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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
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 Executive Offices)
Registrant's Telephone Number, Including Area Code: (847) 272-2244
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the Company's common stock, par value
$0.01 per share, as of May 15, 2003: 100 shares.
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TABLE OF CONTENTS
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 2003 (unaudited)
and December 31, 2002.......................................................... 3
Consolidated Statements of Operations for the Three Months Ended
March 31, 2003 and March 31, 2002 (unaudited).................................. 4
Consolidated Condensed Statements of Cash Flows for the Three Months Ended
March 31, 2003 and March 31, 2002 (unaudited).................................. 5
Notes to the Unaudited Interim Consolidated Financial Statements.................. 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 7
Item 3 Quantitative and Qualitative Disclosures about Market Risk........................ 11
Item 4 Controls and Procedures........................................................... 11
PART II - OTHER INFORMATION
Item 1 Legal Proceedings................................................................. 12
Item 2 Changes in Securities and Use of Proceeds......................................... 12
Item 3 Defaults Upon Senior Securities................................................... 12
Item 4 Submission of Matters to a Vote of Security Holders............................... 12
Item 5 Other Information................................................................. 12
Item 6 Exhibits and Reports on Form 8-K.................................................. 12
Signature Page.......................................................................... 13
Certifications................................................................................ 14-15
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2003 2002
----------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents ....................................................................... $ 2,907 $ 1,696
Accounts receivable, net of allowance for doubtful accounts of $1,310 and $1,340 at
March 31, 2003 and December 31, 2002, respectively ............................................ 19,235 20,133
Inventory ....................................................................................... 2,807 2,639
Prepaid expenses ................................................................................ 1,431 1,361
Deferred income taxes ........................................................................... 1,713 1,713
Other current assets ............................................................................ 295 326
--------- ---------
Total current assets ............................................................................... 28,388 27,868
Property, plant and equipment, net .............................................................. 47,601 48,654
Goodwill ........................................................................................ 185,447 185,447
Intangible assets, net .......................................................................... 231,954 234,317
Deferred financing costs, net ................................................................... 4,514 4,968
Other assets .................................................................................... 428 395
--------- ---------
Total assets ....................................................................................... $ 498,332 $ 501,649
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of Term Loan B .................................................................. $ 744 $ 744
Current portion of long-term liabilities ........................................................ 497 509
Accounts payable ................................................................................ 2,081 2,036
Accrued expenses ................................................................................ 8,901 13,535
Deferred revenue ................................................................................ 8,817 8,591
--------- ---------
Total current liabilities .......................................................................... 21,040 25,415
Long-term liabilities:
Borrowings under revolving credit facility ...................................................... 23,540 21,845
Term Loan B, less current portion ............................................................... 71,384 71,756
Long-term liabilities, less current portion ..................................................... 1,091 1,139
Senior subordinated notes ....................................................................... 180,000 180,000
Deferred income taxes ........................................................................... 27,765 27,765
--------- ---------
Total liabilities .................................................................................. 324,820 327,920
Stockholder's equity:
Common Stock, $0.01 par value, 1,000 shares authorized, 100 shares issued
and outstanding at March 31, 2003 and December 31, 2002 .................................... -- --
Additional paid-in capital ...................................................................... 176,866 176,862
Accumulated deficit ............................................................................. (3,354) (3,133)
--------- ---------
Total stockholder's equity ...................................................................... 173,512 173,729
--------- ---------
Total liabilities and stockholder's equity ......................................................... $ 498,332 $ 501,649
========= =========
See accompanying notes to unaudited interim consolidated financial statements.
3
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
---------------------
2003 2002
-------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
REVENUES:
Advertising ............................................................................ $ 32,638 $ 33,841
Circulation ............................................................................ 8,078 8,181
Job printing and other ................................................................. 3,041 3,003
-------- --------
Total revenues ...................................................................... 43,757 45,025
OPERATING COSTS AND EXPENSES:
Operating costs ........................................................................ 21,550 21,692
Selling, general and administrative .................................................... 12,498 12,669
Depreciation and amortization .......................................................... 3,604 4,182
-------- --------
Income from continuing operations ......................................................... 6,105 6,482
Interest expense .......................................................................... 5,593 6,173
Write-off of deferred financing cots....................................................... 161 --
Amortization of deferred financing costs .................................................. 293 327
-------- --------
Income (loss) from continuing operations before income taxes and cumulative effect of
change in accounting principle ......................................................... 58 (18)
Income tax expense ........................................................................ 105 133
-------- --------
105
Loss from continuing operations before cumulative effect of change in
accounting principle ................................................................... (47) (151)
Income from discontinued operations, net of tax ........................................... -- 4,342
-------- --------
Income (loss) before cumulative effect of change
in accounting principle ................................................................ (47) 4,191
Cumulative effect of change
in accounting principle, net of tax .................................................... -- (1,449)
-------- --------
Net income (loss).......................................................................... $ (47) $ 2,742
======== ========
See accompanying notes to unaudited interim consolidated financial statements.
