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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 AND 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 333-46959
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 60062
NORTHBROOK, ILLINOIS (Zip Code)
(Address of Principal Offices)
Registrant's telephone number, including area code: (847) 272-2244
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2): Yes [ ] No [X]
The number of shares outstanding of the registrant's common stock, par value
$0.01 per share, as of March 31, 2003 was 100, all of which is owned by the
parent company of the registrant. There is no public market for the common
stock.
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TABLE OF CONTENTS
PART I
Disclosure Regarding Forward-Looking Statements......................................................................1
Item 1. Business...................................................................................................1
Item 2. Properties.................................................................................................6
Item 3. Legal Proceedings..........................................................................................6
Item 4. Submission of Matters to a Vote of Security Holders........................................................6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................7
Item 6. Selected Financial Data....................................................................................7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...............................................18
Item 8. Financial Statements and Supplementary Data...............................................................18
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................18
PART III
Item 10. Directors, Executive Officers and Other Key Employees of the Registrant..................................18
Item 11. Executive Compensation...................................................................................19
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...........22
Item 13. Certain Relationships and Related Transactions...........................................................23
Item 14. Controls and Procedures..................................................................................23
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.........................................23
(a) 1. Consolidated Financial Statements.....................................................................23
2. Financial Statement Schedules.........................................................................24
(b) Reports on Form 8-K......................................................................................24
(c) The exhibits filed as a part of this report are listed in the following Exhibit Index....................24
PART I
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains certain "forward-looking
statements" (as defined in Section 21E of the Securities Exchange Act of 1934)
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 annual report on Form 10-K, any statements contained herein
that are not statements of historical fact may be deemed to be forward-looking
statements. The Company is not obligated and has no intention to update or
revise these forward-looking statements to reflect new events, information or
circumstances.
ITEM 1. BUSINESS
OVERVIEW
Liberty Group Operating, Inc. ("Operating Company," "LGO" or "Registrant")
is a Delaware corporation formed on January 27, 1998 for purposes of acquiring a
portion of the daily and weekly newspapers owned by American Publishing Company
or its subsidiaries ("APC"), a wholly-owned subsidiary of Hollinger
International Inc. ("Hollinger"). LGO is a wholly-owned subsidiary of Liberty
Group Publishing, Inc. ("Parent" or "LGP"). The consolidated financial
statements include the accounts of Operating Company 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. The Company owns and operates 302 publications located in 17
states that reach approximately 2.37 million people on a weekly basis. 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 has
strategically clustered its publications in geographically diverse,
non-metropolitan markets in the Midwest, Northeast and Western United States and
in the Chicago suburban market, which limits its exposure to economic conditions
in any single market or region.
The Company's portfolio of publications is comprised of 66 paid daily
newspapers and 126 paid non-daily newspapers. In addition, the Company publishes
110 free circulation and "total market coverage," or TMC, publications with
limited or no news or editorial content that it distributes free of charge and
that generally provide 100% penetration in their areas of distribution. The
Company believes that its publications are generally the most cost-effective
method for its advertisers to reach substantially all of the households in their
markets. Unlike large metropolitan newspapers, the Company derives a majority of
its revenues from local display advertising rather than classified and national
advertising, which are generally more sensitive to economic conditions.
INDUSTRY OVERVIEW
Newspaper publishing is the oldest and largest segment of the media
industry. Although there are several major national newspaper companies, the
Company believes that the newspaper publishing industry in the United States is
highly fragmented, with approximately 74% of daily and non-daily newspapers
having circulations of less than 10,000. Most of these smaller publications are
owned and operated by individuals whose newspaper holdings and financial
resources are generally limited. Further, the Company believes that relatively
few daily newspapers have been established in recent years due to the high cost
of starting a daily newspaper operation and building a franchise identity.
Moreover, most community markets cannot sustain more than one newspaper.
The operating strategy of many newspaper companies has been impacted by the
widespread use of the internet. Most newspapers have internet editions that
deliver the same news and editorial content at no cost to registered users.
However, the Company believes that most customers prefer their newspapers in
printed form.
Advertising revenue is the largest component of a newspaper's total
revenues. Advertising rates at newspapers, free circulars and TMC publications
are usually based on market size, circulation, penetration, demographics and
alternative advertising media available in the marketplace. Readers of
newspapers tend to be more highly educated and have higher incomes than
non-newspaper readers, making the newspaper industry very appealing to
advertisers attempting to reach this demographic group. The Company believes
that newspapers are the most effective medium for retail advertising, which
emphasizes the price of goods, in contrast to broadcast and cable television,
which are generally used for image advertising, or radio, which is usually used
to recall images or brands in the minds of listeners. The Company also believes
that metropolitan and community newspapers represent the dominant medium for
local advertising due to the importance of the information such newspapers
contain in the communities they serve. While circulation revenue is not as
significant as advertising revenue, circulation trends can affect the decisions
of advertisers and advertising rates.
Newspaper advertising revenues are cyclical and are generally affected by
changes in national and regional economic conditions. Classified advertising,
which generally comprises approximately 40% of U.S. newspaper advertising
revenues as a whole, is the most sensitive to economic cycles because it is
driven primarily by the demand for employment, real estate transactions and
automotive sales.
COMPETITIVE STRENGTHS
LOCAL MARKET FOCUS. As a result of the Company's strategic focus on local
content that emphasizes local names and faces, including youth sports, community
events, business, politics and entertainment, the Company believes that its
newspapers generate reader loyalty, perpetuate their franchise value and
represent the most effective means for local advertisers to reach potential
customers. Each of the Company's publications is tailored to its market to
provide local content that radio, television and large metropolitan newspapers
are generally unable to provide on a cost-effective basis because of their
broader geographic coverage. The Company's publications have several advantages
over metropolitan daily publications, including a lower cost structure, the
ability to publish only on their most profitable days (e.g., midweek and one
weekend day) and the ability to limit expensive investments in wire services and
syndicated feature material. In addition, the Company has relatively low
exposure to fluctuations in newsprint prices due to much lower page counts than
large metropolitan newspapers, with newsprint expense related to its
publications comprising 5.0% of its total advertising and circulation revenues
in 2002.
The Company has a broad base of local advertisers, with 73.9% of its
advertising revenues derived from display advertising in 2002. In that period,
no single display advertiser accounted for more than 1% of its total revenues.
The Company believes that local display advertising revenues at its publications
tend to be more stable than the advertising revenues of large metropolitan
newspapers because local businesses generally have fewer effective advertising
channels through which to reach their customers. The Company also is
significantly less reliant than large metropolitan newspapers upon classified
advertising, particularly "help wanted," real estate and automotive sections,
and national advertising, which are generally more sensitive to economic
conditions.
ATTRACTIVE COST STRUCTURE THROUGH STRATEGIC REGIONAL CLUSTERING AND STRICT
COST CONTROLS. The Company has acquired and assembled a network of strategically
clustered newspapers in geographically diverse regions. Strategic clustering
enables it to realize operating efficiencies and economic synergies, such as the
sharing of management, accounting and production functions within clusters. The
Company believes that strategic clustering enables its newspapers to generate
higher operating margins than they would otherwise be able to achieve on a
stand-alone basis. In addition, the Company has increased operating cash flows
at acquired and existing newspapers through cost reductions, including labor,
page width and page count reductions, as well as the implementation of
revenue-generation and expense-control best practices throughout the Company.
BUSINESS STRATEGY
DRIVE REVENUE GROWTH AT EXISTING PROPERTIES BY EXPANDING THE COMPANY'S
ADVERTISING BASE. The Company continuously seeks to utilize its dominant
distribution capability in the markets the Company serves to expand its
advertising base by targeting new advertisers for its local newspapers and
related publications and introducing new products that attract businesses that
do not typically advertise in its newspapers. These products include shopping
and visitors' guides and niche publications and inserts covering subjects such
as children and parenting, employment, health, senior living and real estate,
that are of interest to residents of particular
2
geographic areas and members of particular demographic groups. In addition, the
Company shares advertising concepts throughout its network of publications,
enabling its advertising managers and publishers to implement advertising
products and sales strategies that have already been successful in other markets
that the Company serves.
CONTINUE TO IMPROVE MARGINS THROUGH STRATEGIC REGIONAL CLUSTERING AND STRICT
COST CONTROLS. The Company has achieved significant operating efficiencies
within its network of strategically clustered publications, and the Company
believes that, as the Company continues to acquire and integrate additional
publications into its network, the Company will be able to realize incremental
operating efficiencies and synergies that will position it to continue to
improve its operating margins. The Company intends to continue to focus on
controlling costs, with a particular emphasis on managing staffing requirements,
leveraging production equipment to improve operating efficiencies and reducing
newsprint consumption.
OVERVIEW OF OPERATIONS
Strategic Regional Clusters
The Company has acquired, and intends to continue to acquire, community
publications that the Company can integrate into its network of existing
clusters or that can serve as the basis for creating new clusters. Strategic
clustering of its publications enables the Company to realize operating
efficiencies and economic synergies, such as the sharing of management,
accounting and production functions within clusters. Strategic clustering also
enables it to maximize revenues through the cross-selling of advertising among
contiguous newspaper markets. As a result of strategic clustering, the Company
believes that its newspapers are able to obtain higher operating margins than
they would otherwise be able to achieve on a stand-alone basis.
The following chart sets forth information for its publications by strategic
regional clusters as of December 31, 2002. For purposes of the chart, clusters
consist of five or more publications within a reasonably close proximity to each
other.
NUMBER OF NEWSPAPERS AND OTHER PUBLICATIONS
-------------------------------------------------------
FREE
PAID PAID CIRCULATION/TMC
STRATEGIC REGIONAL CLUSTERS DAILY NON-DAILY PUBLICATIONS TOTAL
-------------------------------------------------------- ---------- ----------- --------------- --------
Baton Rouge region (Louisiana).......................... 0 4 3 7
Grand Forks region (North Dakota/Minnesota)............. 2 2 2 6
Honesdale region (Pennsylvania)......................... 1 2 2 5
Iowa.................................................... 1 4 4 9
Kansas City region (Kansas)............................. 2 4 3 9
Lake of the Ozarks region (Missouri).................... 3 3 9 15
Northern Missouri....................................... 5 1 6 12
Southern Illinois....................................... 6 9 5 20
Southern Michigan....................................... 3 5 7 15
Southwestern Louisiana.................................. 3 1 2 6
Southwestern Minnesota.................................. 0 7 4 11
Southwestern Missouri................................... 2 3 6 11
Southwestern New York/Northwestern Pennsylvania......... 4 3 12 19
Suburban Chicago........................................ 0 38 0 38
Twin Falls region (Idaho)............................... 2 6 2 10
Western Illinois........................................ 5 5 9 19
Wichita region (Kansas)................................. 6 4 6 16
In 2002, no single strategic regional cluster contributed more than 15% of
the Company's total revenues.
Advertising
Advertising revenue is the largest component of the Company's total
revenues, accounting for approximately 77.5%, 75.8% and 76.2% of its total
revenues in 2000, 2001 and 2002, respectively. The Company derives its
advertising revenues from display (local department stores, local accounts at
national department stores, specialty shops and other retailers), national
(national advertising accounts) and classified advertising (employment,
automotive, real estate and personals). Its advertising rate structures vary
among its publications and are a function of various factors, including local
market conditions, competition, circulation, readership and demographics.
3
Substantially all of the Company's advertising revenues are derived from a
diverse group of local retailers and classified advertisers. The Company
believes, based upon its operating experience, that its advertising revenues
tend to be more stable than the advertising revenues of large metropolitan
newspapers because its publications rely primarily on local advertising. Local
advertising has historically been more stable than national advertising because
local businesses generally have fewer effective advertising channels through
which to reach their customers. Moreover, the Company is less reliant than large
metropolitan newspapers upon classified advertising, particularly "help wanted,"
real estate and automotive sections, and national advertising, which are
generally more sensitive to economic conditions. The contribution of display,
national and classified advertising to its total advertising revenues for fiscal
years 2000, 2001 and 2002 were as follows:
YEAR ENDED
DECEMBER 31,
---------------------------
2000 2001 2002
------- ------- ------
Display........................... 70.5% 73.0% 73.9%
National.......................... 2.5 2.4 2.6
Classified........................ 27.0 24.6 23.5
------ ------ ------
Total advertising revenues... 100.0% 100.0% 100.0%
The Company does not rely upon any one company or industry for its
advertising revenues, which are derived from a variety of companies and
industries, and no single display advertiser represented more than 1% of its
total revenues in 2002. The Company's corporate management works with its local
newspaper management to approve advertising rates and with the advertising staff
of each local newspaper to develop marketing kits and presentations. A portion
of its publishers' compensation is based upon increased advertising revenues. In
addition, the Company shares advertising concepts throughout its network of
publications, enabling its advertising managers and publishers to leverage
advertising products and sales strategies that have already been successful in
other markets that the Company serves.
Circulation
While the Company's circulation revenue is not as significant as its
advertising revenue, circulation trends impact the decisions of advertisers and
advertising rates. Substantially all of its circulation revenues are derived
from home delivery sales of publications to subscribers and single copy sales
made through retailers and vending racks. In order to enhance its circulation
revenues and circulation trends, the Company has implemented quality
enhancements, such as: upgrading and expanding printing facilities and printing
presses; increasing the use of color and color photographs; improving graphic
design, including complete redesigns; developing creative and interactive
promotional campaigns and converting selected newspapers from afternoon to
morning publication.
Circulation revenue accounted for approximately 16.1%, 17.0% and 17.3% of
its total revenues in 2000, 2001 and 2002, respectively. A vast majority of 2002
circulation revenues were derived from subscription sales. The Company owns and
operates 66 paid daily publications that range in circulation from approximately
900 to 15,500, and 126 paid non-daily publications that range in circulation
from approximately 100 to 27,200. The Company's corporate management works with
its local newspaper management to establish subscription and single copy rates.
The Company also implements creative and interactive marketing programs and
promotions to increase readership through both subscription and single copy
sales.
Job Printing
The Company operates 48 printing facilities. To the extent the Company has
excess press capacity at these facilities, the Company provides commercial
printing services to third parties, primarily other publishers who do not have a
printing press, on a competitive bid basis. The Company also prints other
commercial materials, including business cards and invitations, to produce
incremental revenue from existing equipment and personnel. Job printing and
other revenue accounted for approximately 6.3%, 7.2% and 6.5% of its total
revenues in 2000, 2001 and 2002, respectively.
Electronic Media
All of the Company's daily publications and certain of its weekly
publications have their own free-access websites. The Company's websites have a
consistent format and provide a selection of local and other news together with
classified advertising, feature articles and details of local events and
activities. The Company has also been able to expand the reach of its classified
advertisements, and increase its advertising revenues, by placing advertisements
on-line as well as in the newspapers. The Company
4
believes that its ability to self-promote its websites in its printed newspapers
as internet portals for the community and its focus on local content limits the
competitive threat to its core newspaper business from new media businesses.
Editorial
The Company's local paid daily and non-daily newspapers generally contain 8
to 14 pages with editorial content that emphasizes local news and topics of
interest to the communities that they serve, such as local business, politics,
entertainment and culture, as well as local youth, high school, college and
professional sports. National and world news stories are sourced from the
Associated Press. The Company's free circulation and TMC publications are
typically used as a vehicle for delivering pre-printed content and range from
limited to no editorial content.
The editorial staff at each of its newspapers typically consists of a
managing editor and several assistant editors and field reporters, who identify
and report the local news in their communities. As of December 31, 2002, the
Company employed approximately 530 editorial personnel that the Company believes
provide the most comprehensive local news coverage in the communities the
Company serves.
PRINTING AND DISTRIBUTION
The Company operates 48 printing and distribution facilities, including 31
facilities within its 17 strategic regional clusters. The production resources
located within each cluster are shared by the publications produced in each
region. On average, each of the Company's printing and distribution facilities
is responsible for producing six publications. Its newspapers are generally
fully paginated utilizing image-setter technology, which allows for design
flexibility and high-quality reproduction of color graphics. By clustering its
production resources, the Company is able to reduce the operating costs of its
newspapers while increasing the quality of its small market newspapers that
might not typically otherwise have access to higher quality production
facilities. Its consolidated printing and distribution facilities are generally
located within 60 miles of its newspapers.
The distribution of the Company's daily newspapers is typically outsourced
to independent, third-party distributors, who also distribute a majority of its
weekly and periodic publications. These distributors generally are independent
and locally based within each cluster. Some of the Company's TMC publications
and weekly publications are also delivered via U.S. mail.
