .......................................................... 2,086 1,602
Other current assets ...................................................... 58 25
------------- -------------
Total current assets ......................................................... 29,196 27,323
Property, plant and equipment, net ........................................ 49,049 52,536
Goodwill .................................................................. 185,488 196,061
Intangible assets, net .................................................... 236,756 256,357
Deferred financing costs, net ............................................. 5,410 6,364
Other assets .............................................................. 213 336
------------- -------------
Total assets ................................................................. $ 506,112 $ 538,977
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of Term Loan B ............................................ $ 1,000 $ 1,000
Current portion of long-term liabilities .................................. 758 981
Accounts payable .......................................................... 1,935 2,243
Accrued expenses .......................................................... 12,471 13,394
Deferred revenue .......................................................... 8,591 9,217
------------- -------------
Total current liabilities .................................................... 24,755 26,835
Long-term liabilities:
Borrowings under revolving credit facility ................................ 7,000 42,950
Term loan B, less current portion ......................................... 96,500 97,500
Long-term liabilities, less current portion ............................... 1,315 1,518
Senior subordinated notes ................................................. 180,000 180,000
Deferred income taxes ..................................................... 24,660 25,484
------------- -------------
Total liabilities ............................................................ 334,230 374,287
Stockholder's Equity:
Common stock, $0.01 par value, 1,000 shares authorized, 100 shares
issued and outstanding at September 30, 2002 and December 31, 2001 ....... -- --
Additional paid in capital ................................................ 176,675 176,845
Accumulated deficit ....................................................... (4,793) (12,155)
------------- -------------
Total stockholder's equity ................................................... 171,882 164,690
------------- -------------
Total liabilities and stockholder's equity ................................... $ 506,112 $ 538,977
============= =============
See accompanying notes to unaudited interim consolidated financial statements.
3
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES:
Advertising .......................................... $ 36,787 $ 36,954 $ 109,313 $ 110,435
Circulation .......................................... 8,447 8,493 24,984 24,827
Job printing and other ............................... 3,242 3,340 9,361 10,749
------------ ------------ ------------ ------------
Total revenues .......................................... 48,476 48,787 143,658 146,011
OPERATING COSTS AND EXPENSES:
Operating costs ...................................... 22,587 23,805 66,539 73,095
Selling, general and administrative .................. 14,042 13,973 40,814 41,604
Depreciation and amortization ........................ 4,469 5,622 13,342 16,107
------------ ------------ ------------ ------------
Income from operations .................................. 7,378 5,387 22,963 15,205
Interest expense ........................................ 5,903 7,361 18,076 23,098
Amortization of deferred financing costs ................ 322 338 965 1,014
Impairment of other assets .............................. 223 -- 223 --
------------ ------------ ------------ ------------
Income (loss) from continuing operations before income
taxes and cumulative effect of change in accounting
principle ............................................ 930 (2,312) 3,699 (8,907)
Income tax expense (benefit) ............................ (1,021) (50) (770) 298
------------ ------------ ------------ ------------
Income (loss) from continuing operations before
cumulative effect of change in accounting principle .. 1,951 (2,262) 4,469 (9,205)
Income from discontinued operations, net of tax ......... -- 408 4,342 1,155
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of change in
accounting principle ................................. 1,951 (1,854) 8,811 (8,050)
Cumulative effect of change in accounting principle,
net of tax ........................................... -- -- (1,449) --
------------ ------------ ------------ ------------
Net income (loss) ....................................... $ 1,951 $ (1,854) $ 7,362 $ (8,050)
============ ============ ============ ============
See accompanying notes to unaudited interim consolidated financial statements.