4
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
----------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
2003 2002
-------- --------
Cash flows from operating activities:
Net income (loss).................................................... $ (47) $ 2,742
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization ....................................... 3,604 4,182
Amortization of deferred financing costs ............................ 293 327
Non-cash compensation ............................................... 4 27
Loss on sale of fixed assets ....................................... 23 --
Write-off of deferred financing costs................................ 161 --
Gain from sale of discontinued operations, net of tax ............... -- (4,342)
Cumulative effect of change in accounting principle, net of tax ..... -- 1,449
Changes in assets and liabilities, net of dispositions:
Accounts receivable, net ......................................... 898 658
Inventory ........................................................ (168) 373
Prepaid expenses and other assets ................................ (72) (1,250)
Accounts payable ................................................. 45 (311)
Accrued expenses ................................................. (4,634) (2,460)
Deferred revenue ................................................. 226 366
-------- --------
Net cash provided by operating activities ................................. 333 1,761
-------- --------
Cash flow from investing activities:
Purchases of property, plant and equipment .......................... (467) (390)
Proceeds from sale of publications and fixed assets ................. 256 26,510
-------- --------
Net cash provided by (used in) investing activities ...................... (211) 26,120
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) under amended credit facility ........... 1,323 (24,950)
Dividends to Parent ................................................. (174) --
Payments on long-term liabilities ................................... (60) (593)
-------- --------
Net cash provided by (used in) financing activities ...................... 1,089 (25,543)
-------- --------
Net increase in cash and cash equivalents ................................ 1,211 2,338
Cash and cash equivalents, at beginning of period ........................ 1,696 1,474
-------- --------
Cash and cash equivalents, at end of period .............................. $ 2,907 $ 3,812
======== ========
See accompanying notes to the unaudited interim
consolidated financial statements.
5
LIBERTY GROUP OPERATING, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) THE COMPANY AND BASIS OF PRESENTATION
Liberty Group Operating, Inc. ("LGO", "Operating Company" or "Registrant")
and subsidiaries 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 (as defined below) 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 during the three months ended
March 31, 2003 and 2002.
The Company's portfolio of publications is comprised of 65 paid daily
newspapers and 126 paid non-daily newspapers. In addition, the Company publishes
111 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.
LGO 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, a wholly owned subsidiary of Hollinger
International Inc. LGO is a wholly-owned subsidiary of Liberty Group Publishing,
Inc. ("Parent" or "LGP"). The unaudited interim consolidated financial
statements include the accounts of Operating Company and Operating Company's
consolidated subsidiaries (the "Company").
The accompanying unaudited interim consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and note disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations. These unaudited interim
consolidated financial statements reflect all adjustments which are, in the
opinion of management, necessary to present a fair statement of the results of
the interim periods presented. The accompanying interim consolidated financial
statements as of March 31, 2003 and for the three months ended March 31, 2003
and March 31, 2002 should be read in conjunction with the audited consolidated
financial statements of the Company included in LGO's Form 10-K for the year
ended December 31, 2002, filed with the Securities and Exchange Commission. The
Company's results for the interim periods are not necessarily indicative of the
results to be expected for the full year.
(2) RECLASSIFICATIONS
Certain amounts in the prior year's unaudited interim consolidated financial
statements have been reclassified to conform to the 2003 presentation, which
include the transfer of inserting expense and certain postage and delivery costs
from selling, general and administrative to operating costs.
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 for the three months ended March
31, 2002. This amount should have been $4,182.
(3) DISCONTINUED OPERATIONS
The Company disposed of the assets of six related publications (acquired in
1999) in one transaction on January 7, 2002 for $26,510 (the "Disposition"). The
net book value of the assets was $19,393, resulting in a pre-tax gain of $7,117,
or a gain of $4,342, net of the tax effect of $2,775. As a result of the sale,
the disposition of the property has been accounted for as a discontinued
operation. Discontinued operations for the three months ended March 31, 2002
consisted solely of the gain on sale of the publications.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Liberty Group Operating, Inc. ("LGO", "Operating Company" 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, a wholly owned subsidiary of Hollinger International Inc.