NEWSPRINT
Newsprint represents one of the Company's largest costs of producing
newspapers. The Company has no long-term contracts to purchase newsprint. Its
newspapers purchase a portion of their newsprint directly from paper mills and
also make opportunistic spot market purchases within their geographic regions.
The Company believes that its purchasing policies have resulted in its
publications obtaining favorable newsprint prices. The Company incurred
newsprint expense related to its publications of approximately $11.3 million,
$12.6 million and $9.1 million in 2000, 2001, and 2002, respectively, net of
newsprint consumed by six related publications whose assets were sold on January
7, 2002. The Company has relatively low exposure to fluctuations in newsprint
prices due to much lower page counts than large metropolitan newspapers.
Newsprint expense related to its publications as a percentage of its total
advertising and circulation revenues for 2000, 2001 and 2002 was 6.4%, 7.0% and
5.0%, respectively, net of newsprint consumed by six related publications whose
assets were sold on January 7, 2002. The Company also incurred newsprint expense
related to job printing and other of approximately $3.5 million, $4.5 million
and $3.0 million in 2000, 2001 and 2002, respectively.
Historically, the price of newsprint has been cyclical and volatile,
reaching approximately $682 per short ton in 1996 and dropping to almost $409
per short ton in 1993. The average price of newsprint for December 2002, as
reported by Pulp & Paper Week, was approximately $436 per short ton. The Company
seeks to manage the effects of increases in prices of newsprint through a
combination of technology improvements, page width and page count reductions,
inventory management and advertising and circulation price increases.
SEASONALITY
The Company's revenues, like those of other newspaper companies, tend to
follow a distinct and recurring seasonal pattern, with high advertising revenues
in months containing significant events or holidays. Accordingly, due to fewer
holidays and more inclement weather as compared to other quarters, the Company's
first fiscal quarter is historically its weakest revenue quarter of the year.
Correspondingly, the Company's fourth fiscal quarter is historically its
strongest revenue quarter because it includes heavy holiday season advertising.
The Company expects that seasonal fluctuations will continue to affect its
results of operations in future periods.
5
COMPETITION
Each of the Company's newspapers competes to varying degrees for advertising
and circulation revenue with local, regional and national newspapers, shoppers,
magazines, radio, broadcast and cable television, direct mail, the internet and
other media sources. Competition for newspaper advertising revenues is based
largely on advertising results, advertising rates, readership demographics and
circulation levels. Competition for circulation revenue is generally based on
the content of the newspaper, its price and editorial quality.
The Company's newspapers are the dominant sources for local news,
announcements and other information of interest to the communities that the
Company serves. Its publications generally have strong name recognition in their
markets and face limited competition as a result of operating in markets that
are distantly located from large metropolitan areas and that can support only
one primary newspaper, with the exception of its publications in the Chicago
suburban market. However, as with most suburban and smaller daily newspapers,
some circulation competition exists from large daily newspapers published in
nearby metropolitan areas. The Company believes that these larger newspapers
generally do not compete in a meaningful way for local advertising revenues. The
Company provides its readers with community-specific content, which is generally
not available on a consistent basis in nearby metropolitan newspapers. Local
advertisers, especially businesses located within a small community, typically
target advertising towards customers living or working within their own
communities. The Company believes that its daily newspapers generally capture
the largest share of local advertising as a result of its direct and focused
coverage of the market and its cost-effective advertising rates relative to the
more broadly circulated metropolitan newspapers.
Although alternative media may be available, the Company believes that local
advertisers generally regard newspapers and free circulation and TMC
publications as the most cost-effective method of advertising time-sensitive
promotions and price-specific advertisements, as compared with broadcast and
cable television, which are generally used to advertise image, or radio, which
is usually used to recall images or brands in the minds of listeners. The
Company has, however, over the past several years faced increased competition
for classified advertising from online advertising as the use of the internet
has increased. From time to time, the Company competes with companies that are
larger and/or have greater financial and distribution resources than the Company
does.
EMPLOYEES
The Company employs approximately 2,200 full-time employees and
approximately 1,200 part-time employees. Approximately 2% of its employees
belong to labor unions. The Company has not experienced a strike or work
stoppage at any of its newspapers during the past five years, and considers its
relations with its employees to be good.
ITEM 2. PROPERTIES
The Company has 143 operating and production facilities for its publications
in the United States. The Company owns 107 of these facilities and leases the
remaining 36 for terms ranging from one to five years. These facilities range in
size from approximately 1,000 to 55,000 square feet. The Company's executive
offices are located in Northbrook, Illinois, where the Company leases
approximately 4,900 square feet under a lease terminating in 2004. The Company
does not believe any individual property is material to its financial condition
or results of operations.
ITEM 3. 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
management, is reasonably expected to have a material adverse effect on its
business, financial condition or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION AND HOLDERS
There is no public market for LGO's common stock, per value $0.01 per share
(the "Common Stock"). As of March 31, 2003, all of the issued and outstanding
Common Stock is owned by LGP. LGO has no outstanding capital stock other
than Common Stock, nor are there any outstanding options, warrants or other
rights to purchase LGO capital stock.
DIVIDENDS
LGO, which paid a cash dividend to Parent of $62,500 in 2001 and $943,000
in 2002, is subject to certain covenants that limits its ability to pay
dividends and make other restricted payments. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
LGO EQUITY COMPENSATION PLAN INFORMATION AS OF DECEMBER 31, 2002
The Company has no outstanding options, warrants or other rights to
purchase LGO capital stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data of the
Company. During January 2002, the Company disposed of the assets of six related
publications that the Company acquired in 1999 and, accordingly, the historical
operating results of these publications have been reclassified and presented
below as a discontinued operation. Certain other historical amounts have been
reclassified to conform to the 2002 presentation, such as the transfer of
inserting expense and certain postage and delivery costs from selling, general
and administrative to operating costs. The data presented below should be read
in conjunction with the consolidated financial statements, including the notes
thereto, and with Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Annual Report.
7
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Advertising.............................. $ 82,570 $ 120,315 $ 145,787 $ 147,977 $ 146,918
Circulation.............................. 22,844 27,052 30,329 33,228 33,353
Job printing and other................... 7,117 12,309 11,887 13,995 12,560
--------- --------- --------- --------- ---------
Total revenues.............................. 112,531 159,676 188,003 195,200 192,831
Operating costs and expenses:
Operating costs.......................... 53,293 76,179 90,541 98,607 90,390
Selling, general and
administrative.............................. 28,986 42,689 52,799 53,764 53,526
Depreciation and amortization............ 11,917 16,496 19,193 21,315 17,027
--------- --------- --------- --------- ---------
Income from continuing operations........... 18,335 24,312 25,470 21,514 31,888
Interest expense and amortization of
deferred financing costs................. 19,300 25,216 32,132 31,658 25,447
Impairment of other assets.................. -- -- -- -- 223
Net gain on exchange and
disposition of properties................ -- 6,197 -- -- --
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes,
extraordinary item and
cumulative effect of change in
accounting principle..................... (965) 5,293 (6,662) (10,144) 6,218
Income tax expense (benefit)................ -- 2,752 491 444 (927)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before extraordinary item and
cumulative effect of change in
accounting principle..................... (965) 2,541 (7,153) (10,588) 7,145
Income from discontinued
operations, net of tax.................... -- 513 1,817 1,508 4,269
Extraordinary gain on insurance
proceeds................................... -- 485 -- -- --
Cumulative effect of change in
accounting principle, net of tax......... -- -- -- -- (1,449)
--------- --------- --------- --------- ---------
Net income (loss)........................... (965) 3,539 (5,336) (9,080) 9,965
STATEMENT OF CASH FLOWS DATA:
Capital expenditures........................ $ 2,232 $ 5,687 $ 9,654 $ 2,715 $ 2,496
Net cash provided by
operating activities..................... 21,865 8,499 15,734 12,925 25,167
Net cash provided by (used in)
investing activities..................... (388,678) (60,509) (92,092) (3,330) 23,954
Net cash provided by (used in)
financing activities..................... 366,386 52,845 75,535 (9,157) (47,956)
OTHER DATA (UNAUDITED):
EBITDA(1)................................... $ 30,252 $ 40,808 $ 44,663 $ 42,829 $ 48,915
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 1,025 $ 1,860 $ 1,036 $ 1,474 $ 1,696
Total assets................................ 406,401 475,881 559,302 540,342 501,649
Total long-term obligations
including current maturities............. 227,834 281,418 332,419 323,949 275,993
Stockholders' equity........................ 147,696 150,985 173,724 164,690 173,729
(1) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization, which for the Company is income from continuing operations
plus depreciation and amortization. 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 in isolation or as
an alternative to income from operations, net income (loss), cash flows from
operating activities or any other measure of
8
performance or liquidity derived in accordance with GAAP. EBITDA is
presented because the Company believes it is an indicative measure of its
operating performance and its ability to meet its debt service requirements
and is used by investors and analysts to evaluate companies in its industry
as a supplement to GAAP measures.
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. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- ------- --------
(IN THOUSANDS)
Income from continuing operations......... $ 18,335 $ 24,312 $ 25,470 $21,514 $ 31,888
Depreciation and amortization............. 11,917 16,496 19,193 21,315 17,027
-------- -------- -------- ------- --------
EBITDA................................ $ 30,252 $ 40,808 $ 44,663 $42,829 $ 48,915
======== ======== ======== ======= ========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the historical
financial statements of the Company, including the notes thereto. The discussion
and analysis below includes certain "forward-looking statements" (as such terms
are defined in Section 21E of the Securities Exchange Act of 1934) pertaining
to, among other things, competition in the Company's markets, availability of
adequate acquisition opportunities, price and availability of newsprint,
significant use of leverage, general economic conditions and environmental
matters. These statements are based on the beliefs, assumptions made by, and
information currently available to, the Company's management. The Company's
actual growth, results of operations, performance and business prospects and
opportunities in 2003 and beyond could differ materially from those expressed
in, or implied by, such forward-looking statements. See Part I. "Disclosure
Regarding Forward-Looking Statements" for certain factors that could cause or
contribute to such material differences.
OVERVIEW
Liberty Group Operating, Inc. ("Operating Company," "LGO" or "Registrant")
is a Delaware corporation formed on January 27, 1998 for purposes of acquiring a
portion of the daily and weekly newspapers owned by American Publishing Company
or its subsidiaries ("APC"), a wholly-owned subsidiary of Hollinger
International Inc. ("Hollinger"). LGO is a wholly-owned subsidiary of Liberty
Group Publishing, Inc. ("Parent" or "LGP"). The consolidated financial
statements include the accounts of Operating Company 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. The Company owns and operates 302 publications located in 17
states that reach approximately 2.37 million people on a weekly basis. 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 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.
The Company acquired 43 publications in 12 transactions for a total
acquisition cost of $84.5 million during 2000. The Company has not acquired any
significant publications since December 2000.
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
operating results of these publications as discontinued operations.
9
RESULTS OF OPERATIONS
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Total Revenues. Total revenues for the year ended December 31, 2002
decreased by $2.4 million, or 1.2%, to $192.8 million. The decrease in total
revenues for 2002 was comprised of a $1.1 million, or 0.7%, decrease in
advertising revenue, a $0.1 million, or 0.4%, increase in circulation revenue
and a $1.4 million, or 10.3%, decrease in job printing and other revenue. The
advertising and printing revenue decrease was primarily driven by a decrease in
classified recruitment and printing revenues of $2.2 million and $1.0 million,
respectively, in the Chicago suburban market, as well as the discontinuation of
two lower margin print jobs in the Company's community markets, partially offset
by an increase in preprint and national advertising revenues of $0.9 million and
$0.2 million, respectively.
Operating Costs. Operating costs for 2002 were $90.4 million, or 46.9% of
total revenues, which was a decrease of $8.2 million over the year ended
December 31, 2001, when operating costs were $98.6 million, or 50.5% of total
revenues. This decrease was primarily due to a decrease in newsprint costs of
$5.0 million, delivery costs of $1.1 million and labor costs of $1.5 million
resulting from a reduction in operating staff.
Selling, General and Administrative. Selling, general and administrative
expenses for 2002 decreased to $53.5 million, or 27.8% of total revenues, from
$53.8 million for 2001 when selling, general and administrative expenses were
27.5% of total revenues. The decrease was primarily due to a decrease in labor
costs of $1.6 million resulting from reductions in administrative staff,
partially offset by higher performance-based incentive compensation of $1.4
million.
Depreciation and Amortization. As of January 1, 2002, the Company adopted
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. The transition provisions of SFAS No. 142 require that useful lives of
previously recognized intangible assets be reassessed and the remaining
amortization periods adjusted accordingly. Prior to the 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 are 30 and 20 years, respectively, and
the amortization periods have been adjusted accordingly, with effect from
January 1, 2002. Non-compete agreements are amortized over periods of up to 10
years depending on the specifics of the agreement. The change in useful lives
had no impact on cash flow.
Depreciation and amortization expense for 2002 decreased by $4.3 million to
$17.0 million, from $21.3 million for 2001 as a result of the adoption of SFAS
No. 142. For 2002, the Company recorded $11.9 million in amortization of
intangible assets compared with $15.3 million for 2001. Upon adoption of SFAS
No. 142, the Company ceased amortization of goodwill. The Company also ceased
amortization of its mastheads because it determined that the useful life of its
mastheads was indefinite. Had SFAS No. 142 been adopted on January 1, 2001,
income from operations for 2001 would have been increased by $5.7 million had
goodwill and mastheads not been amortized and reduced by $1.9 million due to the
change in useful lives of advertiser and subscriber relationship intangible
assets.
Income from Continuing Operations. Income from continuing operations
increased by $10.4 million from $21.5 million, or 11.0% of total revenues, for
2001 to $31.9 million, or 16.5% of total revenues, for 2002. The increase was
primarily driven by decreases in operating costs, selling, general and
administration expenses and amortization expense, partially offset by lower
revenues.
EBITDA. EBITDA for 2002 increased by $6.1 million to $48.9 million, from
$42.8 million for 2001. The increase was primarily driven by lower newsprint,
delivery and labor costs, partially offset by lower revenues, as discussed
above. EBITDA as a percentage of total revenues increased from 21.9% to 25.4%.
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 in isolation or 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. EBITDA is presented
because the Company believes it is an indicative measure of its operating
performance and its ability to meet its debt service requirements and is used by
investors and analysts to evaluate companies in its industry as a supplement to
GAAP measures.
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
10
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.
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- ------- --------
(IN THOUSANDS)
Income from continuing operations....... $ 18,335 $ 24,312 $ 25,470 $21,514 $ 31,888
Depreciation and amortization........... 11,917 16,496 19,193 21,315 17,027
-------- -------- -------- ------- --------
EBITDA.............................. $ 30,252 $ 40,808 $ 44,663 $42,829 $ 48,915
======== ======== ======== ======= ========
Interest Expense. Interest expense (including amortization of deferred
financing costs) decreased by $6.2 million to $25.4 million for 2002 from $31.7
million for 2001. The decrease in interest expense was due to the reduction of
indebtedness resulting from the application of proceeds from the Disposition
and lower interest rates.
Income Tax Expense (Benefit). Income tax expense of $0.4 million for 2002
decreased by $1.4 million to a tax benefit of $0.9 million compared to 2001. The
decrease in income tax expense was due to a deferred tax benefit recognized in
2002.
Income from Discontinued Operations. Income from discontinued operations was
$4.3 million for 2002 compared to $1.5 million for 2001. On January 7, 2002, the
Company disposed of the assets of six related publications (acquired in 1999)
for proceeds of $26.5 million, resulting in a pre-tax gain of $7.0 million and
an after-tax gain of $4.3 million.
Cumulative Effect of Change in Accounting Principle. Pursuant to the
adoption of SFAS No. 142, an initial impairment test of properties was performed
in the first quarter of 2002. As a result of this test, it was determined that
the fair values of five properties were less than the net book value of the
Company's goodwill and mastheads for such properties on January 1, 2002. As a
result, an after-tax goodwill and masthead impairment loss of $1.4 million, or
$2.4 million pre-tax, was recorded in 2002 as a cumulative effect of change in
accounting principle.
Net Income (Loss). For 2002, the Company recognized net income of $10.0
million compared to a net loss of $(9.1) million for 2001. The $19.1 million
increase in net income was primarily attributable to an after-tax gain of $4.3
million on the Disposition, 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, as
previously discussed.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Total Revenues. Total revenues for the year ended December 31, 2001
increased by $7.2 million, or 3.8%, to $195.2 million. The increase in total
revenues for 2001 was comprised of a $2.2 million, or 1.5%, increase in
advertising revenue, a $2.9 million, or 9.6%, increase in circulation revenue,
and a $2.1 million, or 17.7%, increase in job printing and other revenue. The
increase in revenues was primarily due to revenue from publications acquired in
2000 of $12.9 million and same-property increases in circulation of $0.1
million, partially offset by decreases in same-property printing and advertising
revenue of $0.7 million and $5.3 million, respectively.