4
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net income (loss) ................................................................... $ 7,362 $ (8,050)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization ....................................................... 13,342 16,107
Amortization of deferred financing costs ............................................ 966 1,014
Non-cash compensation ............................................................... 80 77
Loss on sale of fixed assets ........................................................ 333 --
Impairment of other assets .......................................................... 223 --
Income from discontinued operations, net of tax ..................................... (4,342) (1,155)
Cumulative effect of change in accounting principle, net of tax ..................... 1,449 --
Changes in assets and liabilities, net of acquisitions and dispositions:
Working capital-net ................................................................. (4,026) (4,440)
Other assets ........................................................................ (100) --
------------ ------------
Net cash provided by operating activities .............................................. 15,287 3,553
------------ ------------
Cash flows from investing activities:
Purchases of property, plant, and equipment ......................................... (1,673) (2,349)
Proceeds from sale of publications and fixed assets ................................. 27,021 --
Acquisitions, net of cash acquired .................................................. -- (561)
------------ ------------
Net cash provided by (used in) investing activities .................................... 25,348 (2,910)
------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) under amended credit facility ........................... (36,950) 1,495
Payments on long term debt and liabilities .......................................... (426) (1,417)
------------ ------------
Net cash provided by (used in) financing activities .................................... (37,376) 78
------------ ------------
Net increase in cash and cash equivalents ........................................... 3,259 721
Cash and cash equivalents, at beginning of period ................................... 1,474 1,036
------------ ------------
Cash and cash equivalents, at end of period ......................................... $ 4,733 $ 1,757
============ ============
See accompanying notes to unaudited interim consolidated financial statements.
5
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 September 30, 2002
and for the three months and nine months ended September 30, 2002 and September
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. Upon
initial adoption of SFAS No. 142 on January 1, 2002, the Company concluded that
its advertiser and subscriber relationship intangible assets did not meet the
criteria for recognition apart from goodwill. As a result, the Company
reclassified $233,793 of advertiser and subscriber relationship intangible
assets into goodwill. However, based on the consensus reached by the Emerging
Issues Task Force (EITF) in Issue No. 02-17 "Recognition of Customer
Relationship Intangible Assets Acquired in a Business Combination," the Company
has subsequently concluded that its advertiser and subscriber relationship
intangibles do meet the criteria for recognition apart from goodwill under SFAS
No. 142. Therefore, the reclassification into goodwill has been reversed as of
January 1, 2002 and the advertiser and subscriber relationship intangible assets
will continue to be amortized. The transition provisions of SFAS No. 142 require
that the useful lives of previously recognized intangible assets be reassessed
and the remaining amortization periods adjusted accordingly. Prior to adoption
of SFAS No. 142, advertiser and subscriber relationship intangible assets were
amortized over estimated remaining useful lives of 40 and 33 years,
respectively. The Company has concluded that, based upon current economic
conditions and its current pricing strategies, the remaining useful lives for
advertiser and subscriber relationship intangible assets were 30 and 20 years,
respectively, and the amortization periods have been adjusted accordingly, with
effect from January 1, 2002.
The Company plans to amend its previously filed first and second quarter
2002 Form 10-Qs to reflect the change in its adoption of SFAS No. 142 as of
January 1, 2002 and to reflect the change in amortization periods. Originally
reported and amended net income for the quarter ended March 31, 2002 were $3,862
and $2,340 (including tax benefit of $746), respectively, and for the quarter
ended June 30, 2002 were $3,406 and $2,873 (including tax benefit of $1,735),
respectively.
Upon adoption of SFAS No. 142, the Company ceased amortization of goodwill
and its mastheads because the Company has determined that the useful life of its
mastheads is indefinite. Operating income for the three and nine months ended
September 30, 2001 includes $1,453 and $4,359, respectively, of amortization of
goodwill and mastheads that are not included in results for the three and nine
months ended September 30, 2002 due to the implementation of SFAS No. 142.