LGO is a wholly owned subsidiary of Liberty Group Publishing, Inc. ("Parent" or
"LGP"). The unaudited interim consolidated financial statements include the
accounts of Operating Company and Operating Company's 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.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2002
Total Revenues. Total revenues for the quarter ended March 31, 2003
decreased by $1.2 million, or 2.7%, to $43.8 million from $45.0 million for the
quarter ended March 31, 2002. The decrease in total revenues was comprised of a
$1.2 million, or 3.6%, decrease in advertising revenue while the marginal
decrease in circulation revenue was offset by a marginal increase in job
printing and other. The advertising revenue decrease was primarily driven by
lower local display and local classified advertising revenues in the Company's
community markets and Chicago suburban market of $0.5 million and $0.7 million,
respectively.
Operating Costs. Operating costs for the quarter ended March 31, 2003
decreased by $0.1 million, or 0.5%, to $21.6 million from $21.7 million for the
quarter ended March 31, 2002. The decrease was primarily due to lower newsprint
costs of $0.3 million, partially offset by increases in energy costs and other
operating costs of $0.2 million. As a percentage of total revenues, operating
costs increased to 49.2% from 48.2%.
Selling, General and Administrative. Selling, general and administrative
expenses for the quarter ended March 31, 2003 decreased by $0.2 million to $12.5
million from $12.7 million for the quarter ended March 31, 2002. The decrease in
selling, general and administrative expenses during the quarter ended March 31,
2003 was primarily due to lower bad debt expense of $0.3 million due to an
improvement in collection efforts, partially offset by increases in other
selling, general and administrative expenses of $0.1 million. As a percentage of
total revenues, selling, general and administrative expenses increased slightly
from 28.1% to 28.6%.
Depreciation and Amortization. Depreciation and amortization expense for the
quarter ended March 31, 2003 decreased by $0.6 million to $3.6 million from $4.2
million for the quarter ended March 31, 2002. During the quarter ended March 31,
2003, the Company recorded $2.4 million in amortization of intangible assets,
compared with $2.8 million for the quarter ended March 31, 2002. The decrease in
amortization is primarily due to a decrease in non-compete intangible
amortization of $0.5 million resulting from certain non-compete assets that are
now fully amortized.
Income from Continuing Operations. Income from continuing operations for the
quarter ended March 31, 2003 decreased by $0.4 million, or 6.2%, to $6.1 million
from $6.5 million for the quarter ended March 31, 2002. The decrease in income
from continuing operations during the quarter ended March 31, 2003 was primarily
due to lower revenues, partially offset by reductions in operating, selling,
general and administrative costs as well as lower depreciation and amortization
expense.
EBITDA. EBITDA (which is defined as earnings before interest, taxes,
depreciation and amortization, which for the Company is income from operations
plus depreciation and amortization) for the quarter ended March 31, 2003
decreased by $1.0 million, or 9.3%,
7
to $9.7 million from $10.7 million for the quarter ended March 31, 2002. The
decrease was primarily due to lower revenues of $1.2 million, partially offset
by lower newsprint costs of $0.3 million and bad debt expense of $0.3 million.
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 payment of interest on its outstanding indebtedness and to service other
commitments, thereby reducing the funds available to the Company for other
purposes. Accordingly, EBITDA does not represent an amount of funds that is
available for management's discretionary use.
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------------ ------------
(IN THOUSANDS)
Income from operations $ 6,105 6,482
Depreciation and amortization 3,604 4,182
--------- ---------
EBITDA $ 9,709 $ 10,664
========= =========
Interest Expense. Interest expense (including amortization of deferred
financing costs) for the quarter ended March 31, 2003 decreased by $0.6 million
to $5.9 million from $6.5 million for the quarter ended March 31, 2002. The
decrease in interest expense was due primarily to lower interest rates and less
outstanding indebtedness during the three months ended March 31, 2003 as
compared to the three months ended March 31, 2002.
Write-off of Deferred Financing Costs. As of March 31, 2003, LGO had
incurred $0.2 million in legal and bank fees associated with a proposed
amendment to its Amended Credit Facility. On March 31, 2003, LGO wrote off these
costs as LGO has decided to postpone amending its Amended Credit Facility.
Income Tax Expense. Income tax expense was $0.1 million for the quarters
ended March 31, 2003 and 2002 and represents state and local income taxes.
