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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 JUNE 30, 2003
COMMISSION FILE NUMBER: 333-46957
LIBERTY GROUP PUBLISHING, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 36-4197635
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
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 August 14, 2003: 2,158,833 shares.
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TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 2003 (Unaudited)
and December 31, 2002............................................................ 3
Consolidated Statements of Operations for the Three Months and Six Months Ended
June 30 , 2003 and June 30, 2002 (Unaudited)..................................... 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2003 and June 30, 2002 (Unaudited)...................................... 5
Notes to Unaudited Interim Consolidated Financial Statements........................ 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 9
Item 3 Quantitative and Qualitative Disclosures about Market Risk.......................... 14
Item 4 Controls and Procedures............................................................. 15
PART II - OTHER INFORMATION
Item 1 Legal Proceedings................................................................... 15
Item 2 Changes in Securities and Use of Proceeds........................................... 15
Item 3 Defaults Upon Senior Securities..................................................... 15
Item 4 Submission of Matters to a Vote of Security Holders................................. 15
Item 5 Other Information................................................................... 15
Item 6 Exhibits and Reports on Form 8-K.................................................... 15
Signatures .................................................................................. 16
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
LIBERTY GROUP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2003 2002
--------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents ....................................................................... $ 3,334 $ 1,696
Accounts receivable, net of allowance for doubtful accounts of $1,247 and $1,340 at
June 30, 2003 and December 31, 2002, respectively ............................................. 20,495 20,133
Inventory ....................................................................................... 2,328 2,639
Prepaid expenses ................................................................................ 1,731 1,361
Deferred income taxes ........................................................................... 1,713 1,713
Other current assets ............................................................................ 314 326
--------- ---------
Total current assets ............................................................................... 29,915 27,868
Property, plant and equipment, net .............................................................. 46,856 48,654
Goodwill ........................................................................................ 185,447 185,447
Intangible assets, net .......................................................................... 229,617 234,317
Deferred financing costs, net ................................................................... 6,790 7,848
Deferred offering costs ......................................................................... -- 1,796
Other assets .................................................................................... 433 395
--------- ---------
Total assets ....................................................................................... $ 499,058 $ 506,325
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of Term Loan B .................................................................. $ 744 $ 744
Current portion of long-term liabilities ........................................................ 429 509
Accounts payable ................................................................................ 2,330 2,036
Accrued expenses ................................................................................ 13,320 14,349
Deferred revenue ................................................................................ 8,567 8,591
--------- ---------
Total current liabilities .......................................................................... 25,390 26,229
Long-term liabilities:
Borrowings under revolving credit facility ...................................................... 15,667 21,845
Term Loan B, less current portion ............................................................... 71,385 71,756
Long-term liabilities, less current portion ..................................................... 949 1,139
Senior subordinated notes ....................................................................... 180,000 180,000
Senior discount debentures, redemption value $89,000 ............................................ 89,000 88,160
Interest due on senior discount debentures to affiliates (note 8)................................ 3,306 --
Deferred income taxes ........................................................................... 28,383 29,442
--------- ---------
Total liabilities .................................................................................. 414,080 418,571
Mandatorily Redeemable Preferred Stock:
Series A 14 3/4% Senior Redeemable Exchangeable Cumulative Preferred Stock,
$0.01 par value, 21,000,000 shares authorized, 3,855,320 and 3,585,978
shares issued and outstanding at June 30, 2003 and December 31, 2002,
respectively. Aggregate involuntary liquidation preference $25 plus accrued dividends ....... 98,752 91,853
Series B 10% Junior Redeemable Cumulative Preferred Stock, $0.01 par value,
250,000 shares authorized, 112,472 and 107,053 shares issued and outstanding
at June 30, 2003 and December 31, 2002, respectively ........................................ 114,347 108,837
--------- ---------
Total mandatorily redeemable preferred stock ...................................................... 213,099 200,690
Stockholders' deficit:
Common Stock, $0.01 par value, 2,655,000 shares authorized, 2,185,177 shares issued
and 2,158,833 shares outstanding at June 30, 2003 and December 31, 2002 .................... 22 22
Additional paid-in capital ...................................................................... 16,444 16,444
Notes receivable ................................................................................ (962) (970)
Accumulated deficit ............................................................................. (143,444) (128,251)
Treasury stock at cost, 26,344 shares at June 30, 2003 and December 31, 2002 .................... (181) (181)
--------- ---------
Total stockholders' deficit ..................................................................... (128,121) (112,936)
--------- ---------
Total liabilities and stockholders' deficit ........................................................ $ 499,058 $ 506,325
========= =========
See accompanying notes to unaudited interim consolidated financial statements.