Operating Costs. Operating costs for 2001 were $98.6 million, or 50.5% of
total revenues, which was an increase of $8.1 million over the year ended
December 31, 2000 when operating costs were $90.5 million, or 48.2% of total
revenues. The increase in operating costs as a percentage of total revenues for
2001 was primarily due to an increase in same-property delivery and newsprint
costs of $0.2 million and $0.1 million, respectively, and lower revenues,
partially offset by a decrease in labor costs of $0.1 million.
Selling, General and Administrative. Selling, general and administrative
expenses for 2001 increased by $1.0 million to $53.8 million, or 27.5% of total
revenues, from $52.8 million for 2000 when expenses were 28.1% of total
revenues.
Depreciation and Amortization. Depreciation and amortization expense for
2001 increased by $2.1 million to $21.3 million, from $19.2 million for 2000.
The increase was due to depreciation of assets acquired in 2000, depreciation on
capital expenditures made in 2001, and a full year of amortization of
intangibles from 2000 acquisitions.
11
Income from Continuing Operations. Income from continuing operations
decreased by $4.0 million from $25.5 million, or 13.5% of total revenues, for
2000 to $21.5 million, or 11.0% of total revenues, for 2001. The decrease was
primarily driven by a decrease in same-property advertising revenue, higher
newsprint and delivery costs, and higher depreciation and amortization expense
partially offset by lower labor costs, as previously discussed.
EBITDA. EBITDA for 2001 decreased to $42.8 million from $44.7 million for
2000. The decrease was primarily driven by a decrease in same-property
advertising revenue and higher same-property delivery and newsprint costs,
partially offset by lower labor costs from reduced headcount, as previously
discussed. EBITDA as a percentage of total revenues declined from 23.8% to
21.9%.
Interest Expense. Interest expense (including amortization of deferred
financing costs) decreased by $0.4 million to $31.7 million for 2001 from $32.1
million for 2000, primarily due to lower interest rates on borrowings under the
Amended Credit Facility (as defined below).
Income Tax Expense. Income tax expense for 2001 was comparable to 2000 and
reflects the provision for state and local income taxes.
Net Loss. For 2001, the Company recognized a net loss of $(9.1) million
compared to a net loss of $(5.3) million for 2000. The $(3.8) million increase
in the net loss was due primarily to lower same-property advertising revenues,
higher newsprint and delivery costs as well as higher depreciation and
amortization expense, which was partially offset by lower labor costs.
CRITICAL ACCOUNTING POLICY DISCLOSURE
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
As of January 1, 2002, the Company adopted SFAS No. 142. SFAS No. 142
requires an annual impairment test for goodwill and other intangible assets
with indefinites lives. The Company assesses impairment of goodwill and
mastheads by using multiples of recent and projected revenues and EBITDA for
individual properties to determine the fair value of the properties and deducts
the fair value of assets other than goodwill and mastheads to arrive at the fair
value of goodwill and mastheads. This amount is then compared to the carrying
value of goodwill and mastheads to determine if any impairment has occurred. The
multiples of revenues and EBITDA used to determine fair value are based on the
Company's experience in acquiring and selling properties and multiples reflected
in the purchase prices of recent sales transactions of newspaper properties
similar to those it owns. If there is a significant change in such multiples, or
a deterioration in revenue or EBITDA for any of the properties, additional
impairment losses may have to be recorded.
Upon adoption of SFAS No. 142, the Company ceased amortization of
goodwill. The Company also ceased amortization of its mastheads because it
determined that the useful life of its mastheads is indefinite.
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 are 30 and 20 years, respectively, and the
amortization periods have been adjusted accordingly, with effect from January 1,
2002. The change in useful lives had no impact on the Company's cash flow.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities. Cash provided by operating activities
in 2000 was $15.7 million and decreased $2.8 million to $12.9 million in 2001.
The decrease in 2001 was primarily due to a decrease of $1.8 million in income
from continuing operations before depreciation and amortization and higher
borrowing levels. Cash provided by operating activities increased by $12.2
million to $25.2 million in 2002. The increase in 2002 was primarily due to an
increase of $6.1 million in income from continuing operations before
depreciation and amortization and a decrease in interest rates and borrowing
levels.
Cash flows from investing activities. Cash used in investing activities was
$92.1 million in 2000 and $3.3 million in 2001 compared to cash provided from
investing activities of $24.0 million in 2002. The decrease of $88.8 million in
cash used from 2000 to 2001
12
relates primarily to a decrease in the number and size of acquisitions from 2000
to 2001 in the amount of $83.9 million and a decrease in capital expenditures of
$6.9 million. The increase of $27.3 million in cash provided from 2001 to 2002
was primarily due to $26.7 million of proceeds from the Disposition and the sale
of other assets, partially offset by $2.5 million of capital expenditures. The
Company's capital expenditures in 2002 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 provided by financing activities
was $75.5 million in 2000 compared to cash used in financing activities of $9.2
million in 2001 and $48.9 million in 2002. Cash provided by financing activities
in 2000 resulted from net contributions from Parent, as well as, borrowings
under the Amended Credit Facility, partially offset by the repayment of the
previous revolving credit facility. Net cash used in financing activities in
2001 related to the repayment of a portion of the revolving credit facility of
$7.1 million and the Term Loan B and other liabilities of $2.0 million. Net cash
used in financing activities in 2002 reflects the reduction of indebtedness
under the revolving credit facility of $21.1 million, the Term Loan B of $26.0
million, other liabilities of $0.9 million, and a dividend to Parent of $0.9
million.
Amended Credit Facility. LGO is a party to an 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 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 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. LGP and the Company is required
to permanently reduce the Term Loan B and/or 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, LGO
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 LGO borrowed such
amounts under the revolving credit facility in connection with the repayment of
the Term Loan B.
The Term Loan B and the revolving credit facility bear interest, at LGO's
option, equal to the Alternate Base Rate for an ABR loan (as defined in the
Amended Credit Facility) or the Adjusted LIBO Rate for a eurodollar loan (as
defined in the Amended Credit Facility) plus an applicable margin. The
applicable margin is based on: (1) whether the loan is an ABR loan or eurodollar
loan; and (2) the ratio of (a) indebtedness of LGO and its subsidiaries that
requires interest to be paid in cash to (b) pro forma EBITDA for the 12-month
period then ended. LGO also pays an annual fee equal to the applicable
eurodollar margin for the aggregate amount of outstanding letters of credit.
Additionally, LGO pays a fee on the unused portion of the revolving credit
facility. No principal payments are due on the revolving credit facility until
the maturity date. As of December 31, 2002, the Term Loan B requires annual
principal payments of $0.7 million in 2003 and 2004, $26.9 million in 2005,
$35.3 million in 2006 and $8.8 million in 2007. The Amended Credit Facility
contains financial covenants that require LGO and LGP to satisfy specified
quarterly financial tests, including a maximum senior leverage ratio, a minimum
cash interest coverage ratio and a maximum leverage ratio. The Amended Credit
Facility also contains affirmative and negative covenants customarily found in
loan agreements for similar transactions.
The Company is highly leveraged and has indebtedness that is substantial in
relation to its stockholders' equity, tangible equity and cash flow. Interest
expense for 2002 was $25.4 million, including amortization of deferred financing
costs of $1.6 million. The degree to which LGO 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 Company's $180.0 million aggregate principal amount of 9 3/8%
Senior Subordinated Notes (the "Notes") due February 1, 2008 and interest on
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'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 (5) the Company's ability to obtain
additional financing for working capital, capital expenditures, acquisitions or
general corporate purposes may be impaired.
As of December 31, 2002, approximately $94.3 million was outstanding under
the Amended Credit Facility, and the aggregate principal amount of the Notes
outstanding was $180.0 million.
13
Liquidity. The Company's principal sources of funds will be cash provided by
operating activities and borrowings under its revolving credit facility.
The indentures relating to the Notes and Amended Credit Facility impose upon
the Company certain financial and operating covenants, including, among others,
requirements that the Company satisfy certain quarterly financial tests,
including a maximum senior leverage ratio, a minimum cash interest coverage
ratio and a maximum leverage ratio, limitations on capital expenditures and
restrictions on the Company's ability to incur debt, pay dividends or take
certain other corporate actions.
Management believes that the Company has adequate capital resources and
liquidity to meet its borrowing obligations, all required capital expenditures
and pursue its business strategy for at least the next 12 months.
On June 3, 2002, Parent 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 LGP Common Stock. Reference is
made to the Registration Statement for information concerning the offering and
transactions contemplated by the Registration Statement, including Parent's
intended use of proceeds from the initial public offering and the impact of such
intended use on Parent and the Company's capital structure and indebtedness.
There can be no assurance that Parent will consummate the initial public
offering of the LGP Common Stock.
SUMMARY DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table reflects a summary of the Company's contractual cash
obligations as of December 31, 2002 (in thousands):
2003 2004 2005 2006 2007 THEREAFTER TOTAL
------- ------- -------- -------- -------- ---------- ---------
9 3/8% senior subordinated notes.. $ -- $ -- $ -- $ -- $ -- $ 180,000 $ 180,000
Term Loan B....................... 744 744 26,862 35,320 8,830 -- 72,500
Revolving credit facility......... -- -- 21,845 -- -- -- 21,845
Non-compete payments.............. 380 282 282 177 177 216 1,514
Real estate lease payments........ 362 214 92 43 7 -- 718
Finder fee payments............... 125 -- -- -- -- -- 125
Other............................. 4 5 -- -- -- -- 9
------- ------- -------- -------- -------- --------- ---------
$ 1,615 $ 1,245 $ 49,081 $ 35,540 $ 9,014 $ 180,216 $ 276,711
======= ======= ======== ======== ======== ========= =========
- ----------
RELATED-PARTY TRANSACTIONS
The Company paid $1.3 million, $1.5 million and $1.5 million in management
fees in 2000, 2001 and 2002, respectively, and $356,000, $375,000 and $350,000
in other fees in 2000, 2001 and 2002, respectively, to Leonard Green & Partners,
L.P. The Company is obligated to pay other fees to Leonard Green & Partners,
L.P. of $125,000 in 2003. See Item 13. "Certain Relationships and Related
Transactions" for further discussion of this and other transactions.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires
the Company to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that results from the acquisition,
construction, development, and/or normal use of the assets. The Company also
records a corresponding asset that is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation, the
obligation will be adjusted at the end of each period to reflect the passage of
time and changes in the estimated future cash flows underlying the obligation.
The Company is required to adopt SFAS No. 143 on January 1, 2003. The adoption
of SFAS No. 143 is not expected to have a material effect on the Company's
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, among other things, amends existing guidance on
reporting gains and losses on the extinguishment of debt to prohibit the
classification of the gain or loss as extraordinary, unless the items meet the
definition of extraordinary under APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". The
provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are
applicable to fiscal years beginning after May 15, 2002. Earlier application of
these
14
provisions is encouraged. The adoption of SFAS No. 145 is not expected to have a
material effect on the Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity".
The provisions of SFAS No. 146 are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The adoption of SFAS No. 146 is not expected to have a material effect on the
Company's consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company's
consolidated financial statements. The disclosure requirements are effective for
financial statements for interim and annual periods ending after December 15,
2002.
RISK FACTORS FOR INVESTMENT CONSIDERATIONS
THE COMPANY DEPENDS TO A GREAT EXTENT ON THE ECONOMIES AND THE DEMOGRAPHICS
OF THE LOCAL COMMUNITIES THAT IT SERVES AND IS ALSO SUSCEPTIBLE TO GENERAL
ECONOMIC DOWNTURNS, WHICH COULD CONTINUE TO HAVE A MATERIAL IMPACT ON ITS
ADVERTISING AND CIRCULATION REVENUES AND ITS PROFITABILITY.
The Company's advertising revenues and, to a lesser extent, circulation
revenues, depend upon a variety of factors specific to the communities that its
publications serve. These factors include, among others, the size and
demographic characteristics of the local population, local economic conditions
in general and the economic condition of the retail segments of the communities
that its publications serve. If the local economy, population or prevailing
retail environment of a community served by the Company experiences a downturn,
its publications, revenues and profitability in that market would be adversely
affected. For example, the Company's total revenues for the 2002 decreased by
$2.4 million from 2001 as a result of, among other things, a decrease in
classified recruitment and printing revenues of $2.2 million and $1.0 million,
respectively, in the Chicago suburban market. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations."
The Company's advertising and circulation revenues are also susceptible to
negative trends in the general economy that affect consumer spending. The
advertisers in its newspapers and related publications are primarily retail
businesses, which can be significantly affected by regional or national economic
downturns and other developments. For example, if there is continued
consolidation among the Company's advertisers, such as retailers, grocery stores
and banks, or if large national retailers that rely less on local print
advertising expand their operations to include grocery stores and replace
grocers that presently advertise in its newspapers, the Company's advertising
revenues would decrease. Additionally, due to the Company's substantial
indebtedness, it may be more susceptible to adverse general economic effects
than some of the competitors in its industry, some of which have greater
financial and other resources than the Company does.
THE COMPANY'S SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT ITS FINANCIAL
HEALTH AND REDUCE THE FUNDS AVAILABLE TO IT FOR OTHER PURPOSES.
The Company has, and intends to continue to have, a significant amount of
indebtedness. As of December 31, 2002, the Company had total indebtedness of
$274.3 million. The Company expects to incur additional indebtedness to fund
operations, capital
15
expenditures or future acquisitions. The Company's substantial indebtedness
could adversely affect its financial health in the following ways:
o a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of interest on its outstanding indebtedness,
thereby reducing the funds available to it for other purposes;
o indebtedness under the Amended Credit Facility is at variable rates of
interest, which causes it to be vulnerable to increases in interest
rates;
o the Company is more leveraged than certain competitors in its
industry, which might place it at a competitive disadvantage;
o 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
o the Company's ability to obtain additional financing for working
capital, capital expenditures, acquisitions or general corporate
purposes may be impaired.
In addition, the Amended Credit Facility and other indebtedness contain
financial and other restrictive covenants that limit the Company's ability to
incur additional debt and engage in other activities that may be in its
long-term best interests. The Company's failure to comply with these covenants
could trigger an event of default which, if not waived or cured, could result in
the acceleration of the maturity of its indebtedness. If the Company's
indebtedness is accelerated, it may not have sufficient cash resources to
satisfy its obligations in respect of its indebtedness and the Company may not
be able to continue its operations.
THE COMPANY INTENDS TO CONTINUE TO PURSUE ACQUISITION OPPORTUNITIES, WHICH
MAY SUBJECT IT TO CONSIDERABLE BUSINESS AND FINANCIAL RISK.
The Company has grown through, and anticipates that it will continue to grow
through, acquisitions of paid daily and non-daily newspapers and free
circulation and TMC publications. The Company continually evaluates potential
acquisitions and intends to actively pursue acquisition opportunities, some of
which could be significant. The Company may not be successful in identifying
acquisition opportunities, assessing the value, strengths and weaknesses of
these opportunities and consummating acquisitions on acceptable terms.
Acquisitions may expose the Company to particular business and financial risks
that include:
o diverting management's attention;
o assuming liabilities;
o incurring significant additional capital expenditures, transaction and
operating expenses and non-recurring acquisition-related charges;
o experiencing an adverse impact on the Company's earnings from the
amortization or impairment of acquired goodwill and other intangible
assets;
o failing to integrate the operations and personnel of the acquired
newspapers and publications;
o entering new markets with which the Company is not familiar; and
o failing to retain key personnel of the acquired newspapers and
publications.
The Company may not be able to successfully manage acquired newspapers and
publications or increase its profits from these operations. If the Company is
unable to successfully implement its acquisition strategy or address the risks
associated with acquisitions, or if the Company encounters unforeseen expenses,
difficulties, complications or delays frequently encountered in connection with
the integration of acquired entities and the expansion of operations, its growth
and ability to compete may be impaired, it may fail to achieve acquisition
synergies and it may be required to focus resources on integration of operations
rather than
16
more profitable areas. In addition, the Company may compete for certain
acquisition targets with companies having greater financial resources than it.
The Company anticipates that it will finance acquisitions through cash provided
by operating activities and borrowings under its Amended Credit Facility, which
would reduce its cash available for other purposes, including the repayment of
indebtedness.