Income from Discontinued Operations. The Company disposed of the assets of
six related publications (acquired in 1999) in one transaction on January 7,
2002 for $26.5 million (the "Disposition"). The net book value of the assets was
$19.4 million, resulting in a pre-tax gain of $7.1 million, or a gain of $4.3
million, net of the tax effect of $2.8 million. As a result of the sale, the
disposition of the property has been accounted for as a discontinued operation.
Discontinued operations for the three months ended March 31, 2002, consisted
solely of the gain on sale of the publications.
Cumulative Effect of Change in Accounting Principle. Pursuant to the
adoption of SFAS No. 142, the Company performed an initial impairment test of
its properties in the first quarter of 2002. As a result of this test, the
Company determined that 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 the quarter ended
March 31, 2002. The Company performed an impairment test at the end of 2002,
which indicated that no additional impairment needed to be recorded. The Company
will perform its annual impairment test for 2003 in the fourth quarter.
Net Income (Loss). The Company recorded a net loss of $0.1 million for the
quarter ended March 31, 2003, compared to net income of $2.7 million for the
quarter ended March 31, 2002. The $2.8 million decrease in net income was
primarily attributable to lower revenues of $1.2 million and the after-tax gain
of $4.3 million on the Disposition in 2002, partially offset by the cumulative
effect of change in accounting principle related to goodwill and masthead
impairment losses in the amount of $1.4 million in 2002. The decrease in net
income was partially offset by lower newsprint costs of $0.3 million, bad debt
expense of $0.3 million, lower non-compete amortization of $0.6 and interest
expense of $0.6 million.
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.
8
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
indefinite 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
deterioration in revenue or EBITDA for any of the properties, additional
impairment losses may have to be recorded.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities. Net cash provided by operating
activities for the three months ended March 31, 2003 decreased by $1.5 million
to $0.3 million compared with net cash provided by operating activities of $1.8
million for the three months ended March 31, 2002. The decrease is primarily due
to a decrease in income from operations before depreciation and amortization of
$1.0 million. The additional $0.5 million decrease is attributable to an
increase in working capital and senior discount debenture accretion.
Cash flows from investing activities. Net cash used in investing activities
was $0.2 million for the three months ended March 31, 2003 compared to net cash
provided by investing activities of $26.1 million for the three months ended
March 31, 2002. The decrease of $26.3 million in cash flows was primarily due to
the $26.5 million of proceeds from the Disposition in 2002. The Company's
capital expenditures of $0.5 million 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 will
continue to pursue its strategy of opportunistically purchasing community
newspapers in contiguous markets and new markets.
Cash flows from financing activities. Net cash provided by financing
activities was $1.1 million for the three months ended March 31, 2003 compared
to net cash used in investing activities of $25.5 million for the three months
ended March 31, 2002. The increase in cash flows was primarily due to a
repayment during the quarter ended March 31, 2002 of the Company's Amended
Credit Facility resulting from the Disposition proceeds. The Company's net cash
provided by financing activities for the quarter ended March 31, 2003 reflects
funding under LGO's Amended and Restated Credit Agreement, dated as of April 18,
2000, as further amended, with a syndicate of financial institutions led by
Citibank, N.A, with Citicorp USA, Inc. as administrative agent (the "Amended
Credit Facility"). The Company is subject to certain covenants that limit its
ability to pay cash dividends and make other restricted payments and does not
expect to pay cash dividends in the foreseeable future.
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. 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.
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 March 31, 2003, the Term Loan B requires principal
payments of $0.4 million in 2003, $0.7 million in 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.
9
The Company is highly leveraged and has indebtedness that is substantial in
relation to its stockholders' deficit, tangible equity and cash flow. Interest
expense for the three months ended March 31, 2003 was $5.9 million, including
non-cash interest of $0.3 million for amortization of deferred financing cost.
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 Operating
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 March 31, 2003, approximately $95.7 million was outstanding under the
Amended Credit Facility, and the aggregate principal amount of the Notes
outstanding was $180.0 million.
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, Debentures and the 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, LGP filed a registration statement with the Securities and
Exchange Commission on Form S-2 with respect to an initial public offering of
Common Stock. As of March 31, 2003, LGP had incurred $2.2 million in legal and
professional fees associated with its proposed initial public that had been
capitalized as deferred offering costs. On March 31, 2003, LGP wrote off these
costs as LGP has recently decided to postpone its proposed initial public
offering.
Safe Harbor Provision. This Form 10-Q contains certain "forward-looking
statements" (as defined in Section 21E of the Securities Exchange Act of 1934,
as amended) that reflect the Company's expectations regarding its future growth,
results of operations, performance and business prospects and opportunities.