3
LIBERTY GROUP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
REVENUES:
Advertising ....................................................... $ 38,103 $ 38,686 $ 70,741 $ 72,527
Circulation ....................................................... 8,236 8,357 16,314 16,538
Job printing and other ............................................ 2,985 3,114 6,026 6,117
----------- ----------- ----------- -----------
Total revenues ................................................. 49,324 50,157 93,081 95,182
OPERATING COSTS AND EXPENSES:
Operating costs ................................................... 22,625 22,716 44,175 44,408
Selling, general and administrative ............................... 13,499 13,646 25,997 26,315
Depreciation and amortization ..................................... 3,559 4,283 7,163 8,465
----------- ----------- ----------- -----------
Income from continuing operations .................................... 9,641 9,512 15,746 15,994
Interest expense ..................................................... 8,084 8,309 16,189 16,750
Amortization of deferred financing costs ............................. 459 477 897 963
Write-off of deferred offering costs ................................. -- -- 2,221 --
----------- ----------- ----------- -----------
Income (loss) from continuing operations before income taxes and
cumulative effect of change in accounting principle ............... 1,098 726 (3,561) (1,719)
Income tax expense (benefit) ......................................... 770 1,011 (777) 740
----------- ----------- ----------- -----------
Income (loss) from continuing operations before cumulative effect of
change in accounting principle .................................... 328 (285) (2,784) (2,459)
Income from discontinued operations, net of tax ...................... -- -- -- 4,342
----------- ----------- ----------- -----------
Income (loss) before cumulative effect of change
in accounting principle ........................................... 328 (285) (2,784) 1,883
Cumulative effect of change
in accounting principle, net of tax ............................... -- -- -- (1,449)
----------- ----------- ----------- -----------
Net income (loss) .................................................... 328 (285) (2,784) 434
Dividends on preferred stock ......................................... 6,301 5,565 12,409 10,960
----------- ----------- ----------- -----------
Net loss available to common stockholders ............................ $ (5,973) $ (5,850) $ (15,193) $ (10,526)
=========== =========== =========== ===========
Earnings (loss) per share:
Basic and diluted weighted-average shares outstanding ............. 2,158,833 2,158,833 2,158,833 2,158,833
Basic and diluted earnings (loss) per common share:
Loss from continuing operations before cumulative
effect of change in accounting principle ...................... $ (2.77) $ (2.71) $ (7.04) $ (6.22)
Discontinued operations, net of tax ............................... -- -- -- 2.01
Cumulative effect of change in accounting principle, net of tax ... -- -- -- (0.67)
----------- ----------- ----------- -----------
Net loss available to common stockholders per share ............... $ (2.77) $ (2.71) $ (7.04) $ (4.88)
=========== =========== =========== ===========
See accompanying notes to unaudited interim consolidated financial statements.
4
LIBERTY GROUP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
-----------------------
2003 2002
-------- --------
(UNAUDITED)
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss) ................................................ $ (2,784) $ 434
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization .................................... 7,163 8,465
Amortization of deferred financing costs ......................... 897 963
Accretion of senior discount debentures .......................... 840 4,577
Interest expense due to affiliates on senior discount debentures
(note 8)......................................................... 3,306 --
Non-cash compensation ............................................ 8 53
Deferred taxes ................................................... (1,059) 489
Write-off of deferred offering costs ............................. 2,221 --
Loss on sale of fixed assets .................................... 20 --
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 ......................................... (362) (23)
Inventory ........................................................ 311 361
Prepaid expenses and other assets ................................ (396) (887)
Deferred offering costs .......................................... (264) (826)
Accounts payable ................................................. 294 (161)
Accrued expenses ................................................. (1,029) 716
Deferred revenue ................................................. (24) 23
-------- --------
Net cash provided by operating activities .............................. 9,142 11,291
-------- --------
Cash flow from investing activities:
Purchases of property, plant and equipment ....................... (945) (949)
Proceeds from sale of publications and fixed assets .............. 260 26,510
-------- --------
Net cash provided by (used in) investing activities ................... (685) 25,561
-------- --------
Cash flows from financing activities:
Net repayments under amended credit facility ..................... (6,549) (36,010)
Payments on long-term liabilities ................................ (270) (325)
-------- --------
Net cash used in financing activities ................................. (6,819) (36,335)
-------- --------
Net increase in cash and cash equivalents ............................. 1,638 517
Cash and cash equivalents, at beginning of period ..................... 1,696 1,474
-------- --------
Cash and cash equivalents, at end of period ........................... $ 3,334 $ 1,991
======== ========
See accompanying notes to unaudited interim consolidated financial statements.