THE COMPANY'S BUSINESS MAY SUFFER IF THERE IS A SIGNIFICANT INCREASE IN THE
PRICE OF NEWSPRINT OR A REDUCTION IN THE AVAILABILITY OF NEWSPRINT.
The basic raw material for newspapers is newsprint. In 2002, the Company's
newsprint consumption related to its publications totaled approximately $9.1
million, which was 5.0% of its total advertising and circulation revenues. The
Company also incurred newsprint expense related to job printing and other of
approximately $3.0 million in 2002. The Company has no long-term contracts to
purchase newsprint. The Company's inability to obtain an adequate supply of
newsprint in the future could have a material adverse effect on its ability to
produce its publications. Historically, the price of newsprint has been cyclical
and volatile, reaching approximately $682 per short ton in 1996 and dropping to
almost $409 per short ton in 1993. The average price of newsprint for December
2002, as reported by Pulp & Paper Week, was approximately $436 per short ton.
Significant increases in newsprint costs could have a material adverse effect on
the Company's financial condition and results of operations. See Item 1.
"Business -- Newsprint."
THE COMPANY COMPETES WITH A LARGE NUMBER OF COMPANIES IN THE MEDIA INDUSTRY,
AND IF IT IS UNABLE TO COMPETE EFFECTIVELY, ITS ADVERTISING AND CIRCULATION
REVENUES MAY DECLINE.
The Company's business is concentrated in newspapers and other publications
located primarily in non-metropolitan markets in the United States. The
Company's revenues primarily consist of advertising and paid circulation.
Competition for advertising revenues and paid circulation comes from local,
regional and national newspapers, shoppers, magazines, broadcast and cable
television, radio, direct mail, the internet and other media. For example, as
the use of the internet has increased over the past several years, the Company
has lost some classified advertising and subscribers to online advertising
businesses and its free internet sites that contain abbreviated versions of its
newspapers, respectively. Competition for newspaper advertising revenues is
based largely upon advertiser results, advertising rates, readership,
demographics and circulation levels, while competition for circulation is based
largely upon the content of the newspaper, its price and editorial quality. The
Company's local and regional competitors are typically unique to each market,
and many of its competitors for advertising revenues are larger and have greater
financial and distribution resources than it. The Company may incur increasing
costs competing for advertising expenditures and paid circulation. The Company
may also experience a decline of circulation or print advertising revenue due to
alternative media, such as the internet. If it is not able to compete
effectively for advertising expenditures and paid circulation, the Company's
revenues may decline. See "Business -- Competition."
THE COMPANY'S QUARTERLY REVENUES AND OPERATING RESULTS FLUCTUATE AS A RESULT
OF A VARIETY OF FACTORS, WHICH MAY AFFECT ITS CASH FLOWS.
The Company's quarterly revenues and operating results have varied
significantly in the past and are expected to fluctuate in the future due to a
number of factors. For example, the timing of new newspaper acquisitions,
related pre-acquisition expenses, losses or charges incurred as a result of
acquisitions, including significant write-downs, write-offs or impairment
charges, and the amount of revenue contributed by new and existing newspapers
may cause its quarterly results to fluctuate. Additionally, the Company's
business is subject to seasonal fluctuations that it expects to continue to
affect its operating results in future periods. The Company's first fiscal
quarter of the year tends to be its weakest quarter because advertising volume
is at its lowest levels following the holiday season. Correspondingly, its
fourth fiscal quarter tends to be its strongest quarter because the fourth
fiscal quarter includes heavy holiday season advertising. Other factors that
affect the Company's quarterly revenues and operating results may be beyond its
control, including changes in the pricing policies of its competitors, the
hiring and retention of key personnel, wage and cost pressures, changes in
newsprint prices and general economic factors. These quarterly fluctuations in
revenues and operating results may affect the Company's cash flows.
THE COMPANY IS SUBJECT TO ENVIRONMENTAL AND EMPLOYEE SAFETY AND HEALTH
REGULATION THAT COULD CAUSE IT TO INCUR SIGNIFICANT COMPLIANCE EXPENDITURES AND
LIABILITIES.
The Company's operations are subject to federal, state and local laws and
regulations pertaining to the environment, air and water quality, storage tanks
and the management and disposal of wastes at its facilities. Its operations are
also subject to various employee safety and health laws and regulations,
including those pertaining to occupational injury and illness, employee exposure
to hazardous
17
materials and employee complaints. Environmental and employee safety and health
laws tend to be complex, comprehensive and frequently changing. As a result, the
Company may be involved from time to time in administrative and judicial
proceedings and investigations related to environmental and employee safety and
health issues. These proceedings and investigations could result in substantial
costs to it, divert management's attention and, if it is determined that the
Company is not in compliance with applicable laws and regulations, result in
significant liabilities, fines or the suspension or interruption of the
operations of specific printing facilities. Future events, such as changes in
existing laws and regulations, new laws or regulations or the discovery of
conditions not currently known to the Company, may give rise to additional
compliance or remedial costs that could be material.
THE COMPANY DEPENDS ON KEY PERSONNEL, AND IT MAY NOT BE ABLE TO OPERATE AND
GROW ITS BUSINESS EFFECTIVELY IF IT LOSES THE SERVICES OF ANY OF ITS SENIOR
EXECUTIVE OFFICERS OR IS UNABLE TO ATTRACT QUALIFIED PERSONNEL IN THE FUTURE.
The Company is dependent upon the efforts of its senior executive officers.
In particular, it is dependent upon the management and leadership of Kenneth L.
Serota, the Company's President, Chief Executive Officer and Chairman of the
Board of Directors. The loss of Mr. Serota or other senior executive officers
could affect the Company's ability to run its business effectively.
The success of the Company's business is heavily dependent on its ability to
retain its current management and to attract and retain qualified personnel in
the future. Competition for senior management personnel is intense and the
Company may not be able to retain its personnel. The Company has not entered
into employment agreements with its key personnel, other than with Mr. Serota,
and these individuals may not continue in their present capacity with the
Company for any particular period of time. The Company does not have key man
insurance for any executive officers or key personnel. The loss of any senior
executive officer requires the remaining executive officers to divert immediate
and substantial attention to seeking a replacement. The Company's inability to
find a replacement for any departing executive officer on a timely basis could
adversely affect its ability to operate and grow its business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Operating 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 December 31, 2002, the Company had borrowings outstanding
of $21.8 million under the revolving credit facility and $72.5 million under the
Term Loan B. A hypothetical 100 basis point change in interest rates would
impact annual interest expense by approximately $0.9 million based on the amount
outstanding at December 31, 2002.
For additional information regarding the Company's Amended Credit Facility,
see Item 7 " Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information in response to this Item 8 is included in the consolidated
financial statements and notes thereto, and related Independent Auditors'
Report, appearing on pages 34 to 56 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE
REGISTRANT
The following table sets forth the name, age and position of LGO's
directors, executive officers and other key employees as of March 31, 2003:
NAME AGE POSITION
-------------------- ----- --------------------------------------------------
EXECUTIVE OFFICERS AND DIRECTORS:
Kenneth L. Serota.................... 41 President, Chief Executive Officer and Chairman of the
18
Board of Directors
Daniel D. Lewis........................ 40 Chief Financial Officer
Scott T. Champion...................... 43 Executive Vice President, Chief Operating Officer --
Community Division and Director
Gene A. Hall........................... 51 Senior Vice President-- Midwestern Region
Randy Cope............................. 42 Executive Vice President-- Missouri, Kansas and Arkansas
Kelly Luvison.......................... 43 Executive Vice President-- Eastern Region
KEY EMPLOYEES:
Theodore G. Mike....................... 56 Vice President-- Eastern Region
Ronald A. Wallace...................... 45 Vice President-- Sales and Marketing
Gerald R. Smith........................ 54 President-- Liberty Group Suburban Newspapers, Inc.
KENNETH L. SEROTA is LGO's President and Chief Executive Officer and has
served in that capacity since January 1998. Mr. Serota is also the Chairman of
the Board of Directors of LGO and has been a Director of LGO since January 1998.
Mr. Serota has had equivalent titles and responsibilities at LGP during the same
time periods. Previously, he served as Vice President-- Law & Finance and
Secretary of Hollinger from May 1995 to December 1997 and as a director of its
APC Division, which owned the publications initially acquired by us, from 1996
to 1997. Previously, Mr. Serota served as an attorney and a certified public
accountant. Mr. Serota has significant experience negotiating and closing
acquisitions of publications and primarily focuses his efforts on executing the
Company's acquisition functions and overseeing all of its administrative and
finance functions. Mr. Serota received a B.S. in Accountancy and a J.D. from the
University of Illinois.
DANIEL D. LEWIS is LGO's Chief Financial Officer with primary responsibility
for its financial and accounting activities. He served as LGO's Vice President--
Finance and Secretary from May 2001 to May 2002. From September 1999 to May
2001, Mr. Lewis served as LGP's corporate controller. Mr. Lewis has had
equivalent titles and responsibilities at LGP during the same time periods.
Prior to joining us, Mr. Lewis served as a management consultant for
PricewaterhouseCoopers LLP. In addition, Mr. Lewis has held management positions
with Kraft Foods Inc. and Berkshire Hathaway Inc. Mr. Lewis is a certified
public accountant.
SCOTT T. CHAMPION is LGO's Executive Vice President and Chief Operating
Officer -- Community Division and has primary responsibility for all community
publications. In 1998, he served as LGO's Senior Vice President. Mr. Champion
has had equivalent titles and responsibilities at LGP during the same time
periods. Additionally, Mr. Champion has been a Director of LGP since January
2000. Prior to 1998, he served as Senior Vice President, regional manager, and
district manager of APC and had been employed at APC since 1988. Prior to his
employment at APC, Mr. Champion served as the publisher of a group of privately
owned publications. Mr. Champion has more than 19 years of experience in the
newspaper industry.
GENE A. HALL is LGO's Senior Vice President and has primary responsibility
for publications in the Midwestern region of the United States. He was appointed
LGO's Senior Vice President in January 1998. Mr. Hall has had equivalent titles
and responsibilities at LGP during the same time periods. Prior to his
employment with LGO, he served as a Senior Vice President of APC from 1992 to
1998. Prior to 1992, he served as a regional manager and had been employed at
APC since 1988. Prior to his employment at APC, Mr. Hall was the owner and
publisher of the Charles City Press, Six County Shopper and The Extra in Charles
City, Iowa, which the Company currently owns. Mr. Hall has more than 33 years of
experience in the newspaper industry.
RANDALL W. COPE is LGO's Executive Vice President responsible for newspaper
operations in Missouri, Kansas and Arkansas. Mr. Cope held the position of Vice
President from December 1998 until he was named LGO's Executive Vice President
in April 2002. Mr. Cope has had equivalent titles and responsibilities at LGP
during the same time periods. Mr. Cope also oversees the Company's national
classified advertising network. From 1995 to 1998, Mr. Cope was regional manager
and publisher of the Northwest Arkansas Times in Fayetteville, Arkansas, which
was owned by APC. Mr. Cope has 20 years of experience covering all areas of
newspaper operations.
KELLY M. LUVISON is LGO's Executive Vice President responsible for newspaper
operations in western New York, Pennsylvania and West Virginia, as well as
Liberty Business Development Group. Mr. Luvison served as regional manager for
the Company since January 1998, was appointed a Vice President in January 2000
and Executive Vice President in April 2002. Mr. Luvison has had equivalent
titles and responsibilities at LGP during the same time periods. Prior to
January 1998, Mr. Luvison was a regional manager for APC. Since 1996, Mr.
Luvison has been publisher of the Evening Tribune in Hornell, New York, a
newspaper the Company currently owns, in addition to his duties as a regional
manager and Vice President.
THEODORE G. MIKE is LGO's Vice President and has primary responsibility for
many of its newspaper operations in the eastern region of the United States. Mr.
Mike served as regional manager since January 1998, and was appointed Vice
President in January 1999. Mr. Mike has had equivalent titles and
responsibilities at LGP during the same time periods. Mr. Mike served as a
regional manager for APC from 1992 to 1997. Mr. Mike has also been publisher of
The Evening Times in Sayre, Pennsylvania, a newspaper the Company currently
owns, since 1992. Mr. Mike has more than 35 years of experience in the newspaper
industry.
RONALD A. WALLACE is LGO's Vice President-- Sales and Marketing. Mr. Wallace
joined the Company in his current role in March 2002. Mr. Wallace has had
equivalent titles and responsibilities at LGP during the same time period.
Prior to joining LGO, Mr. Wallace was a Regional Publisher with Morris
Communications Corporation from 1996 to 2001. Also with Morris from 1994 to
1995, Mr. Wallace served as Advertising & Marketing Director at a 40,000
circulation daily newspaper in Athens, Georgia. Mr. Wallace is a 25-year
newspaper veteran having held positions with Times Mirror Corporation, Hartman
Walls Corporation, Belo Corp., Ingersoll Publications, Sun Newspapers and Ogden
Newspapers, Inc.
GERALD R. SMITH is President of Liberty Group Suburban Newspapers, Inc., an
indirect subsidiary of the Company. From February 1999 to February 2001, Mr.
Smith served as Executive Vice President-- General Manager of Liberty Group
Suburban Newspapers, Inc. Mr. Smith has had equivalent titles and
responsibilities at LGP during the same time periods. Prior to February 1999,
Mr. Smith held various positions over 14 years at the Daily Southtown, a 60,000
circulation daily newspaper in Chicago including Executive Vice
President-General Manager, and was responsible for day-to-day operations from
1991 to 1999.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the cash and non-cash compensation paid to
LGO's chief executive officer and each of the three other most highly
compensated executive officers of LGO who earned more than $100,000 in salary
and bonus during 2002 (each a named executive officer and, collectively, the
named executive officers):
19
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
--------------------------------------------------------
FISCAL OTHER ANNUAL
NAME AND POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($)
----------------------------------------------- -------- ----------- ---------- ----------------
Kenneth L. Serota.............................. 2002 478,008 675,000 --
President and CEO 2001 455,500 -- --
2000 405,500 300,000 112,973 (1)
Scott T. Champion.............................. 2002 204,500 245,000 --
Executive Vice President, Chief 2001 171,654 30,000 --
Operating Officer - Community Division 2000 155,500 85,000 --
Gene H. Hall................................... 2002 130,500 75,000 --
Senior Vice President - Midwestern 2001 150,500 30,000 --
Region 2000 138,289 38,200 --
Randall W. Cope................................ 2002 150,500 70,000 --
Executive Vice President - Missouri, 2001 150,500 25,000 --
Kansas and Arkansas 2000 135,500 62,000 --
Daniel D. Lewis................................ 2002 130,500 55,000 --
Chief Financial Officer 2001 117,308 25,000 --
2000 99,000 15,000 --
- ----------
(1) Includes $109,973 of loan forgiveness for fiscal year 2000.
COMPENSATION OF DIRECTORS
Individuals who are officers of LGO do not receive any compensation directly
for their service on LGO's Board of Directors.
EMPLOYMENT AGREEMENTS
First Amended Employment Agreement
LGP, LGO and Kenneth Serota entered into an employment agreement, dated as
of November 21, 1997, whereby Mr. Serota agreed to serve as President and Chief
Executive Officer of LGP, LGO and any of LGP's other subsidiaries for a period
of three years commencing January 1, 1998 and for additional successive one-year
periods thereafter, unless either LGO or Mr. Serota gives timely notice to the
other that the employment term shall not be so extended.
The employment agreement provided for a base salary of $350,000, $375,000
and $400,000 for the years 1998, 1999 and 2000, respectively, and provided for
those benefits generally available to LGO's employees, including life insurance,
health insurance, deferred compensation and profit sharing. In addition to
receiving a base salary, Mr. Serota is eligible to receive a bonus based on the
attainment of applicable performance standards agreeable to LGO and Mr. Serota,
including standards based on annual revenue growth, EBITDA growth, completion of
reasonably acceptable acquisitions and growth of acquired properties. The
employment agreement also provided, subject to certain exceptions, that upon a
termination of Mr. Serota's employment during the term thereof (other than for
"cause" or voluntary resignation without "good reason," as defined therein, but
including a "change of control" as defined therein), LGO was generally obligated
to pay Mr. Serota the greater of one year's salary or an amount equal to his
base salary for the remaining term under the employment agreement plus, in
either case, a portion of his bonus for the year of termination. The employment
agreement provided that during its term Mr. Serota shall be a member of the
board of directors of LGP and each of its subsidiaries and he shall also be a
member of any executive or similar committee of LGP and its subsidiaries that
has executive functions or responsibilities.