Words such as "anticipates," "believes," "plans," "expects," "intends,"
"estimates" and similar expressions have been used to identify these
forward-looking statements, but are not the exclusive means of identifying these
statements. These statements reflect the Company's current beliefs and
expectations and are based on information currently available to the Company.
Accordingly, these statements are subject to known and unknown risks,
uncertainties and other factors that could cause the Company's actual growth,
results of operations, performance and business prospects and opportunities to
differ from those expressed in, or implied by, these statements. As a result, no
assurance can be given that the Company's future growth, results of operations,
performance and business prospects and opportunities covered by such
forward-looking statements will be achieved. Such factors include, among others:
(1) the Company's dependence on local economies and vulnerability to general
economic conditions; (2) the Company's substantial indebtedness; (3) the
Company's holding company structure; (4) the Company's ability to implement its
acquisition strategy, (5) the Company's competitive business environment, which
may reduce demand for advertising and (6) the Company's ability to attract and
retain key employees. For purposes of this Form 10-Q, any statements contained
herein that are not statements of historical fact may be deemed to be
forward-looking statements. The Company is not obligated and has no intention to
update or revise these forward-looking statements to reflect new events,
information or circumstances.
10
SUMMARY DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table reflects a summary of the Company's contractual cash
obligations as of March 31, 2003 (in thousands):
2003 2004 2005 2006 2007 THEREAFTER TOTAL
-------- -------- -------- -------- --------- --------------- ----------
9 3/8% senior subordinated notes..... $ -- $ -- $ -- $ -- $ -- $ 180,000 $ 180,000
Term Loan B........................... 372 744 26,862 35,320 8,830 -- 72,128
Revolving credit facility............. -- -- 23,540 -- -- -- 23,540
Non-compete payments.................. 308 282 282 177 177 229 1,455
Real estate lease payments............ 271 214 92 43 7 -- 627
Finder fee payments................... 125 -- -- -- -- -- 125
Other................................. 3 5 -- -- -- -- 8
-------- -------- -------- -------- --------- ---------- ---------
$ 1,079 $ 1,245 $ 50,776 $ 35,540 $ 9,014 $ 180,229 $ 277,883
======== ======== ======== ======== ========= ========== =========
RELATED PARTY TRANSACTIONS
The Company paid $370,000 in management fees for each of the quarters ended
March 31, 2003 and 2002 to Leonard Green & Partners, L.P. As of March 31, 2003,
the Company is also obligated to pay other fees to Leonard Green & Partners,
L.P. of $125,000, which will be paid this year.
ITEM 3. 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 Operating 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, Operating Company
's interest expense will be affected by changes in the Alternate Base Rate or in
the Adjusted LIBO Rate. At March 31, 2003, Operating Company had borrowings
outstanding of $23.6 million under the revolving credit facility (without giving
effect to $1,500,000 of outstanding letters of credit as of such date) and $72.1
million under the Term Loan B. A hypothetical 100 basis point change in interest
rates would impact quarterly interest expense by approximately $0.2 million
based on the balance outstanding at March 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and in
reaching a reasonable level of assurance, 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.
11
PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved from time to time in legal proceedings relating to
claims arising out of its operations in the ordinary course of business. The
Company is not party to any legal proceedings that, in the opinion of the
Company's management, are reasonably expected to have a material adverse effect
on the Company's business, financial condition or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
99.1 1350 Certifications
(b) Reports on Form 8-K
None
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2003 LIBERTY GROUP OPERATING, INC.
/s/ KENNETH L. SEROTA
--------------------------------------------
Kenneth L. Serota
President, Chief Executive Officer and
Chairman of the Board of Directors
(principal executive officer)
/s/ DANIEL D. LEWIS
--------------------------------------------
Daniel D. Lewis
Chief Financial Officer
(principal financial and accounting officer)
13
CERTIFICATION
I, Kenneth L. Serota, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Liberty Group
Operating, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedure to ensure that material
information relating to the registrant, including its consolidated subsidiaries
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluations
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weakness.
Date: May 15, 2003 /s/ KENNETH L. SEROTA
---------------------------------------
Name: Kenneth L. Serota
Title: President, Chief Executive
Officer and Chairman of the
Board of Directors
14
CERTIFICATION
I, Daniel D. Lewis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Liberty Group
Operating, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedure to ensure that material
information relating to the registrant, including its consolidated subsidiaries
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluations
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weakness.
Date: May 15, 2003
/s/ DANIEL D. LEWIS
---------------------------------------
Name: Daniel D. Lewis
Title: Chief Financial Officer
15