5
LIBERTY GROUP PUBLISHING, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) THE COMPANY AND BASIS OF PRESENTATION
Liberty Group Publishing, Inc. ("LGP" 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 303 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 and six months
ended June 30, 2003 and 2002.
The Company's portfolio of publications is comprised of 65 paid daily
newspapers and 127 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.
LGP 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. LGP is a holding company for its wholly-owned subsidiary,
Liberty Group Operating, Inc. ("Operating Company" or "LGO"). The unaudited
interim consolidated financial statements include the accounts of LGP, 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 June 30, 2003 and for the three months and six months ended
June 30, 2003 and June 30, 2002 should be read in conjunction with the audited
consolidated financial statements of the Company included in LGP'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) STOCK-BASED EMPLOYEE COMPENSATION
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123". SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these unaudited interim consolidated financial statements.
At June 30, 2003, LGP has one stock-based employee compensation plan, which
is more fully described in Note 17 of LGP's Form 10-K for the year ended
December 31, 2002. LGP accounts for its stock options under the provisions of
SFAS No. 123. SFAS No. 123 permits entities to recognize the fair value of all
stock-based awards on the date of grant as expense over the vesting period.
Alternatively, SFAS No. 123 also allows entities to apply the provisions of
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees" and provide pro forma net income (loss) disclosures for employee
stock option grants made as if the fair value-based method defined in SFAS No.
123 had been applied. Under APB 25, compensation expense would be
6
recorded on the date of the grant only if the current market price of the
underlying stock exceeded the exercise price. LGP has elected to apply the
provisions of APB 25 and provide the pro forma disclosures of SFAS No. 123. The
following table illustrates the effect on net loss available to common
stockholders and net loss per share if LGP had applied the fair-value-based
method to all outstanding and unvested awards in each period:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net loss available to common stockholders, as reported ....... $ (5,973) $ (5,850) $(15,193) $(10,526)
Add: Stock-based employee compensation expense included in
reported net loss available to common stockholders ......... -- -- -- --
Deduct: Stock-based employee compensation expense
determined under fair-value-based method ................... (2) (2) (4) (4)
-------- -------- -------- --------
Pro forma net loss available to common stockholders .......... $ (5,975) $ (5,852) $(15,197) $(10,530)
======== ======== ======== ========
Net loss per share:
Basic and diluted - as reported .............................. $ (2.77) $ (2.71) $ (7.04) $ (4.88)
======== ======== ======== ========
Basic and diluted - pro forma ................................ $ (2.77) $ (2.71) $ (7.04) $ (4.88)
======== ======== ======== ========
Under the plan, the exercise price of each option equals the fair value of
LGP's common stock, par value $0.01 per share (the "Common Stock"), on the date
of grant. There were no stock option grants during the three and six months
ended June 30, 2003 and 2002.
(3) 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 $4,487 and $8,873, respectively, for
the three and six months ended June 30, 2002. These amounts should have been
$4,283 and $8,465, respectively, for the three and six months ended June 30,
2002.
The Company previously reported income tax expense of $929 and $577,
respectively, for the three and six months ended June 30, 2002. In connection
with the change in depreciation and amortization expense discussed above, the
Company's income tax expense for the three and six months ended June 30, 2002
has been revised to $1,011 and $740, respectively.
(4) DISCONTINUED OPERATIONS
The Company disposed of the assets of six related publications (acquired in
1999) in one transaction on January 7, 2002 for $26,510 (the "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 six months ended June 30, 2002
consisted solely of the gain on sale of these publications.