On August 11, 2000, LGP, LGO, Mr. Serota, GEI II and GEI III entered into an
amendment to the employment agreement, pursuant to which: (1) the term of the
employment agreement was extended for an additional three-year period until
January 1, 2004 and for additional successive one-year periods thereafter,
unless either LGO or Mr. Serota gives timely notice to the other that the
employment term shall not be so extended; (2) the annual base salary payable to
Mr. Serota thereunder for years 2001, 2002 and 2003
20
of the extended term thereof was established at $450,000, $475,000 and $500,000,
respectively; (3) LGO agreed to pay, in arrears, to Mr. Serota an automobile
allowance of $500 per month for each month from January 1, 1998 through December
31, 2000 and $800 per month for each month thereafter; (4) Mr. Serota's
severance package was amended whereby LGO agreed to pay to Mr. Serota eighteen
(18) months of base salary at the then current annual base salary payable to Mr.
Serota in the event that Mr. Serota's employment with LGO is terminated by LGO
without cause or by Mr. Serota for good reason (including a change of control,
as defined therein); (5) LGP issued and sold to Mr. Serota (a) 4,372 shares of
LGP's common stock, par value $0.01 per share ("LGP Common Stock") and 184.42
shares of LGP's junior redeemable cumulative preferred stock, $0.01 par value
per share ("LGP Junior Preferred Stock") for an aggregate purchase price of
$250,000 and (b) 23,174 shares of LGP Common Stock for a purchase price of
$15.00 per share, for an aggregate purchase price of $347,610; and (6) LGP
provided Mr. Serota with (a) an unsecured full-recourse loan in the principal
amount of $250,000 to pay the consideration for the shares of LGP Common Stock
and 184.42 shares of LGP Junior Preferred Stock, (b) a secured non-recourse loan
in the principal amount of $225,947 to pay a portion of the consideration for
the 23,174 shares of LGP Common Stock and (c) a secured recourse loan in the
amount of $121,663 to pay the remaining consideration for the 23,174 shares of
LGP Common Stock. To secure repayment of the secured loans, LGP retained a
security interest in the LGP Common Stock described in clause 5(b) above. Each
of these loans accrues interest at a rate of 6.22% per annum, which accrues
until such loan matures. LGP is required under the amendment to the employment
agreement to forgive the unsecured loan, including all accrued interest, upon
the consummation of a public offering of LGP Common Stock. The secured loans
become due, including unpaid accrued interest, when Mr. Serota sells all or part
of the LGP Common Stock purchased with the proceeds of such loans in an amount
proportional to the number of shares of LGP Common Stock sold.
Second Employment Agreement
LGP, LGO and Kenneth Serota (and GEI I and GEI II for limited purposes
therein) entered into an employment agreement, effective as of January 1, 2003,
whereby Mr. Serota agreed to serve as President, Chief Executive Officer and
Chairman of LGP, LGO and all of LGP's subsidiaries for a period ending on the
third anniversary of the consummation of the initial public offering
contemplated pursuant to the Registration Statement and for additional
successive one-year periods thereafter, unless either LGO or Mr. Serota gives
notice to the other 180 days prior to the end of the current employment term
that such term shall not be so extended. For the term of the employment
agreement, Mr. Serota shall also serve as a member of each of LGP's and LGP's
subsidiaries' board of directors and executive or similar committees that have
executive functions or responsibilities. Upon termination of the employment
agreement for any reason, Mr. Serota will be entitled to all earned and unpaid
compensation through the date of such termination, which does not include any
portion of his bonus unless otherwise noted therein. The employment agreement
also provides, subject to certain exceptions, that (a) upon a termination of Mr.
Serota's employment during the term thereof by LGO without "cause" or by Mr.
Serota for "good reason," including a "change of control," each as defined
therein, LGO will pay Mr. Serota an amount equal to two years' base salary (or
three years' base salary after a change of control) and a pro rata portion of
his annual bonus, or (b) upon a termination due to the death or disability, as
defined therein, of Mr. Serota, LGO will pay a pro rata portion of his annual
bonus. Mr. Serota has no duty to mitigate any amounts owed resulting from the
termination of his employment agreement.
Mr. Serota will receive (1) an annual base salary of $500,000 for the period
beginning on January 1, 2003 until the end of the term, subject to any increase
in salary granted by LGO's board of directors, (2) a bonus, based on the
attainment of realistic applicable performance standards agreeable to LGO and
Mr. Serota, including standards based on revenue growth, EBITDA growth,
completion of reasonably acceptable acquisitions and growth of acquired
properties (such performance standards to be approved by the compensation
committee or a subcommittee thereof) (3) those benefits generally available to
LGO's employees, including life insurance, health insurance, deferred
compensation and profit sharing, (4) payment for business-related organizational
or association memberships, and (5) an automobile allowance of $800 per month.
Additionally, upon consummation of the initial public offering, (1) all
repurchase rights related to certain equity securities owned by Mr. Serota
pursuant to Mr. Serota's previous employment agreement, dated as of November 21,
1997, as amended, will be terminated, and (2) Mr. Serota will receive (a)
200,000 shares of LGP Common Stock pursuant to an incentive award plan and a
restricted stock agreement, and (b) a number of shares of LGP Common Stock equal
to the result of (x) $1,000,000 divided by (y) the median of the range of the
expected initial public offering price per share of the LGP Common Stock set
forth in the Registration Statement immediately prior to the effective date of
the initial public offering.
21
COMPENSATION PLANS
Defined Contribution Plan
Parent maintains a defined contribution plan conforming to IRS rules for
401(k) plans, for all of its employees satisfying minimum service requirements
as set forth under the plan. The plan allows for a matching contribution at the
discretion of Parent. Parent recorded approximately $271,000, $296,000, and $0
in expenses related to the plan in 2000, 2001 and 2002, respectively.
Deferred Compensation Plans
Parent maintains three non-qualified deferred compensation plans, as
described below, for certain of its employees.
Parent maintains the Liberty Group Publishing, Inc. Publishers' Deferred
Compensation Plan, a non-qualified deferred compensation plan for the benefit of
certain designated publishers of its newspapers. Under the publishers' plan,
Parent credits an amount to a bookkeeping account established for each
participating publisher pursuant to a pre-determined formula that is based upon
the gross operating profits of each such publisher's newspaper. The bookkeeping
account is credited with earnings and losses based upon the investment choices
selected by the participant. The amounts credited to the bookkeeping account on
behalf of each participating publisher vest on an installment basis over a
period of 15 years. A participating publisher forfeits all amounts under the
publishers' plan in the event that the publisher's employment with Parent is
terminated for "cause" as defined in the publishers' plan. Amounts credited to a
participating publisher's bookkeeping account are distributable upon termination
of the publisher's employment with Parent and will be made in a lump sum or
installments as elected by the publisher. Parent recorded $160,000, $146,000 and
$169,000 of compensation expense related to the plan in 2000, 2001 and 2002,
respectively.
Parent maintains the Liberty Group Publishing, Inc. Executive Benefit
Plan, a non-qualified deferred compensation plan for the benefit of certain of
its key employees. Under the executive benefit plan, Parent credits an
amount, determined in its sole discretion, to a bookkeeping account established
for each participating key employee. The bookkeeping account is credited with
earnings and losses based upon the investment choices selected by the
participant. The amounts credited to the bookkeeping account on behalf of each
participating key employee vest on an installment basis over a period of 5
years. A participating key employee forfeits all amounts under the executive
benefit plan in the event that the key employee's employment with Parent is
terminated for "cause" as defined in the executive benefit plan. Amounts
credited to a participating key employee's bookkeeping account are distributable
upon termination of the key employee's employment with Parent, and will be
made in a lump sum or installments as elected by the key employee. Parent
recorded $66,000, $61,000 and $61,000 of compensation expense related to the
plan in 2000, 2001 and 2002, respectively.
Parent maintains the Liberty Group Publishing, Inc. Executive Deferral
Plan, a non-qualified deferred compensation plan for the benefit of certain of
its key employees. Under the executive deferral plan, eligible key employees may
elect to defer a portion of their compensation for payment at a later date.
Currently, the executive deferral plan allows a participating key employee to
defer up to 100% of his or her annual compensation until termination of
employment or such earlier period as elected by the participating key employee.
Amounts deferred are credited to a bookkeeping account established by
Parent for this purpose. The bookkeeping account is credited with earnings and
losses based upon the investment choices selected by the participant. Amounts
deferred under the executive deferral plan are fully vested and nonforfeitable.
The amounts in the bookkeeping account are payable to the key employee at the
time and in the manner elected by the key employee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table provides summary information regarding the beneficial
ownership of shares of Common Stock as of March 31, 2003. Beneficial ownership
of shares is determined under the rules of the Securities and Exchange
Commission and generally includes any shares over which a person exercises sole
or shared voting or investment power.
NUMBER
NAME AND ADDRESS OF BENEFICIAL OWNERS OF SHARES % OWNED
-------------------------------------------------- --------- -------
Liberty Group Publishing, Inc..................... 100 100%
3000 Dundee Road, Suite 203
Northbrook, IL 60062
22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with its Chief Executive Officer.
See Item 11. "Executive Compensation-- Employment Agreements."
MANAGEMENT SERVICES AGREEMENT
On April 18, 2000, LGO entered into a management services agreement with
Leonard Green & Partners, L.P., an affiliate of each of GEI II and GEI III,
which acts as the manager under the agreement. The management services agreement
provides that the manager will provide management, consulting and financial
planning services and transaction-related financial advisory and investment
banking services to LGO. The manager receives an annual fee of approximately
$1.5 million as compensation for its management, consulting and financial
planning services, which is payable in equal monthly installments and is
subordinated in right of payment to the Notes and the Amended Credit Facility.
The manager also receives reasonable and customary fees for transaction-related
services and is reimbursed for out-of-pocket expenses. The management services
agreement terminates on January 27, 2010.
The Company paid $1.3 million, $1.5 million and $1.5 million in management
fees in 2000, 2001 and 2002, respectively, and $356,000, $375,000 and $350,000
in other fees in 2000, 2001 and 2002, respectively, to Leonard Green & Partners,
L.P. The Company is obligated to pay other fees to Leonard Green & Partners,
L.P. of $125,000 in 2003.
ITEM 14. 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.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements.
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 2001 and 2002.
Consolidated Statements of Operations for the years ended December 31,
2000, 2001, and 2002.
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 2000, 2001, and 2002.
23
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 2001, and 2002.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
All financial statement schedules have been omitted because they
are not required, are not applicable or the information required has
been presented in the aforementioned consolidated financial statements
or notes thereto.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the fourth quarter of the
period covered by this report.
(c) The exhibits filed as a part of this report are listed in the following
Exhibit Index.
24
EXHIBIT INDEX
EXHIBIT
NO. ITEMS
------- ------------------------------------------------------------------------------------
2.1 Asset Purchase Agreement dated as of November 21, 1997, among Liberty Incorporated by reference to
Group Publishing, Inc., Green Equity Investors II, L.P. (as guarantor), Exhibit 2.1 included on the
Liberty Group Operating, Inc., Hollinger International Inc., APAC-90 Company's Registration
Inc., American Publishing, and APAC-95, Inc. Statement on Form S-4
(Registration No. 333-46957)
(the "Company's S-4").
2.2 Asset Purchase Agreement dated as of November 21, 1997, among Liberty Incorporated by reference to
Group Publishing, Inc., Green Equity Investors II, L.P. (as guarantor), Exhibit 2.2 included on the
Liberty Group Operating, Inc., Hollinger International Inc., American Company's S-4.
Publishing Company of Illinois, APAC-90 Inc., and APAC-95, Inc.
2.3 Exchange Agreement dated as of November 21, 1997, between American Incorporated by reference to
Publishing Company of Illinois and Chicago Deferred Exchange Exhibit 2.3 included on the
Corporation. Company's S-4.
2.4 Qualified Exchange Trust Agreement, dated as of November 21, 1997 among Incorporated by reference to
the Chicago Trust Company, as Trustee under Trust No. 38347501, Chicago Exhibit 2.4 included on the
Deferred Exchange Corporation, and American Publishing Company of Company's S-4.
Illinois.
2.5 Amendment to Asset Purchase Agreement dated as of January 14, 1998, Incorporated by reference to
among Liberty Group Publishing, Inc., Green Equity Investors II, L.P. Exhibit 2.5 included on the
(as guarantor), Liberty Group Operating, Inc., Hollinger International Company's S-4.
Inc., APAL-90 Inc., American Publishing (1991) Inc. and APAC-95 Inc.
2.6 Amendment to Asset Purchase Agreement, dated as of January 14, 1998, Incorporated by reference to
among Liberty Group Publishing, Inc., Green Equity Investors II, L.P. Exhibit 2.6 included on the
(as guarantor), Liberty Group Operating, Inc., Hollinger International Company's S-4.
Inc., American Publishing Company of Illinois, APAC-90 Inc., American
Publishing (1991) Inc. and APAC-95 Inc.
2.7 Amendment to Exchange Agreement, dated as of January 14, 1998, between Incorporated by reference to
American Publishing Company of Illinois and Chicago Deferred Exchange Exhibit 2.7 included on the
Corporation. Company's S-4.
2.8 Amendment to Qualified Exchange Trust Agreement, dated as of January Incorporated by reference to
14, 1998, among The Chicago Trust Company, as Trustee under No. Exhibit 2.8 included on the
38347501, Chicago. Company's S-4.
2.9 Agreement dated as of January 15, 1998, among Liberty Group Publishing, Incorporated by reference to
Inc., Green Equity Investors II, L.P. (as guarantor), Liberty Group Exhibit 2.9 included on the
Operating, Inc., Hollinger International, Inc., American Publishing Company's S-4.
Company of Illinois, APAC-90 Inc., American Publishing (1991) Inc., and
APAC-95 Inc.
2.10 Agreement dated as of January 23, 1998, among American Publishing Incorporated by reference to
Company of Illinois, Chicago Deferred Exchange Corporation and The Exhibit 2.10 included on the
Chicago Trust Company. Company's S-4.
2.11 Agreement dated as of January 26, 1998, among Liberty Group Publishing, Incorporated by reference to
Inc., Green Equity Investors II, L.P. (as guarantor), Liberty Group Exhibit 2.11 included on the
Operating, Inc. Hollinger International, Inc., American Publishing Company's S-4.
Company of Illinois, APAC-90 Inc., American Publishing (1991) Inc., and
APAC-95 Inc.
3.1 Certificate of Incorporation of Liberty Group Operating, Inc. Incorporated by reference to
Exhibit 2.11 included on the
Company's S-4.
3.2 By-laws of Liberty Group Operating, Inc. Incorporated by reference to
Exhibit 3.2 included on the
Company's S-4.
4.1 Indenture dated as of January 27, 1998 among Liberty Group Operating, Incorporated by reference to
Inc. and State Street Bank and Trust Company, as Trustee, including Exhibit 4.1 included on the
form of 9 3/8% Senior Subordinated Notes due 2008. Company's S-4.
*10.1 Employment Agreement dated as of November 27, 1997, between Liberty Incorporated by reference to
Group Publishing, Inc. and Kenneth L. Serota. Exhibit 10.1 included on the
25
EXHIBIT
NO. ITEMS
------- ------------------------------------------------------------------------------------
Company's S-4.
*10.2 Amendment to Employment Agreement, dated as of August 11, 2000, between Incorporated by reference to
Liberty Group Operating, Inc., Kenneth L. Serota, Liberty Group Exhibit 10.2 included on the
Publishing, Inc., Green Equity Investors II, L.P. and Green Equity Company's Annual Report on
Investors III, L.P. Form 10-K for the year ending
December 31, 2000 (the
"Company's 2000 10-K").
10.3 Non-Competition Agreement dated as of January 27, 1998 between Liberty Incorporated by reference to
Group Operating, Inc. and Hollinger International, Inc. Exhibit 10.3 included on the
Company's S-4.
10.4 Management Services Agreement, dated as of April 18, 2000, between Incorporated by reference to
Liberty Group Operating, Inc. and Leonard Green & Partners, L.P. Exhibit 10.13 included on the
Company's 2000 10-K.
10.5 Amended and Restated Credit Agreement dated as of April 18, 2000, among Incorporated by reference to
Liberty Group Operating, Inc., Liberty Group Publishing, Inc., the lenders Exhibit 10.14 included on the
party thereto, Citicorp USA, Inc., Citibank N.A., DB Banc Alex Brown LLC, Company's 2000 10-K.
Wells Fargo Bank, N.A., and Bank of America, N.A.
10.6 First Amendment to Credit Agreement dated as of May 10, 2001, Incorporated by reference to
among Liberty Group Operating, Inc., Liberty Group Publishing, Inc., Exhibit 99 included on the
the lenders party thereto, Citibank, N.A. and Citicorp USA, Inc. Company's March 31, 2001 10-Q.