The effect on the Company's net income (loss) and basic and diluted net loss
per share as a result of the revised adoption of SFAS No. 142 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Reported net income (loss) ................................... $ 1,951 $ (1,854) $ 7,362 $ (8,050)
Add back: Goodwill amortization .............................. -- 1,344 -- 4,032
Add back: Masthead amortization (change in useful life) ...... -- 109 -- 327
Adjust: Advertises relationships (change in useful life)...... -- (406) -- (1,218)
Adjust: Subscribes relationships (change in useful life)...... -- (253) -- (759)
------------ ------------ ------------ ------------
Adjusted net income (loss) ................................... $ 1,951 $ (1,060) $ 7,362 $ (5,668)
============ ============ ============ ============
6
LIBERTY GROUP OPERATING, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
AS OF SEPTEMBER 30, 2002
---------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
------------- ------------ ------------
Amortized Intangible Assets:
Non-compete agreements ........... $ 17,536 $ 15,166 $ 2,370
Advertiser relationships ......... 195,019 21,385 173,634
Subscriber relationships ......... 51,451 7,249 44,202
------------ ------------ ------------
Total ............................... $ 264,006 $ 43,800 $ 220,206
============ ============ ============
Non-amortized Intangible Assets:
Goodwill ......................... $ 185,488
Mastheads ........................ 16,550
------------
Total ............................... $ 202,038
============
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------ ------------------
Aggregate Amortization Expense:...................... $ 3,219 $ 9,441
================ ==================
Estimated Amortization Expense:
For the three months ending December 31, 2002..... $ 3,266
For the year ending December 31, 2003............. 9,825
For the year ending December 31, 2004............. 9,134
For the year ending December 31, 2005............. 9,134
For the year ending December 31, 2006............. 9,134
Thereafter........................................ 179,713
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002 are as follows:
Balance as of January 1, 2002.......... $ 196,061
Impairment losses...................... (2,231)
Goodwill related to sale of property... (8,342)
-----------
Balance as of September 30, 2002....... $ 185,488
===========
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 nine
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 and masthead impairment loss of $2,375 was recognized. The
loss, which was $1,449, 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 multiples
of revenues and EBITDA (earnings before interest, taxes, depreciation, and
amortization) used in recent transactions for similar properties.
(4) DISCONTINUED OPERATIONS
The Company disposed of the assets of six related publications (acquired in
1999) in one transaction 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 for the nine months ended
September 30, 2002, consisted of the gain on sale of the publications. For the
quarter and nine months ended September 30, 2001, income from discontinued
operations, net of zero income taxes, was $408 and $1,155, respectively, and
represented the operating results of the publications sold.
7
(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 September 30, 2002, the Company owned and operated 318
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, with the exception of
the Company's publications in the Chicago suburban market.
The Company's portfolio of publications is comprised of 66 paid daily
newspapers and 142 paid non-daily newspapers. In addition, the Company publishes
110 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.
On January 7, 2002, the Company disposed of the assets of six related
publications (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.
8
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED
TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
Total Revenues. Total revenues for the quarter ended September 30, 2002
decreased by $0.3 million, or 0.6%, to $48.5 million from $48.8 million for the
quarter ended September 30, 2001. The decrease in total revenues was comprised
of a $0.2 million decrease in advertising revenue, a nominal decrease in
circulation revenue and a $0.1 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. The classified advertising decrease was partially offset by an increase
in preprint and national advertising revenues. Total revenues for the nine
months ended September 30, 2002 decreased by $2.3 million, or 1.6%, to $143.7
million from $146.0 million for the nine months ended September 30, 2001. The
decrease in total revenues was comprised of a $1.1 million decrease in
advertising revenue, a $0.2 million increase in circulation revenue and a $1.4
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 national advertising revenues.
Operating Costs. Operating costs for the quarter ended September 30, 2002
decreased $1.2 million, or 5.1%, to $22.6 million from $23.8 million for the
quarter ended September 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 September 30, 2002, operating costs decreased to 46.6% from 48.8%
for the quarter ended September 30, 2001. Operating costs for the nine months
ended September 30, 2002 decreased by $6.6 million to $66.5 million from $73.1
million for the nine months ended September 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 nine months ended September 30, 2002, operating costs
decreased to 46.3% from 50.1% for the nine months ended September 30, 2001.