(5) LOSS PER SHARE
Loss per share is calculated in accordance with SFAS No. 128, "Earnings Per
Share." Basic loss per share is computed based on the weighted-average number of
common shares outstanding during the period. The dilutive effect of common stock
equivalents is included in the calculation of diluted earnings per share only
when the effect of their inclusion would be dilutive. Because LGP reported a net
loss available to common stockholders for the three and six months ended June
30, 2003 and 2002, potentially dilutive securities have not been included in the
shares used to compute net loss available to common stockholders per share.
Had LGP reported net income for the three and six months ended June 30,
2003, the weighted-average number of shares outstanding for those periods would
have potentially been diluted by 25,000 and 25,700 stock options outstanding
during the respective periods, and had LGP reported net income for the three and
six months ended June 30, 2002, the weighted-average number of shares
outstanding for those periods would have potentially been diluted by 25,900 and
26,575 stock options outstanding during the respective periods.
7
A reconciliation of the amounts used in the basic and diluted earnings per
share computations is as follows (in thousands, except share and per share
data):
FOR THE THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------------
2003 2002
----------------------------------------- ---------------------------------------
PER PER
INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
Income (loss) from
continuing operations... $ 328 $ (285)
Less: Preferred stock
dividends............. $ (6,301) $ (5,565)
Basic and diluted loss
from continuing
operations available
to common
stockholders.......... $ (5,973) 2,158,833 $(2.77) $ (5,850) 2,158,833 $ (2.71)
======== ========= ====== ========= ========= =======
FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------------
2003 2002
----------------------------------------- ---------------------------------------
PER PER
INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
Loss from continuing
operations............ $ (2,784) $ (2,459)
Less: Preferred stock
dividends............. $(12,409) $ (10,960)
Basic and diluted loss
from continuing
operations available
to common
stockholders.......... $(15,193) 2,158,833 $(7.04) $ (13,419) 2,158,833 $ (6.22)
======== ========= ====== ========= ========= =======
(6) WRITE-OFF OF DEFERRED OFFERING COSTS
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 $2,221 in legal and other
professional fees associated with its proposed initial public offering that had
been capitalized as deferred offering costs. On March 31, 2003, LGP wrote off
these costs because LGP decided to postpone its proposed initial public
offering.
(7) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS AND INTERPRETATIONS
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." The
Statement requires issuers to classify as liabilities (or assets in some
circumstance) three classes of freestanding financial instruments that embody
obligations for the issuer.
Generally, SFAS No. 150 is effective for financial instruments entered into
or modified after May 31, 2003 and is otherwise effective at the beginning of
the first interim period beginning after June 15, 2003. The Company adopted the
provisions of SFAS No. 150 on July 1, 2003.
The Company did not enter into any financial instruments within the scope
of SFAS No. 150 during June 2003. However, as a result of adopting SFAS No. 150
on July 1, 2003 for existing financial instruments entered into on or before May
31, 2003, liabilities increased by $213,099 upon the reclassification of the
Company's mandatorily redeemable preferred stock.
(8) SUBSEQUENT EVENTS
On July 25, 2003, the Operating Company and LGP entered into an amendment
to its Amended Credit Facility. The amendment permits LGP to issue debt in lieu
of paying cash on the interest due on the 11 5/8% Senior Discount Debentures
(the "Senior Discount Debentures") due February 1, 2009, and to issue debt in
lieu of paying cash interest due on the additional debt that was issued in lieu
of paying cash interest on the Senior Discount Debentures.
8
On July 30, 2003, LGP entered into an agreement, effective August 1,
2003, with Green Equity Investors II, L.P. ("GEI II") and Green Equity Investors
III, L.P. ("GEI III"), whereby LGP may, at its option, issue 11 5/8% senior
debentures (the "Senior Debentures") to GEI II and GEI III on each interest
payment date of the Senior Discount Debentures, in lieu of paying cash interest
on the Senior Discount Debentures that are owned by GEI II and GEI III, with an
aggregate initial principal amount equal to the amount of cash interest
otherwise payable on such interest payment date under the terms of the Senior
Discount Debentures. In addition, LGP may, at its option, issue additional
Senior Debentures to GEI II and GEI III on each interest payment date of the
Senior Debentures, in lieu of paying cash interest on the Senior Debentures that
are owned by GEI II and GEI III, with an aggregate initial principal amount
equal to the amount of cash interest otherwise payable on such interest payment
date under the terms of the Senior Debentures. This agreement may be terminated
by GEI II and GEI III at any time upon delivery of written notice to LGP at
least 30 days prior to the next interest payment date.