10.7 Second Amendment to Credit Agreement and Limited Waiver and Consent Incorporated by reference to
dated as of December 14, 2001 among Liberty Group Operating, Inc., Exhibit 10.7 included on the
Liberty Group Publishing, Inc. the lenders party thereto, Citibank, Company's 2001 10-K.
N.A. and Citicorp USA, Inc.
10.15 Guarantor Pledge and Security Agreement dated as of January 27, 1998 Incorporated by reference to
among Liberty Group Publishing, Inc., Liberty Group Arizona Holdings, Inc., Exhibit 10.6 included on the
Liberty Group Arkansas Holdings, Inc., Liberty Group California Holdings, Company's S-4.
Inc., Liberty Group Illinois Holdings, Inc., Liberty Group Iowa Holdings,
Inc., Liberty Group Kansas Holdings, Inc., Liberty Group Michigan Holdings, Inc.
Liberty Group Minnesota Holdings, Inc., Liberty Group Missouri Holdings, Inc.,
Liberty Group New York Holdings, Inc., Liberty Group Pennsylvania Holdings, Inc.,
Liberty Group Management Services, Inc. and Citicorp USA, Inc.
10.16 Borrower Pledge and Security Agreement dated as of January 27, 1998 Incorporated by reference to
between Liberty Group Operating, Inc. and Citicorp USA, Inc. Exhibit 10.7 included on the
Company's S-4.
10.10 Guaranty, Indemnity and Subordination Agreement, dated as of January Incorporated by reference to
27, 1998, entered into by Liberty Group Publishing, Inc., Liberty Group Exhibit 10.10 included on the
Arizona Holdings, Inc., Liberty Group Arkansas Holdings, Inc., Liberty Company's 2001 10-K/A.
Group California Holdings, Inc., Liberty Group Illinois Holdings, Inc.,
Liberty Group Iowa Holdings, Inc., Liberty Group Kansas Holdings, Inc.,
Liberty Group Michigan Holdings, Inc., Liberty Group Minnesota
Holdings, Inc., Liberty Group Missouri Holdings, Inc., Liberty Group
New York Holdings, Inc., Liberty Group Pennsylvania Holdings, Inc. and
Liberty Group Management Services, Inc., for the benefit of the
Beneficiaries (as defined therein).
*10.11 Liberty Group Publishing, Inc.'s Publisher's Deferred Compensation Plan. Incorporated by reference to
Exhibit 10.10 included on the
Company's Annual Report on
Form 10-K for the period
ended December 31, 1998 (the
"Company's 1998 10-K").
*10.12 Liberty Group Publishing, Inc.'s Executive Benefit Plan. Incorporated by reference to
Exhibit 10.11 included on the
Company's 1998 10-K.
*10.13 Liberty Group Publishing, Inc.'s Executive Deferral Plan. Incorporated by reference to
Exhibit 10.12 included on the
26
EXHIBIT
NO. ITEMS
------- ------------------------------------------------------------------------------------
Company's 1998 10-K.
*10.14 Liberty Group Publishing, Inc.'s 1999 Stock Option Plan. Incorporated by reference to
Exhibit 10.15 included on the
Company's 1999 10-K.
*10.25 Amended and Restated Employment Agreement, dated as of February 11, Included herewith.
2003, between Liberty Group Operating, Inc., Kenneth L. Serota, Liberty
Group Publishing, Green Equity Investors II, L.P. and Green Equity
Investors III, L.P.
21 Subsidiaries of Liberty Group Operating, Inc. Incorporated by reference to
Exhibit 21 included on the
Company's 2001 10-K.
99.1 1350 Certifications Included herewith.
* Management Contract/Compensatory Plan or Arrangement
The Company has agreed to furnish to the Commission, upon request, a copy of
each agreement defining the rights of holders of long-term debt not filed
herewith in reliance upon the exemption from filing applicable to any such
agreement pursuant to which the total amount of securities authorized does not
exceed 10% of the total consolidated assets of the Company.
27
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report................................................................... 29
Consolidated Balance Sheets as of December 31, 2001 and 2002................................... 30
Consolidated Statements of Operations for the years ended December 31, 2000, 2001 and 2002 31
Consolidated Statements of Stockholder's Equity for the years ended December 31, 2000, 2001 and 32
2002...........................................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 2001 and 2002 33
Notes to Consolidated Financial Statements..................................................... 34
28
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Liberty Group Operating, Inc.:
We have audited the accompanying consolidated balance sheets of Liberty Group
Operating, Inc. and subsidiaries as of December 31, 2001 and 2002, and the
related consolidated statements of operations, stockholder's equity, and cash
flows for each of the years in the three-year period ended December 31, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Liberty Group Operating, Inc. and
subsidiaries as of December 31, 2001 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, on January 1, 2002.
/s/ KPMG LLP
Chicago, Illinois
March 20, 2003
29
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------
2001 2002
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE DATA)
Assets
Current assets:
Cash and cash equivalents ........................................ $ 1,474 $ 1,696
Accounts receivable, net of allowance for
doubtful accounts of $1,458 and $1,340 at December 31, 2001
and 2002, respectively ........................................ 21,398 20,133
Inventory ........................................................ 2,824 2,639
Prepaid expenses ................................................. 1,602 1,361
Deferred income taxes ............................................ 1,365 1,713
Other current assets ............................................. 25 326
--------- ---------
Total current assets ................................................ 28,688 27,868
Property, plant and equipment, net ............................... 52,536 48,654
Goodwill ......................................................... 196,061 185,447
Intangible assets, net ........................................... 256,357 234,317
Deferred financing costs, net .................................... 6,364 4,968
Other assets ..................................................... 336 395
--------- ---------
Total assets ........................................................ $ 540,342 $ 501,649
========= =========
Liabilities and stockholder's equity
Current liabilities:
Current portion of Term Loan B ................................... $ 1,000 $ 744
Current portion of long-term liabilities ......................... 981 509
Accounts payable ................................................. 2,243 2,036
Accrued expenses ................................................. 13,394 13,535
Deferred revenue ................................................. 9,217 8,591
--------- ---------
Total current liabilities ........................................... 26,835 25,415
Long-term liabilities:
Borrowings under revolving credit facility ....................... 42,950 21,845
Term Loan B, less current portion ................................ 97,500 71,756
Long-term liabilities, less current portion ...................... 1,518 1,139
Senior subordinated notes ........................................ 180,000 180,000
Deferred income taxes ............................................ 26,849 27,765
--------- ---------
Total liabilities ................................................... 375,652 327,920
Stockholder's equity:
Common stock, $0.01 par value, 1,000 shares authorized, 100 shares
issued and outstanding at December 31, 2001 and
2002, respectively ............................................ -- --
Additional paid-in capital ....................................... 176,845 176,862
Accumulated deficit .............................................. (12,155) (3,133)
--------- ---------
Total stockholder's equity .......................................... 164,690 173,729
--------- ---------
Total liabilities and stockholder's equity .......................... $ 540,342 $ 501,649
========= =========
30
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 2001 2002
--------- --------- ---------
(IN THOUSANDS)
REVENUES:
Advertising ..................................... $ 145,787 $ 147,977 $ 146,918
Circulation ..................................... 30,329 33,228 33,353
Job printing and other .......................... 11,887 13,995 12,560
--------- --------- ---------
Total revenues ..................................... 188,003 195,200 192,831
OPERATING COSTS AND EXPENSES:
Operating costs ................................. 90,541 98,607 90,390
Selling, general and administrative ............. 52,799 53,764 53,526
Depreciation and amortization ................... 19,193 21,315 17,027
--------- --------- ---------
Income from continuing operations .................. 25,470 21,514 31,888
Interest expense ................................... 30,895 29,935 23,816
Amortization of deferred financing costs ........... 1,237 1,723 1,631
Impairment of other assets ......................... -- -- 223
--------- --------- ---------
Income (loss) from continuing operations before
income taxes and cumulative effect of change
in accounting principle ......................... (6,662) (10,144) 6,218
Income tax expense (benefit)........................ 491 444 (927)
--------- --------- ---------
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle........................................ (7,153) (10,588) 7,145
Income from discontinued operations, net of tax .... 1,817 1,508 4,269
--------- --------- ---------
Income (loss) before cumulative effect of change
in accounting principle ......................... (5,336) (9,080) 11,414
Cumulative effect of change
in accounting principle, net of tax ............. -- -- (1,449)
--------- --------- ---------
Net income (loss) .................................. $ (5,336) $ (9,080) $ 9,965
========= ========= =========
See accompanying notes to consolidated financial statements.
31
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S QEUITY
COMMON COMMON ADDITIONAL
STOCK STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----- ---- --------- --------- ---------
Balances at 12/31/99 ................. 100 $ -- $ 148,661 $ 2,324 $ 150,985
Net contributions of capital ...... -- -- 28,075 -- 28,075
Net loss .......................... -- -- -- (5,336) (5,336)
----- ---- --------- --------- ---------
Balances at 12/31/00 ................. 100 -- 176,736 (3,012) 173,724
Net contributions of capital ...... -- -- 109 -- 109
Dividend paid to Company's
Parent ............................ -- -- -- (63) (63)
Net loss .......................... -- -- -- (9,080) (9,080)
----- ---- --------- --------- ---------
Balances at 12/31/01 ................. 100 $ -- $ 176,845 $ (12,155) $ 164,690
===== ==== ========= ========= =========
Net contributions of capital ...... -- -- 17 -- 17
Dividend paid to Company's
Parent ............................ -- -- -- (943) (943)
Net income ........................ -- -- -- 9,965 9,965
----- ---- --------- --------- ---------
Balances at 12/31/02 ................. 100 $ -- $ 176,862 $ (3,133) $ 173,729
===== ==== ========= ========= =========
See accompanying notes to consolidated financial statements.
32
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 2001 2002
--------- --------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss) ................................................. $ (5,336) $ (9,080) $ 9,965
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ..................................... 19,864 21,997 17,027
Amortization of deferred financing costs .......................... 1,237 1,723 1,631
Non-cash compensation ............................................. 163 109 17
Deferred taxes .................................................... -- -- (1,234)
Impairment of other assets ........................................ -- -- 223
Loss on sale of fixed assets ...................................... -- -- 325
Gain from sale of discontinued operations, net of tax ............. -- -- (4,269)
Cumulative effect of change in accounting principle, net of tax ... -- -- 1,449
Changes in assets and liabilities, net of acquisitions and
dispositions:
Accounts receivable, net ....................................... 372 1,354 526
Inventory ...................................................... (467) 218 49
Prepaid expenses and other assets .............................. (417) (314) (202)
Accounts payable ............................................... (38) (242) (117)
Accrued expenses ............................................... 427 (2,932) (84)
Deferred revenue ............................................... (72) 92 (139)
--------- --------- ---------
Net cash provided by operating activities ............................ 15,734 12,925 25,167
--------- --------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment ........................ (9,654) (2,715) (2,496)
Proceeds from sale of publications and other assets ............... 2,103 -- 26,703
Acquisitions and investments, net of cash acquired ................ (84,541) (615) (255)
--------- --------- ---------
Net cash provided by (used in) investing activities .................. (92,092) (3,330) 23,954
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from (repayments on) Term Loan B ..................... 98,505 (1,000) (26,000)
Net borrowings (repayments) under revolving credit facility ....... 71,750 (7,065) (21,105)
Net contributions of capital from Parent .......................... 28,075 -- --
Dividends to Parent ............................................... -- -- (943)
Repurchase of common stock ........................................ -- (63) --
Payments on long-term liabilities ................................. (945) (1,029) (851)
Payment of debt on prior revolving credit facility ................ (121,850) -- --
--------- --------- ---------
Net cash provided by (used in) financing activities ............... 75,535 (9,157) (48,899)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ................. (824) 438 222
Cash and cash equivalents, at beginning of period .................... 1,860 1,036 1,474
--------- --------- ---------
Cash and cash equivalents, at end of period .......................... $ 1,036 $ 1,474 $ 1,696
========= ========= =========
Supplemental cash flow disclosure:
Cash interest paid ................................................ $ 28,388 $ 32,130 $ 23,810
Income taxes paid ................................................. 532 505 480
See accompanying notes to consolidated financial statements.
33
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Description of Business
Liberty Group Operating, Inc. ("Operating Company," "LGO" or "Registrant")
is a wholly-owned subsidiary of Liberty Group Publishing, Inc. ("Parent" or
"LGP"). The Company (as defined below) 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. The Company owns and operates 302
publications located in 17 states that reach approximately 2.37 million people
on a weekly basis. 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 has
strategically clustered its publications in geographically diverse,
non-metropolitan markets in the Midwest, Northeast and Western United States and
in the Chicago suburban market, which limits its exposure to economic conditions
in any single market or region. No single display advertiser accounted for
greater than 1% of the Company's total revenues in 2000, 2001 and 2002.
The Company's portfolio of publications is comprised of 66 paid daily
newspapers and 126 paid non-daily newspapers. In addition, the Company publishes
110 free circulation and "total market coverage," or TMC, publications with
limited or no news or editorial content that it distributes free of charge and
that generally provide 100% penetration in their areas of distribution. The
Company believes that its publications are generally the most cost-effective
method for its advertisers to reach substantially all of the households in their
markets. Unlike large metropolitan newspapers, the Company derives a majority of
its revenues from local display advertising rather than classified and national
advertising, which are generally more sensitive to economic conditions.
(B) Basis of Presentation
LGP was formed on January 27, 1998 for purposes of acquiring a portion of
the daily and weekly newspapers owned by American Publishing Company or its
subsidiaries ("APC"), a wholly-owned subsidiary of Hollinger International Inc.
("Hollinger"). LGO is a wholly-owned subsidiary of LGP. The consolidated
financial statements include the accounts of Operating Company and its
consolidated subsidiaries (the "Company"). All significant intercompany accounts
and transactions have been eliminated.
(C) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(D) Inventory
Inventory consists principally of newsprint, which is valued at the lower of
cost or net realizable value. Cost is determined using the first-in, first-out
(FIFO) or moving-average method.
34
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(E) Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Routine maintenance and
repairs are expensed as incurred.
Depreciation is calculated under the straight-line method over the estimated
useful lives, principally 25 years for buildings and improvements and 5 to 10
years for machinery and equipment. Leasehold improvements are amortized using
the straight-line method over the shorter of the lease term or estimated useful
life of the asset.
(F) Goodwill and Intangible Assets
Intangible assets consist of subscriber and advertiser relationships,
mastheads, non-compete agreements with former owners of acquired newspapers, and
the excess of acquisition costs over the estimated fair value of net assets
acquired (goodwill). The fair value of intangible assets acquired is determined
primarily through the use of independent appraisals.
On January 1, 2002, the Company adopted 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. 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 are 30 and 20 years, respectively, and the amortization periods have been
adjusted accordingly, with effect from January 1, 2002. Non-compete agreements
are amortized over periods of up to 10 years depending on the specifics of the
agreement.
Prior to the adoption of SFAS No. 142, the Company amortized goodwill and
mastheads over 40 years. Upon adoption of SFAS No. 142, the Company ceased
amortization of goodwill. The amortization of mastheads was also discontinued
because it has been determined that the useful life of the mastheads is
indefinite.
The Company assesses impairment of goodwill and mastheads by using multiples
of recent and projected revenues and EBITDA (earnings before interest, taxes,
depreciation, and amortization) for individual properties to determine the fair
value of the properties and deducts the fair value of assets other than goodwill
and mastheads to arrive at the fair value of goodwill and mastheads. This amount
is then compared to the carrying value of goodwill and mastheads to determine if
any impairment has occurred. The multiples of revenue and EBITDA used to
determine fair value are based on the Company's experience in acquiring and
selling properties and multiples reflected in the purchase prices of recent
sales transactions of newspaper properties similar to those it owns.
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." The Company assesses the recoverability of its long-lived assets,
including property, plant and equipment and definite lived intangible assets,
whenever events or changes in business circumstances indicate the carrying
amount of the assets, or related group of assets, may not be fully recoverable.
Factors leading to impairment include significant under performance relative to
expected historical or projected future operating losses, significant changes in
the manner of use of the acquired assets or the strategy for the Company's
overall business, and significant negative industry or economic trends. The
assessment of recoverability is based on management's estimate. If undiscounted
future operating cash flows do not exceed the net book value of the long-lived
assets, then a permanent impairment has occurred. The Company would record the
difference between the net book value of the long-lived asset and the fair value
of such asset as a charge against income in the consolidated statements of
operations if such a difference arose.