Selling, General and Administrative. Selling, general and administrative
expenses for the quarter ended September 30, 2002 increased by $0.1 million
from the quarter ended September 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
total revenues, selling, general and administrative expenses increased to 29.0%
for the quarter ended September 30, 2001 from 28.6% for the quarter ended
September 30, 2002. For the nine months ended September 30, 2002, selling,
general and administrative expenses decreased by $0.8 million to $40.8 million
from $41.6 million for the nine months ended September 30, 2001 primarily due to
lower labor costs resulting from reductions in administrative staff. As a
percentage of total revenues, selling, general and administrative expenses
decreased from 28.5% for the nine months ended September 30, 2001 to 28.4% for
the nine months ended September 30, 2002.
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 September 30, 2002
increased by $0.8 million to $11.8 million from $11.0 million for the quarter
ended September 30, 2001. The increase in EBITDA during the quarter ended
September 30, 2002 was primarily due to lower newsprint, delivery and labor
costs from reduced headcount partially offset by lower revenues. For the nine
months ended September 30, 2002, EBITDA increased $5.0 million to $36.3 million
from $31.3 million for the nine months ended September 30, 2001. The increase in
EBITDA for the nine months ended September 30, 2002 was primarily due to lower
newsprint, delivery and labor costs 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 herein 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.
9
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Income from operations ................. $ 7,378 $ 5,387 $ 22,963 $ 15,205
Depreciation and amortization .......... 4,469 5,622 13,342 16,107
------------ ------------ ------------ ------------
EBITDA .............................. $ 11,847 $ 11,009 $ 36,305 $ 31,312
============ ============ ============ ============
Depreciation and Amortization. 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. Upon initial adoption of SFAS No. 142 on January
1, 2002, the Company concluded that its advertiser and subscriber relationship
intangible assets did not meet the criteria for recognition apart from goodwill.
As a result, the Company reclassified $233.8 million of advertiser and
subscriber relationship intangible assets into goodwill. However, based on the
consensus reached by the Emerging Issues Task Force (EITF) in Issue No. 02-17
"Recognition of Customer Relationship Intangible Assets Acquired in a Business
Combination," the Company has subsequently concluded that its advertiser and
subscriber relationship intangibles do meet the criteria for recognition apart
from goodwill under SFAS No. 142. Therefore, the reclassification into goodwill
has been reversed as of January 1, 2002 and the advertiser and subscriber
relationship intangible assets will continue to be amortized. The
reclassification and adjustment of useful lives had no impact on the Company's
cash flow. The transition provisions of SFAS No. 142 require that the useful
lives of previously recognized intangible assets be reassessed and the remaining
amortization periods adjusted accordingly. Prior to adoption of SFAS No. 142,
advertiser and subscriber relationship intangible assets were amortized over
estimated remaining useful lives of 40 and 33 years, respectively. The Company
has concluded that, based upon current economic conditions and its current
pricing strategies the remaining useful lives for advertiser and subscriber
relationship intangible assets were 30 and 20 years, respectively, and the
amortization periods have been adjusted accordingly, with effect from January 1,
2002, respectively.