On August 1, 2003, LGP elected to issue Senior Debentures in lieu of
paying cash interest on the Senior Discount Debentures that are owned GEI II and
GEI III. In conjunction with its election, LGP issued Senior Debentures
to GEI II and III in the amount of $687,003 and $3,335,247, respectively, which
will accrue interest at an annual rate of 11 5/8% and become payable on February
1, 2009. As a result of these agreements, interest due on the Senior Discount
Debentures as of June 30, 2003 has been reflected as a long-term liability on
the Company's consolidated balance sheet.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Liberty Group Publishing, Inc. ("LGP" 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. LGP is a
holding company for its wholly owned subsidiary, Liberty Group Operating, Inc.
("Operating Company" or "LGO"). The unaudited interim consolidated financial
statements include the accounts of LGP, 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 303 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 AND SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO
THREE AND SIX MONTHS ENDED JUNE 30, 2002
Total Revenues. Total revenues for the quarter ended June 30, 2003 decreased
by $0.8 million, or 1.7%, to $49.3 million from $50.2 million for the quarter
ended June 30, 2002. The decrease in total revenues was comprised of a $0.6
million, or 1.5%, decrease in advertising revenues, a $0.1 million, or 1.4%,
decrease in circulation revenue, and a $0.1 million, or 4.1%, decrease in job
printing and other revenue. In the Company's community markets, advertising
revenues increased $0.4 million, or 1.3%, primarily due to increases in preprint
and national advertising, which were partially offset by lower local display and
classified advertising. Outside of the community newspaper markets, the
Company's advertising revenues declined $1.0 million primarily due to lower
classified and display revenue in the Chicago suburban market of $0.6 million
and a reduction in non-newspaper related revenues of $0.4 million. The decrease
in circulation revenue resulted primarily from a reduction in subscriber levels
in certain community markets. The decrease in job printing and other revenue was
due to lower commercial volume in the Chicago suburban market as well as the
loss of several community print jobs. Total revenues for the six months ended
June 30, 2003 decreased by $2.1 million, or 2.2%, to $93.1 million from $95.2
million for the six months ended June 30, 2002. The decrease in total revenues
was comprised of a $1.8 million, or 2.5%, decrease in advertising revenues, a
$0.2 million, or 1.4%, decrease in circulation revenue, and a $0.1 million, or
1.5%, decrease in job printing and other revenue. In the Company's community
markets, advertising revenues increased $0.1 million, primarily due to increases
in preprint and national advertising, which were partially offset by lower local
display and classified advertising. Outside of
9
the community newspaper markets, the Company's advertising revenues declined
$1.9 million primarily due to lower classified and display revenue in the
Chicago suburban market of $1.3 million and a reduction in non-newspaper related
revenues of $0.6 million. The decrease in circulation revenue resulted primarily
from a reduction in subscriber levels in certain community markets. The decrease
in job printing and other revenue was due to lower commercial volume in the
Chicago suburban market as well as the loss of several community print jobs.
Operating Costs. Operating costs for the quarter ended June 30, 2003
decreased by $0.1 million, or 0.4%, to $22.6 million from $22.7 million for the
quarter ended June 30, 2002. The decrease in operating costs was primarily due
to a reduction in external composition and printing services of $0.2 million,
partially offset by an increase in delivery costs of $0.1 million. As a
percentage of total revenues, operating costs increased to 45.9% from 45.3%.
Operating costs for the six months ended June 30, 2003 decreased by $0.2
million, or 0.5%, to $44.2 million from $44.4 million for the six months ended
June 30, 2002. The decrease in operating costs was primarily due to lower
newsprint costs of $0.3 million, a reduction in external composition and
printing services of $0.2 million, partially offset by an increase in delivery
costs of $0.1 million and increases in energy and other operating costs of $0.2
million. As a percentage of total revenues, operating costs increased to 47.5%
from 46.7%.