(G) Revenue Recognition
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. Advertising revenue is recognized upon publication of the
advertisements. Revenue for job printing is recognized upon delivery.
35
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(H) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(I) Fair Value of Financial Instruments
The Company has reviewed its cash equivalents, accounts receivable, accounts
payable and accrued expenses and has determined that their carrying values
approximate fair value due to the short maturity of these instruments. The
Company's carrying values for its Term Loan B and its borrowings under the
revolving credit facility approximate fair value due to the variable interest
rates associated with these financial instruments. It is not practical to
determine the fair value of the Notes, as defined below, as such securities are
not actively traded.
(J) Cash Equivalents
Cash equivalents represent highly liquid certificates of deposit with a
maximum term at origination of three months or less.
(K) 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.
(2) ACQUISITIONS
In 2000, the Company acquired 43 publications in 12 transactions for an
aggregate cash purchase price of $84,541. The excess of purchase prices over the
estimated fair value of tangible and identifiable intangible assets acquired
(goodwill) was approximately $39,685.
The Company has accounted for acquisitions using the purchase method of
accounting. Accordingly, the cost of each acquisition has been allocated to the
assets acquired and liabilities assumed based upon their respective fair values
using independent valuations where appropriate. The costs of certain intangible
assets acquired are being amortized over periods ranging from 5 to 30 years. The
results of operations are included in the consolidated financial statements
since the dates of acquisition.
(3) DISCONTINUED OPERATIONS
The Company disposed of the assets of six related publications in one
transaction on January 7, 2002 for cash proceeds of $26,519, resulting in a
pre-tax gain of $6,997, or a gain of $4,269, net of the tax effect of $2,728
(the "Disposition"). 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. Income from
discontinued operations for 2000 and 2001 were $1,817 and $1,508, respectively,
and represented the operating results of the publications sold. Income from
discontinued operations for 2002 consisted of the gain on sale of the
publications.
(4) ACCOUNTS RECEIVABLE
Net accounts receivable consisted of the following:
36
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31,
----------------------
2001 2002
-------- --------
Accounts receivable ................................... $ 22,856 $ 21,473
Allowance for doubtful accounts ....................... (1,458) (1,340)
-------- --------
$ 21,398 $ 20,133
======== ========
Activity in the allowance for doubtful accounts is summarized as follows:
YEAR ENDED DECEMBER 31,
---------------------------------
2000 2001 2002
------- ------- -------
Beginning balance ........................... $ 1,141 $ 1,523 $ 1,458
Balance acquired from acquisitions .......... 187 -- --
Balance relieved from dispositions .......... -- -- (32)
Bad debt expense ............................ 1,584 1,249 1,119
Write-offs .................................. (1,389) (1,314) (1,205)
------- ------- -------
Ending balance .............................. $ 1,523 $ 1,458 $ 1,340
======= ======= =======
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
DECEMBER 31,
----------------------
2001 2002
-------- --------
Land ............................................... $ 8,125 $ 7,864
Buildings and improvements ......................... 26,841 26,853
Machinery and equipment ............................ 28,965 29,965
Furniture and fixtures ............................. 3,199 3,043
-------- --------
67,130 67,725
Less accumulated depreciation and amortization ..... (14,594) (19,071)
-------- --------
$ 52,536 $ 48,654
======== ========
(6) GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consisted of the following:
AS OF DECEMBER 31, 2002
---------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
Amortized intangible assets:
Non-compete agreements .............. $ 17,542 $ 16,179 $ 1,363
Advertiser relationships ............ 195,039 22,438 172,601
Subscriber relationships ............ 51,451 7,650 43,801
-------- -------- --------
Total .................................. $264,032 $ 46,267 $217,765
======== ======== ========
Non-amortized intangible assets:
Goodwill ............................ $185,447
Mastheads ........................... 16,552
--------
Total .................................. $201,999
========
37
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Amortization expense for the year ended
December 31, 2002:...................................... $ 11,904
========
Estimated amortization expense:
For the year ending December 31, 2003................ $ 9,011
For the year ending December 31, 2004................ 8,320
For the year ending December 31, 2005................ 8,320
For the year ending December 31, 2006................ 8,320
For the year ending December 31, 2007................ 8,320
Thereafter........................................... 175,474
The changes in the carrying amount of goodwill for the year ended December
31, 2002 are as follows:
Balance as of January 1, 2002............ $ 196,061
Impairment losses........................ (2,231)
Goodwill related to publications sold.... (8,342)
Other.................................... (41)
---------
Balance as of December 31, 2002.......... $ 185,447
=========
After the Company's initial impairment test, it was determined that the fair
values of five properties were less than the net book value of the Company's
goodwill and mastheads for such properties as of January 1, 2002. 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) reflected in the purchase prices of recent sales
transactions of newspaper properties similar to those owned by the Company.
The Company's annual impairment test conducted as of December 31, 2002
indicated that no additional impairment would need to be recorded.
The effect on the Company's net income (loss) as a result of the adoption of
SFAS No. 142 is as follows:
2000 2001 2002
-------- -------- --------
Reported net income (loss) ................................................ $ (5,336) $ (9,080) $ 9,965
Add back: Goodwill amortization ........................................... 4,680 5,186 --
Add back: Masthead amortization ........................................... 394 474 --
Adjust: Advertiser relationships amortization (change in useful life) ..... (1,080) (1,109) --
Adjust: Subscriber relationships amortization (change in useful life) ..... (700) (797) --
-------- -------- --------
Adjusted net income (loss)................................................. $ (2,042) $ (5,326) $ 9,965
======== ======== ========
38
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) ACCRUED EXPENSES
Accrued expenses consisted of the following:
DECEMBER 31,
------------------
2001 2002
------- -------
Accrued payroll............. $ 1,823 $ 2,024
Accrued vacation............ 594 592
Accrued bonus............... 853 1,692
Accrued interest............ 7,949 7,391
Accrued other............... 2,175 1,836
------- -------
$13,394 $13,535
======= =======
(8) LEASE COMMITMENTS
The future minimum lease payments related to the Company's non-cancelable
operating lease commitments as of December 31, 2002 are as follows:
2003................................................ $ 362
2004................................................ 214
2005................................................ 92
2006................................................ 43
2007................................................ 7
-------
Total minimum lease payments.................. $ 718
=======
Rental expense under operating leases was $575, $752 and $815 for the years
ended December 31, 2000 and 2001 and 2002, respectively.
(9) SENIOR SUBORDINATED NOTES
The acquisition of 166 newspapers from Hollinger in January 1998 was
financed in part by: (i) $180,000 from the issuance and sale by the Operating
Company of $180,000 aggregate principal amount of 9 3/8% Senior Subordinated
Notes (the "Notes") due February 1, 2008 and (ii) $50,500 from the issuance and
sale by LGP of $89,000 aggregate principal amount of 11 5/8% Senior Discount
Debentures (the "Debentures") due February 1, 2009.
The Notes are general unsecured obligations of the Operating Company, and
are irrevocably and unconditionally jointly and severally guaranteed by each of
the Operating Company's existing and future subsidiaries. The Notes are
redeemable for cash at the option of the Operating Company anytime after
February 1, 2003 at stipulated redemption amounts. In the event of a change in
control (as defined in the Notes) of the Operating Company or the Company, the
Company must offer to repurchase the Notes at 101% of their principal amount.
39
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) REVOLVING CREDIT FACILITY AND TERM LOAN B (COLLECTIVELY, THE "AMENDED
CREDIT FACILITY")
On April 18, 2000, the Operating Company entered into an agreement to amend
and restate its $175,000 revolving credit facility. The amendment and
restatement extended the maturity date of the revolving credit facility from
January 2003 to March 2005, and included the issuance of a $100,000 Term Loan B.
The Term Loan B matures in March 2007.
On May 10, 2001, the Operating Company entered into an amendment to its
Amended Credit Facility. The amendment decreased the aggregate commitment
available under the revolving credit facility from $175,000 to $135,000 and
amended the Cash Coverage Ratio and Senior Leverage Ratio as defined within the
Amended Credit Facility.
On October 23, 2002, the Operating Company repaid $25,000 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 Operating Company borrowed such amounts under
the revolving credit facility in connection with the repayment of the Term Loan
B.
The Term Loan B and the revolving credit facility bear interest at the
Operating Company's option equal to the Base Rate (as defined in the Amended
Credit Facility) or the adjusted LIBO Rate for a eurodollar loan (as defined in
the Amended Credit Facility) plus a margin that varies based upon a ratio set
forth in the Amended Credit Facility. There is an individual margin applicable
to each of the Term Loan B and the revolving credit facility. The Operating
Company pays a fee on the aggregate amount of outstanding letters of credit. The
Operating Company also pays a fee on the unused portion of the revolving credit
facility. No principal payments are due on the revolving credit facility until
the maturity date. At December 31, 2002, the Operating Company had utilized
$21,845 of the revolving credit facility and $72,500 was outstanding under the
Term Loan B. The Term Loan B requires annual principal payments of $744 in
2003 and 2004, $26,862 in 2005, $35,320 in 2006 and $8,830 in 2007. The average
interest rate on borrowings under the Amended Credit Facility for 2002 was 5.7%.
The Amended Credit Facility contains certain financial covenants and other
limitations on LGP and the Operating Company, including restrictions on the
ability of LGP and its subsidiaries, including the Operating Company, to make
investments or other loans or to pay dividends or make other specified
restricted payments. These provisions generally prohibit dividend payments,
loans or advances by LGP or by the Operating Company to LGP without the consent
of the lenders under the Amended Credit Facility.
(11) LONG-TERM LIABILITIES
Long-term liabilities principally represent amounts due under
non-interest-bearing non-compete agreements through 2010 and deferred
acquisition consideration to be paid in 2003.
The aggregate amount of payments related to long-term liabilities at
December 31, 2002 are as follows:
2003............... $ 509
2004............... 287
2005............... 282
2006............... 177
2007............... 177
Thereafter......... 216
------
$1,648
======
(12) COMMON STOCK
On the date of the Initial Acquisition, LGO issued 100 shares of common
stock, par value $0.01 per share ("Common Stock"), to LGP. No shares of
Common Stock have been issued since such time.
40
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) INCOME TAXES
Income tax expense (benefit) for the periods shown below consisted of:
CURRENT DEFERRED TOTAL
------- -------- -------
Year ended December 31, 2000:
U.S. Federal ................ $ -- $ -- $ --
State and local ............. 491 -- 491
------- ------- -------
$ 491 $ -- $ 491
======= ======= =======
Year ended December 31, 2001:
U.S. Federal ................ $ -- $ -- $ --
State and local ............. 444 -- 444
------- ------- -------
$ 444 $ -- $ 444
======= ======= =======
Year ended December 31, 2002:
U.S. Federal ................ $ -- $ (929) $ (929)
State and local ............. 275 (273) 2
------- ------- -------
$ 275 $(1,202) $ (927)
======= ======= =======
Income tax expense (benefit) differed from the amounts computed by applying
the U.S. Federal income tax rate of 34% to income (loss) from continuing
operations before income taxes and cumulative effect of change in accounting
principle as a result of the following:
YEAR ENDED DECEMBER 31,
------------------------------------
2000 2001 2002
-------- -------- --------
Computed "expected" tax expense (benefit) ....................... $ (2,265) $ (3,449) $ 2,114
Increase in income taxes resulting from:
Amortization of nondeductible goodwill ....................... 394 1,687 --
State and local income taxes ................................. 324 293 1
Nondeductible meals and entertainment ........................ 110 95 26
Discontinued operations ...................................... 618 513 79
Nondeductible expenses ....................................... 4 -- --
Change in Federal valuation allowance ........................... 1,306 (1,305) (3,147)
-------- -------- --------
$ 491 $ 2,004 $ (927)
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2001 and
2002 are presented below:
DECEMBER 31
----------------------
2001 2002
-------- --------
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts ........... $ 583 $ 536
Accrued expenses .................................................................. 783 1,177
Net operating losses .............................................................. 22,512 20,795
-------- --------
Gross deferred tax assets ............................................................ 23,878 22,508
Less: valuation allowance ............................................................ (8,561) (4,948)
-------- --------
Net deferred tax assets ........................................................... 15,317 17,560
-------- --------
Deferred tax liabilities:
Long-lived assets, principally due to differences in depreciation and amortization ... 3,389 3,951
Intangible assets, principally due to differences in amortization .................... 37,412 39,661
-------- --------
40,801 43,612
Net deferred tax liability ........................................................ $ 25,484 $ 26,052
======== ========
41
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The valuation allowance increased by $7,025 in 2001 and decreased by $3,613
in 2002. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. In assessing the
realizability of the Company's deferred tax assets, which are principally net
operating loss carry-forwards, management considers the reversal of deferred tax
liabilities which are scheduled to reverse during the carry-forward period and
tax planning strategies.
At December 31, 2002, the Company has net operating loss carry-forwards for
Federal and state income tax purposes of $52,407, which are available to offset
future taxable income, if any. These Federal and state net operating loss
carry-forwards begin to expire in 2018 and 2003, respectively.
(14) EMPLOYEE BENEFIT PLANS
The Parent maintains certain benefit plans which include the Company's
employees.
Parent maintains a defined contribution plan conforming to IRS rules for
401(k) plans, for all of its employees satisfying minimum service requirements
as set forth under the plan. The plan allows for a matching contribution at the
discretion of Parent. Parent recorded $271, $296, and $0 in expenses related to
the plan in 2000, 2001 and 2002, respectively.
Parent maintains three non-qualified deferred compensation plans, as
described below, for certain of its employees.
Parent maintains the Liberty Group Publishing, Inc. Publishers' Deferred
Compensation Plan ("Publishers Plan"), a non-qualified deferred compensation
plan for the benefit of certain designated publishers of Parent's newspapers.
Under the Publishers' Plan, Parent credits an amount to a bookkeeping account
established for each participating publisher pursuant to a pre-determined
formula which is based upon the gross operating profits of each such publisher's
newspaper. The bookkeeping account is credited with earnings and losses based
upon the investment choices selected by the participant. The amounts credited to
the bookkeeping account on behalf of each participating publisher vest on an
installment basis over a period of 15 years. A participating publisher forfeits
all amounts under the Publishers' Plan in the event that the publisher's
employment with the Company is terminated for "cause" as defined in the
Publishers' Plan. Amounts credited to a participating publisher's bookkeeping
account are distributable upon termination of the publisher's employment with
Parent and will be made in a lump sum or installments as elected by the
publisher. Parent recorded $160, $146 and $169 of compensation expense related
to the plan in 2000, 2001 and 2002, respectively.
Parent maintains the Liberty Group Publishing, Inc. Executive Benefit Plan
("Executive Benefit Plan"), a non-qualified deferred compensation plan for the
benefit of certain key employees of Parent. Under the Executive Benefit Plan,
Parent credits an amount, determined at Parent's sole discretion, to a
bookkeeping account established for each participating key employee. The
bookkeeping account is credited with earnings and losses based upon the
investment choices selected by the participant. The amounts credited to the
bookkeeping account on behalf of each participating key employee vest on an
installment basis over a period of 5 years. A participating key employee
forfeits all amounts under the Executive Benefit Plan in the event that the key
employee's employment with Parent is terminated for "cause" as defined in the
Executive Benefit Plan. Amounts credited to a participating key employee's
bookkeeping account are distributable upon termination of the key employee's
employment with Parent, and will be made in a lump sum or installments as
elected by the key employee. Parent recorded $66, $61 and $61 of compensation
expense related to the plan in 2000, 2001 and 2002, respectively.
Parent maintains the Liberty Group Publishing, Inc. Executive Deferral
Plan ("Executive Deferral Plan"), a non-qualified deferred compensation plan for
the benefit of certain key employees of Parent. Under the Executive
Deferral Plan, eligible key employees may elect to defer a portion of their
compensation for payment at a later date. Currently, the Executive Deferral Plan
allows a participating key employee to defer up to 100% of his or her annual
compensation until termination of employment or such
42
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
earlier period as elected by the participating key employee. Amounts deferred
are credited to a bookkeeping account established by Parent for this purpose.
The bookkeeping account is credited with earnings and losses based upon the
investment choices selected by the participant. Amounts deferred under the
Executive Deferral Plan are fully vested and nonforfeitable. The amounts in the
bookkeeping account are payable to the key employee at the time and in the
manner elected by the key employee.
(15) RELATED-PARTY TRANSACTIONS
The Company paid $1,320, $1,480 and $1,480 in management fees in 2000, 2001
and 2002, respectively, and $356, $375 and $350 in other fees in 2000, 2001 and
2002, respectively, to Leonard Green & Partners, L.P. The Company is obligated
to pay other fees to Leonard Green & Partners, L.P. of $125 in 2003.