Depreciation and amortization expense for the quarter ended September 30,
2002 decreased by $1.1 million to $4.5 million from $5.6 million for the quarter
ended September 30, 2001 as a result of the adoption of SFAS No. 142. The
Company recorded $3.2 million in amortization of intangible assets for the
quarter ended September 30, 2002, compared with $3.9 million for the quarter
ended September 30, 2001. For the nine months ended September 30, 2002,
depreciation and amortization expense decreased by $2.8 million to $13.3 million
from $16.1 million for the nine months ended September 30, 2001 as a result of
the adoption of SFAS No. 142. For the nine months ended September 30, 2002, the
Company recorded $9.4 million in amortization of intangible assets, compared
with $11.6 million for the nine months ended September 30, 2001. The Company
ceased amortization of goodwill and its mastheads because the Company has
determined that the useful life of its mastheads is indefinite. Operating income
for the three and nine months ended September 30, 2001 includes $1.5 million and
$4.4 million, respectively, of amortization of goodwill and mastheads that are
not included in results for the three and nine months ended September 30, 2002
due to the implementation of SFAS No. 142. Additionally, advertiser and
subscriber relationship intangible assets were amortized over 40 and 33 years,
respectively. For the three and nine months ended September 30, 2002 as compared
to 30 and 20 years, respectively, for the three and nine months ended September
30, 2001.
Interest Expense. Interest expense (including amortization of deferred
financing costs) for the quarter ended September 30, 2002 decreased by $1.5
million to $6.2 million from $7.7 million for the quarter ended September 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 nine months ended
September 30, 2002, interest expense decreased $5.1 million to $19.0 million
from $24.1 million for the nine months ended September 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 (Benefit). Income tax benefit for the quarter ended
September 30, 2002 increased by $1.0 million from the quarter ended September
30, 2001. The increase in income tax benefit was due to a decrease in the
Company's deferred tax liability. For the nine months ended September 30, 2002,
the income tax benefit was $0.8 million compared to income tax expense of $0.3
million for the nine months ended September 30, 2001.
10
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 in the first quarter of 2002. As a result of this test, the
Company determined that operating profits and cash flows for nine 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 and masthead impairment loss of $1.4 million, or $2.4 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 nine months ended September 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 nine months ended September 30, 2001
was $0.4 million and $1.2 million, respectively.
Net Income (Loss). The Company recorded net income of $2.0 million for the
quarter ended September 30, 2002, compared to a net loss of $1.9 million for the
quarter ended September 30, 2001. The 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. For the nine months ended September 30, 2002, the
Company recorded net income of $7.4 million compared to a net loss of $8.1
million for the nine months ended September 30, 2001. The 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 and lower newsprint, labor, delivery and interest costs, partially
offset by lower revenues and the cumulative effect of change in accounting
principle related to goodwill and masthead impairment losses in the amount of
$1.4 million discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating Activities. Cash provided by operating activities
for the nine months ended September 30, 2002 increased by $11.7 million to $15.3
million, compared with $3.6 million for the nine months ended September 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 nine months ended September 30, 2002 primarily reflects the Disposition
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
new markets.
Cash Flows from Financing Activities. Cash used in financing activities for
the nine months ended September 30, 2002 reflects the reduction of indebtedness
under the Company's 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 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 Credit Facility. The Amended Credit Facility provides for a
$100.0 million principal amount Term Loan B that matures in March 2007 and a
revolving credit facility with a $135.0 million aggregate commitment amount
available, including a $10.0 million sub-facility for letters of credit, that
matures in March 2005. 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, and 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
11
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. On October 23, 2002, the Company repaid $25.0
million principal amount of the Term Loan B with the proceeds from the
Disposition. The proceeds of the Disposition were initially used to reduce the
outstanding amount under the revolving credit facility and the Company
reborrowed such amounts under the revolving credit facility in connection with
the repayment of the Term Loan B.
The Company is highly leveraged and has indebtedness that is substantial in
relation to its stockholder's equity, tangible equity and cash flow. Interest
expense for the nine months ended September 30, 2002 was $26.5 million,
including non-cash interest of $7.0 million and amortization of deferred
financing costs of $1.4 million. The degree to which LGP is leveraged could have
important consequences, including the following: (1) a substantial portion of
the Company's cash flow from operations must be dedicated to the payment of
interest on the 9 3/8% Senior Subordinated Notes and interest on its other
indebtedness, thereby reducing the funds available to the Company for other
purposes; (2) indebtedness under the Amended Credit Facility is at variable
rates of interest, which causes the Company to be vulnerable to increases in
interest rates; (3) the Company is more leveraged than certain competitors in
its industry, which might place the Company at a competitive disadvantage; (4)
the Company may be hindered in its ability to adjust rapidly to changing market
conditions; (5) 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 (6) the Company's ability to obtain
additional financing for working capital, capital expenditures, acquisitions or
general corporate purposes may be impaired.