Selling, General and Administrative. Selling, general and administrative
expenses for the quarter ended June 30, 2003 decreased by $0.1 million, or 1.1%,
to $13.5 million from $13.6 million for the quarter ended June 30, 2002. The
decrease in selling, general, and administrative expenses was primarily due to
lower labor costs resulting from a reduction in performance-based incentive
compensation. As a percentage of total revenues, selling, general and
administrative expenses increased slightly from 27.2% to 27.4%. Selling, general
and administrative expenses for the six months ended June 30, 2003 decreased by
$0.3 million, or 1.2%, to $26.0 million from $26.3 million for the six months
ended June 30, 2002. The decrease in selling, general, and administrative
expenses was primarily due to lower bad debt expense of $0.3 million due to an
improvement in collection efforts and lower labor costs resulting from a
reduction in performance-based incentive compensation of $0.1 million, partially
offset by increases in promotion expense of $0.1 million. As a percentage of
total revenues, selling, general and administrative expenses increased slightly
to 27.9% from 27.6%.
Depreciation and Amortization. Depreciation and amortization expense for the
quarter ended June 30, 2003 decreased by $0.7 million to $3.6 million from $4.3
million for the quarter ended June 30, 2002. During the quarter ended June 30,
2003, the Company recorded $2.3 million in amortization of intangible assets,
compared with $3.0 million for the quarter ended June 30, 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. Depreciation and amortization expense for the six months
ended June 30, 2003 decreased by $1.3 million to $7.2 million from $8.5 million
for the six months ended June 30, 2002. For the six months ended June 30, 2003,
the Company recorded $4.7 million in amortization of intangible assets, compared
with $5.8 million for the six months ended June 30, 2002. The decrease in
amortization is primarily due to a decrease in non-compete intangible
amortization of $1.0 million resulting from certain non-compete assets that are
now fully amortized.
Income from Continuing Operations. Income from continuing operations for the
quarter ended June 30, 2003 increased by $0.1 million, or 1.4%, to $9.6 million
from $9.5 million for the quarter ended June 30, 2002. The increase in income
from continuing operations during the quarter ended June 30, 2003 was primarily
due to lower depreciation and amortization expense of $0.7 million, lower
operating costs of $0.1 million and lower selling, general and administrative
expense of $0.1 million, partially offset by lower revenues of $0.8 million.
Income from continuing operations for the six months ended June 30, 2003
decreased by $0.2 million, or 1.6%, to $15.7 million from $16.0 million for the
six months ended June 30, 2002. The decrease was comprised of lower revenues of
$2.1 million partially offset by lower depreciation and amortization expense of
$1.3 million, lower operating costs of $0.2 million and lower selling, general
and administrative costs of $0.3 million.
EBITDA. EBITDA (which is defined as earnings before interest, taxes,
depreciation and amortization) for the quarter ended June, 2003 decreased by
$0.6 million, or 4.3%, to $13.2 million from $13.8 million for the quarter ended
June 30, 2002. The decrease was primarily due to lower revenues of $0.8 million,
partially offset by lower operating costs of $0.1 million, and lower selling,
general and administrative costs of $0.1 million. EBITDA for the six months
ended June 30, 2003 decreased by $1.6 million, or 6.3%, to $22.9 million from
$24.5 million for the six months ended June 30, 2002. The decrease was primarily
due to lower revenues of $2.1 million, partially offset by lower operating costs
of $0.2 million, and lower selling, general and administrative costs 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.
10
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.
The Company believes that net income (loss) is the financial measure
calculated and presented in accordance with GAAP that is most directly
comparable to EBITDA. The following table reconciles net income (loss) to EBITDA
for the three and six months ended June 30, 2003 and 2002:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2003 2002 2003 2002
---------- ------------ --------- ----------
Net income (loss) ....................................... $ 328 $ (285) $ (2,784) $ 434
Depreciation and amortization ........................... 3,559 4,283 7,163 8,465
Write-off of deferred offering costs .................... - - 2,221 -
Interest expense ........................................ 8,543 8,786 17,086 17,713
Income tax expense (benefit) ............................ 770 1,011 (777) 740
Income from discontinued operations, net of tax ......... - - - (4,342)
Cumulative effect of change in accounting
principle, net of tax ............................... - - - 1,449
-------- -------- -------- --------
EBITDA .................................................. 13,200 13,795 22,909 24,459
======== ======== ======== ========
Interest Expense. Interest expense (including amortization of deferred
financing costs) for the quarter ended June 30, 2003 decreased by $0.2 million
to $8.5 million from $8.8 million for the quarter ended June 30, 2002. The
decrease in interest expense was due primarily to lower interest rates and less
outstanding indebtedness during the quarter ended June 30, 2003 as compared to
the quarter ended June 30, 2002. Interest expense for the six months ended June
30, 2003 decreased by $0.6 million to $17.1 million from $17.7 million for the
six months ended June 30, 2002. The decrease in interest expense was due
primarily to lower interest rates and less outstanding indebtedness during the
six months ended June 30, 2003 as compared to the six months ended June 30,
2002.