(16) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires
the Company to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that results from the acquisition,
construction, development, and/or normal use of the assets. The Company also
records a corresponding asset that is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation, the
obligation will be adjusted at the end of each period to reflect the passage of
time and changes in the estimated future cash flows underlying the obligation.
The Company is required to adopt SFAS No. 143 on January 1, 2003. The adoption
of SFAS No. 143 is not expected to have a material effect on the Company's
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, among other things, amends existing guidance on
reporting gains and losses on the extinguishment of debt to prohibit the
classification of the gain or loss as extraordinary, unless the items meet the
definition of extraordinary under APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". The
provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are
applicable to fiscal years beginning after May 15, 2002. Earlier application of
these provisions is encouraged. The adoption of SFAS No. 145 is not expected to
have a material effect on the Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity".
The provisions of SFAS No. 146 are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The adoption of SFAS No. 146 is not expected to have a material effect on the
Company's consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company's
consolidated financial statements. The disclosure requirements are effective for
financial statements for interim and annual periods ending after December 15,
2002.
43
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(17) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth selected quarterly financial information for
the years ended December 31, 2001 and 2002. The operating results for any given
quarter are not necessarily indicative of results for any future period.
2001 QUARTERS ENDED
--------------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
-------- -------- -------- --------
REVENUES:
Advertising ..................................... $ 37,543 $ 36,954 $ 38,839 $ 34,641
Circulation ..................................... 8,401 8,493 8,158 8,176
Job printing and other .......................... 3,246 3,340 3,787 3,622
-------- -------- -------- --------
Total revenues ........................................... 49,190 48,787 50,784 46,439
OPERATING COSTS AND EXPENSES:
Operating costs ................................. 24,179 24,247 25,405 24,776
Selling, general and administrative ............. 13,493 13,531 13,306 13,434
Depreciation and amortization ................... 5,206 5,622 5,256 5,231
-------- -------- -------- --------
Income from operations ................................... 6,312 5,387 6,817 2,998
Interest expense ......................................... 6,839 7,361 7,771 7,964
Amortization of deferred financing costs ................. 709 338 357 319
Loss from continuing operations before
income taxes .................................... (1,236) (2,312) (1,311) (5,285)
Income tax expense (benefit) .............................. 145 (50) 268 81
-------- -------- -------- --------
Loss from continuing operations .......................... (1,381) (2,262) (1,579) (5,366)
Income from discontinued operations, net of tax .......... 351 408 438 311
-------- -------- -------- --------
Net loss ................................................. (1,030) (1,854) (1,141) (5,055)
======== ======== ======== ========
2002 QUARTERS ENDED
--------------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
-------- -------- -------- --------
REVENUES:
Advertising ..................................... $ 37,604 $ 36,787 $ 38,686 $ 33,841
Circulation ..................................... 8,368 8,447 8,357 8,181
Job printing and other .......................... 3,201 3,242 3,114 3,003
-------- -------- -------- --------
Total revenues ........................................... 49,173 48,476 50,157 45,025
OPERATING COSTS AND EXPENSES:
Operating costs ................................. 23,184 22,798 22,716 21,692
Selling, general and administrative ............. 13,380 13,831 13,646 12,669
Depreciation and amortization ................... 4,297 4,265 4,283 4,182
-------- -------- -------- --------
Income from operations ................................... 8,312 7,582 9,512 6,482
Interest expense ......................................... 5,740 5,903 6,000 6,173
Amortization of deferred financing costs ................. 666 322 316 327
Impairment of other assets ............................... -- 223 -- --
-------- -------- -------- --------
Income (loss) from continuing operations before
income taxes and cumulative effect of change
accounting principle ............................ 1,906 1,134 3,196 (18)
Income tax expense (benefit) ............................. (711) (284) (85) 133
-------- -------- -------- --------
44
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income (loss) from continuing operations before
cumulative effect of change in
accounting principle ............................ 2,617 1,398 3,281 (151)
Income (loss) from discontinued operations,
net of tax ...................................... (73) -- -- 4,342
-------- -------- -------- --------
Income before cumulative effect of change
in accounting principle ......................... 2,544 1,398 3,281 4,191
Cumulative effect of change
in accounting principle, net of tax ............. -- -- -- (1,449)
-------- -------- -------- --------
Net income ............................................... 2,544 1,398 3,281 2,742
======== ======== ======== ========
The Company has restated its 2002 interim period consolidated financial
information to reflect a revision to its depreciation and amortization expense
that resulted from a mathematical error. Previously, the Company had reported
depreciation and amortization expense of $4,386, $4,487, and $4,469 for the
three months ended March 31, June 30, and September 30, 2002, respectively.
These amounts should have been $4,182, $4,283, and $4,265, respectively, as
indicated in the table above.
The Company previously reported income tax benefit of $408 and $495 for the
three months ended June 30 and September 30, 2002, respectively. In connection
with the change in depreciation and amortization expense discussed above, the
Company's income tax benefit for the three months ended June 30 and September
30, 2002 has been revised to $85 and $264, respectively, as indicated in the
table above. There was no change to income tax expense for the three months
ended March 31, 2002 as a result of the revision to depreciation and
amortization expense.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 31, 2003 LIBERTY GROUP OPERATING, INC. (Registrant)
By /s/ KENNETH L. SEROTA
----------------------------------------
Kenneth L. Serota,
President, Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities on the dates indicated.
Dated: March 31, 2003 /s/ KENNETH L. SEROTA
------------------------------------------
Kenneth L. Serota,
President, Chief Executive Officer and
Chairman of the Board of Directors
(principal executive officer)
Dated: March 31, 2003 /s/ DANIEL D. LEWIS
------------------------------------------
Daniel D. Lewis,
Chief Financial Officer
(principal financial and accounting
officer)
46
CERTIFICATION
I, Kenneth L. Serota, certify that:
1. I have reviewed this annual report on Form 10-K of Liberty Group Operating,
Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. 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;
5. 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; and
6. 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.
Dated: March 31, 2003
/s/ KENNETH L. SEROTA
------------------------------------------
Name: Kenneth L. Serota
Title: President, Chief Executive Officer
and Chairman of the Board of
Directors
CERTIFICATION
I, Daniel D. Lewis, certify that:
1. I have reviewed this annual report on Form 10-K of Liberty Group Operating,
Inc.;
2. Based on my knowledge, this annual 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 annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. 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;
5. 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; and
6. 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.
Dated: March 31, 2003
/s/ DANIEL D. LEWIS
------------------------------------------
Name: Daniel D. Lewis
Title: Chief Financial Officer
INDEX TO EXHIBITS
EXHIBIT
NO. ITEMS
- ----------- ------------------------------------------------------------------------------------
2.1 Asset Purchase Agreement dated as of November 21, 1997, among Liberty Incorporated by reference to
Group Publishing, Inc., Green Equity Investors II, L.P. (as guarantor), Exhibit 2.1 included on the
Liberty Group Operating, Inc., Hollinger International Inc., APAC-90 Company's Registration
Inc., American Publishing, and APAC-95, Inc. Statement on Form S-4
(Registration No. 333-46957)
(the "Company's S-4").
2.2 Asset Purchase Agreement dated as of November 21, 1997, among Liberty Incorporated by reference to
Group Publishing, Inc., Green Equity Investors II, L.P. (as guarantor), Exhibit 2.2 included on the
Liberty Group Operating, Inc., Hollinger International Inc., American Company's S-4.
Publishing Company of Illinois, APAC-90 Inc., and APAC-95, Inc.
2.3 Exchange Agreement dated as of November 21, 1997, between American Incorporated by reference to
Publishing Company of Illinois and Chicago Deferred Exchange Exhibit 2.3 included on the
Corporation. Company's S-4.
2.4 Qualified Exchange Trust Agreement, dated as of November 21, 1997 among Incorporated by reference to
the Chicago Trust Company, as Trustee under Trust No. 38347501, Chicago Exhibit 2.4 included on the
Deferred Exchange Corporation, and American Publishing Company of Company's S-4.
Illinois.
2.5 Amendment to Asset Purchase Agreement dated as of January 14, 1998, Incorporated by reference to
among Liberty Group Publishing, Inc., Green Equity Investors II, L.P. Exhibit 2.5 included on the
(as guarantor), Liberty Group Operating, Inc., Hollinger International Company's S-4.
Inc., APAL-90 Inc., American Publishing (1991) Inc. and APAC-95 Inc.
2.6 Amendment to Asset Purchase Agreement, dated as of January 14, 1998, Incorporated by reference to
among Liberty Group Publishing, Inc., Green Equity Investors II, L.P. Exhibit 2.6 included on the
(as guarantor), Liberty Group Operating, Inc., Hollinger International Company's S-4.
Inc., American Publishing Company of Illinois, APAC-90 Inc., American
Publishing (1991) Inc. and APAC-95 Inc.
2.7 Amendment to Exchange Agreement, dated as of January 14, 1998, between Incorporated by reference to
American Publishing Company of Illinois and Chicago Deferred Exchange Exhibit 2.7 included on the
Corporation. Company's S-4.
2.8 Amendment to Qualified Exchange Trust Agreement, dated as of January Incorporated by reference to
14, 1998, among The Chicago Trust Company, as Trustee under No. Exhibit 2.8 included on the
38347501, Chicago. Company's S-4.
2.9 Agreement dated as of January 15, 1998, among Liberty Group Publishing, Incorporated by reference to
Inc., Green Equity Investors II, L.P. (as guarantor), Liberty Group Exhibit 2.9 included on the
Operating, Inc., Hollinger International, Inc., American Publishing Company's S-4.
Company of Illinois, APAC-90 Inc., American Publishing (1991) Inc., and
APAC-95 Inc.
2.10 Agreement dated as of January 23, 1998, among American Publishing Incorporated by reference to
Company of Illinois, Chicago Deferred Exchange Corporation and The Exhibit 2.10 included on the
Chicago Trust Company. Company's S-4.
2.11 Agreement dated as of January 26, 1998, among Liberty Group Publishing, Incorporated by reference to
Inc., Green Equity Investors II, L.P. (as guarantor), Liberty Group Exhibit 2.11 included on the
Operating, Inc. Hollinger International, Inc., American Publishing Company's S-4.
Company of Illinois, APAC-90 Inc., American Publishing (1991) Inc., and
APAC-95 Inc.
3.1 Certificate of Incorporation of Liberty Group Operating, Inc. Incorporated by reference to
Exhibit 2.11 included on the
Company's S-4.
3.2 By-laws of Liberty Group Operating, Inc. Incorporated by reference to
Exhibit 3.2 included on the
Company's S-4.
4.1 Indenture dated as of January 27, 1998 among Liberty Group Operating, Incorporated by reference to
Inc. and State Street Bank and Trust Company, as Trustee, including Exhibit 4.1 included on the
form of 9 3/8% Senior Subordinated Notes due 2008. Company's S-4.
EXHIBIT
NO. ITEMS
- ----------- ------------------------------------------------------------------------------------
*10.1 Employment Agreement dated as of November 27, 1997, between Liberty Incorporated by reference to
Group Publishing, Inc. and Kenneth L. Serota. Exhibit 10.1 included on the
Company's S-4.
*10.2 Amendment to Employment Agreement, dated as of August 11, 2000, between Incorporated by reference to
Liberty Group Operating, Inc., Kenneth L. Serota, Liberty Group Exhibit 10.2 included on the
Publishing, Inc., Green Equity Investors II, L.P. and Green Equity Company's Annual Report on
Investors III, L.P. Form 10-K for the year ending
December 31, 2000 (the
"Company's 2000 10-K").
10.3 Non-Competition Agreement dated as of January 27, 1998 between Liberty Incorporated by reference to
Group Operating, Inc. and Hollinger International, Inc. Exhibit 10.3 included on the
Company's S-4.
10.4 Management Services Agreement, dated as of April 18, 2000, between Incorporated by reference to
Liberty Group Operating, Inc. and Leonard Green & Partners, L.P. Exhibit 10.13 included on the
Company's 2000 10-K.
10.5 Amended and Restated Credit Agreement dated as of April 18, 2000, among Incorporated by reference to
Liberty Group Operating, Inc., Liberty Group Publishing, Inc., the lenders Exhibit 10.14 included on the
party thereto, Citicorp USA, Inc., Citibank N.A., DB Banc Alex Brown LLC, Company's 2000 10-K.
Wells Fargo Bank, N.A., and Bank of America, N.A.
10.6 First Amendment to Credit Agreement dated as of May 10, 2001, Incorporated by reference to
among Liberty Group Operating, Inc., Liberty Group Publishing, Inc., Exhibit 99 included on the
the lenders party thereto, Citibank, N.A. and Citicorp USA, Inc. Company's March 31, 2001 10-Q.
10.7 Second Amendment to Credit Agreement and Limited Waiver and Consent Incorporated by reference to
dated as of December 14, 2001 among Liberty Group Operating, Inc., Exhibit 10.7 included on the
Liberty Group Publishing, Inc. the lenders party thereto, Citibank, Company's 2001 10-K.
N.A. and Citicorp USA, Inc.
10.15 Guarantor Pledge and Security Agreement dated as of January 27, 1998 Incorporated by reference to
among Liberty Group Publishing, Inc., Liberty Group Arizona Holdings, Inc., Exhibit 10.6 included on the
Liberty Group Arkansas Holdings, Inc., Liberty Group California Holdings, Company's S-4.
Inc., Liberty Group Illinois Holdings, Inc., Liberty Group Iowa Holdings,
Inc., Liberty Group Kansas Holdings, Inc., Liberty Group Michigan Holdings, Inc.
Liberty Group Minnesota Holdings, Inc., Liberty Group Missouri Holdings, Inc.,
Liberty Group New York Holdings, Inc., Liberty Group Pennsylvania Holdings, Inc.,
Liberty Group Management Services, Inc. and Citicorp USA, Inc.
10.16 Borrower Pledge and Security Agreement dated as of January 27, 1998 Incorporated by reference to
between Liberty Group Operating, Inc. and Citicorp USA, Inc. Exhibit 10.7 included on the
Company's S-4.
10.10 Guaranty, Indemnity and Subordination Agreement, dated as of January Incorporated by reference to
27, 1998, entered into by Liberty Group Publishing, Inc., Liberty Group Exhibit 10.10 included on the
Arizona Holdings, Inc., Liberty Group Arkansas Holdings, Inc., Liberty Company's 2001 10-K/A.
Group California Holdings, Inc., Liberty Group Illinois Holdings, Inc.,
Liberty Group Iowa Holdings, Inc., Liberty Group Kansas Holdings, Inc.,
Liberty Group Michigan Holdings, Inc., Liberty Group Minnesota
Holdings, Inc., Liberty Group Missouri Holdings, Inc., Liberty Group
New York Holdings, Inc., Liberty Group Pennsylvania Holdings, Inc. and
Liberty Group Management Services, Inc., for the benefit of the
Beneficiaries (as defined therein).
*10.11 Liberty Group Publishing, Inc.'s Publisher's Deferred Compensation Plan. Incorporated by reference to
Exhibit 10.10 included on the
Company's Annual Report on
Form 10-K for the period ended
December 31, 1998 (the
"Company's 1998 10-K").
*10.12 Liberty Group Publishing, Inc.'s Executive Benefit Plan. Incorporated by reference to
Exhibit 10.11 included on the
Company's 1998 10-K.
EXHIBIT
NO. ITEMS
- ----------- ------------------------------------------------------------------------------------
*10.13 Liberty Group Publishing, Inc.'s Executive Deferral Plan. Incorporated by reference to
Exhibit 10.12 included on the
Company's 1998 10-K.
*10.14 Liberty Group Publishing, Inc.'s 1999 Stock Option Plan. Incorporated by reference to
Exhibit 10.15 included on the
Company's 1999 10-K.
*10.25 Amended and Restated Employment Agreement, dated as of February 11, Included herewith.
2003, between Liberty Group Operating, Inc., Kenneth L. Serota, Liberty
Group Publishing, Green Equity Investors II, L.P. and Green Equity
Investors III, L.P.
21 Subsidiaries of Liberty Group Operating, Inc. Incorporated by reference to
Exhibit 21 included on the
Company's 2001 10-K.
99.1 1350 Certifications Included herewith.
* Management Contract/Compensatory Plan or Arrangement
The Company has agreed to furnish to the Commission, upon request, a copy of
each agreement defining the rights of holders of long-term debt not filed
herewith in reliance upon the exemption from filing applicable to any such
agreement pursuant to which the total amount of securities authorized does not
exceed 10% of the total consolidated assets of the Company.