As of September 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," "intends,"
"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 the Company.
Accordingly, these statements are subject to known and unknown risks,
uncertainties and other factors that could cause the Company's actual growth,
results of operations, 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 growth, results of operations,
performance and business prospects and opportunities covered by such
forward-looking statements will be achieved. Such factors include, among others:
(1) the Company's dependence on local economies and vulnerability to general
economic conditions; (2) the Company's substantial indebtedness; (3) the
Company's holding company structure; (4) the Company's ability to implement its
acquisition strategy; (5) the Company's competitive business environment, which
may reduce demand for advertising; and (6) 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.
12
SUMMARY DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table reflects a summary of the Company's contractual cash
obligations as of September 30, 2002:
2002 2003 2004 2005 2006 THEREAFTER TOTAL
-------- -------- -------- -------- -------- ------------- --------
(IN THOUSANDS)
9 3/8% senior subordinated notes ..... $ -- $ -- $ -- $ -- -- $ 180,000 $180,000
Term Loan B .......................... -- 1,000 1,000 36,125 47,500 11,875 97,500
Revolving credit facility ............ -- -- -- 7,000 -- -- 7,000
Non-compete payments ................. 58 382 282 282 177 406 1,587
Real estate lease payments ........... 130 326 244 199 139 84 1,122
Finder fee payments .................. 350 125 -- -- -- -- 475
Other ................................ 3 4 4 -- -- -- 11
-------- -------- -------- -------- -------- ------------- --------
$ 541 $ 1,837 $ 1,530 $ 43,606 $ 47,816 $ 192,365 $287,695
======== ======== ======== ======== ======== ============= ========
RELATED PARTY TRANSACTIONS
The Company paid $370,000 in management fees for each of the quarters ended
September 30, 2002 and 2001 to Leonard Green & Partners, L.P. The Company is
also obligated to pay other fees to Leonard Green & Partners, L.P. 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 September 30, 2002, the Company had borrowings outstanding of $7.0 million
under the revolving credit facility (without giving effect to approximately $1.2
million of outstanding letters of credit as of such date) and $97.5 million
under the Term Loan B. A hypothetical 100 basis point change in interest rates
would impact quarterly interest expense by approximately $0.3 million based on
the amount outstanding at September 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
the Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on the
foregoing, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date the Company completed its evaluation.
13
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. 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 the
Company's business, 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
Form 8-K filed August 14, 2002 reporting that each of the Chief
Executive Officer, Kenneth L. Serata, and the Chief Financial Officer, Daniel D.
Lewis, of Liberty Group Operating, Inc. submitted to the Securities and Exchange
Commission sworn statements pursuant to 18 U.S.C. Section 1350, as created by
Section 906 of the Sarbanes-Oxley Act of 2002.
14
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 D. LEWIS
- ------------------------------------------------
Daniel D. Lewis
Chief Financial Officer
(principal financial and accounting officer)
Date: November 14, 2002
15
CERTIFICATION
I, Kenneth L. Serota, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Liberty Group
Operating, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries,is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant roll in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ KENNETH L. SEROTA
----------------------------------
Name: Kenneth L. Serota
Title: President, Chief Executive
Officer and Chairman of the
Board of Directors
16
CERTIFICATION
I, Daniel D. Lewis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Liberty Group
Operating, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant roll in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ DANIEL D. LEWIS
----------------------------------
Name: Daniel D. Lewis
Title: Chief Financial Officer
17