Write-off of Deferred Offering Costs. 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 other professional fees
associated with its proposed initial public offering that had been capitalized
as deferred offering costs. On March 31, 2003, LGP wrote off these costs because
LGP decided to postpone its proposed initial public offering.
Income Tax Expense (Benefit). Income tax expense for the quarter ended June
30, 2003 was $0.8 million compared to income tax expense of $1.0 million for the
quarter ended June 30, 2002. The decrease of $0.2 million for the quarter ended
June 30, 2003 was primarily due to lower deferred federal income tax expense
recognized by the Company for the quarter ended June 30, 2003. Income tax
benefit for the six months ended June 30, 2003 was $0.8 million compared to
income tax expense of $0.7 million for the six months ended June 30, 2002. The
decrease of $1.5 million for the six months ended June 30, 2003 was primarily
due to an increase in deferred federal income tax benefit recognized by the
Company for the six months ended June 30, 2003.
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 six months ended June 30, 2002, consisted solely
of the gain on sale of the publications.
11
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 reported net income of $0.3 million for the
quarter ended June 30, 2003, compared to a net loss of $0.3 million for the
quarter ended June 30, 2002. The $0.6 million increase in net income was
primarily attributable to higher income from continuing operations of $0.1
million, lower interest expense of $0.2 million, and lower income tax expense of
$0.2 million. The Company recorded a net loss of $2.8 million for the six months
ended June 30, 2003, compared to net income of $0.4 million for the six months
ended June 30, 2002. The $3.2 million decrease in net income was primarily
attributable to a decrease in income from continuing operations of $0.3 million
and the inclusion in 2002 of the after-tax gain of $4.3 million on the
Disposition, 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. The decrease in net income was further attributable to a write-off
of deferred offering costs of $2.2 million, partially offset by lower interest
expense of $0.6 million and lower income tax expense of $1.5 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.
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 six months ended June 30, 2003 decreased by $2.1 million to
$9.1 million compared with net cash provided by operating activities of $11.3
million for the six months ended June 30, 2002. The decrease is primarily due to
a decrease in income from operations before depreciation and amortization of
$1.5 million. The additional $0.6 million decrease is attributable to changes in
working capital.
Cash flows from investing activities. Net cash used in investing activities
was $0.7 million for the six months ended June 30, 2003 compared to net cash
provided by investing activities of $25.6 million for the six months ended June
30, 2002. The decrease of $26.2 million in cash flows was primarily due to the
$26.5 million of proceeds from the Disposition in 2002. The Company's capital
expenditures consisted of the purchase of machinery, equipment, furniture and
fixtures relating to its publishing operations. The Company has no material
commitments for capital expenditures. The Company will continue to pursue its
strategy of opportunistically purchasing community newspapers in contiguous
markets and new markets.
Cash flows from financing activities. Net cash used in financing activities
was $6.8 million for the six months ended June 30, 2003 compared to net cash
used in financing activities of $36.3 million for the six months ended June 30,
2002. The decrease of $29.5 million in cash flows used 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 of $26.5 million. The
Company's net cash used in financing activities for the six months ended June
30, 2003 reflects payments 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.
12
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 June 30, 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.
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 and six months ended June 30, 2003 was $8.5 million and
$17.1 million, respectively, including non-cash interest of $2.0 million and
$4.1 million with respect to the Senior Discount Debentures and Senior
Debentures and amortization of deferred financing costs of $0.5 million and $0.9
million. The degree to which the Company 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 June 30, 2003, approximately $87.8 million was outstanding under the
Amended Credit Facility (without giving effect to $1.5 million of outstanding
letters of credit as of such date), the aggregate principal amount of the Notes
outstanding was $180.0 million, the aggregate principal amount of the Senior
Discount Debentures was $89.0 million and the aggregate principal amount of the
Senior Debentures was $3.3 million.
On July 25, 2003, the Operating Company and LGP entered into an amendment
to its Amended Credit Facility. The amendment permits LGP to issue debt in lieu
of paying cash on the interest due on the 11 5/8% Senior Discount Debentures
(the "Senior Discount Debentures") due February 1, 2009, and to issue debt in
lieu of paying cash interest due on the additional debt that was issued in lieu
of paying cash interest on the Senior Discount Debentures.
On July 30, 2003, LGP entered into an agreement, effective August
1, 2003, with Green Equity Investors II, L.P. ("GEI II") and Green Equity
Investors III, L.P. ("GEI III"), whereby LGP may, at its option, issue 11 5/8%
senior debentures (the "Senior Debentures") to GEI II and GEI III on each
interest payment date of the Senior Discount Debentures, in lieu of paying cash
interest on the Senior Discount Debentures that are owned by GEI II and GEI III,
with an aggregate initial principal amount equal to the amount of cash interest
otherwise payable on such interest payment date under the terms of the Senior
Discount Debentures. In addition, LGP may, at its option, issue additional
Senior Debentures to GEI II and GEI III on each interest payment date of the
Senior Debentures, in lieu of paying cash interest on the Senior Debentures that
are owned by GEI II and GEI III, with an aggregate initial principal amount
equal to the amount of cash interest otherwise payable on such interest payment
date under the terms of the Senior Debentures. This agreement may be terminated
by GEI II and GEI III at any time upon delivery of written notice to LGP at
least 30 days prior to the next interest payment date.
On August 1, 2003, LGP elected to issue Senior Debentures in lieu
of paying cash interest on the Senior Discount Debentures that are owned GEI II
and GEI III. In conjunction with its election, LGP issued Senior
Debentures to GEI II and III in the amount of $687,003 and $3,335,247,
respectively, which will accrue interest at an annual rate of 11 5/8% and become
payable on
13
February 1, 2009. As a result of these agreements, interest due on the Senior
Discount Debentures as of June 30, 2003 has been reflected as a long-term
liability on the Company's consolidated balance sheet.
Liquidity. The Company's principal sources of funds will be cash provided by
operating activities and borrowings under its revolving credit facility.
LGP has no operations of its own and accordingly has no independent means of
generating revenue. As a holding company, LGP's internal sources of funds to
meet its cash needs, including payment of expenses, are dividends and other
permitted payments from its subsidiaries, in particular from Operating Company.
The indentures relating to the Notes, Senior Discount Debentures and the Amended
Credit Facility and the terms of the Senior Debentures 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 February 1,
2003, the Company's Senior Discount Debentures reached an accreted value of
$89.0 million, which is equivalent to the principal amount of the Senior
Discount Debentures at maturity. At this time, the Company began accruing cash
interest on the Senior Discount Debentures. On August 1, 2003, the initial
semi-annual interest payment date for the Senior Discount Debentures, the
Company issued Senior Debentures in lieu of cash interest for the Senior
Discount Debentures that are owned by GEI II and GEI III. The Company's
obligation to pay cash interest or issue Senior Debentures for the Senior
Discount Debentures, or issue additional Senior Debentures in lieu of paying
cash interest on the Senior Debentures, that are owned by GEI II and GEI III
continues through February 1, 2009, the maturity date of the Senior Discount
Debentures and Senior Debentures, respectively. If the Company were to pay the
remaining semi-annual interest payments due in cash, the Company's annual cash
interest obligations will increase by $10.3 million in each year from 2004
through 2008 and $5.2 million in 2009. If the Company were to issue Senior
Debentures to GEI II and GEI III in lieu of cash interest on each semi-annual
interest payment date of the Senior Discount Debentures, the Company would be
required to pay an additional $40.2 million in principal amount of the Senior
Debentures on February 1, 2009.
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 offering that had
been capitalized as deferred offering costs. On March 31, 2003, LGP wrote off
these costs because LGP 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.
SUMMARY DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table reflects a summary of the Company's contractual cash
obligations as of June 30, 2003 (in thousands):
2003 2004 2005 2006 2007 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
9 3/8% senior subordinated notes........ $ -- $ -- $ -- $ -- $ -- $180,000 $180,000
11 5/8% senior discount debentures...... -- -- -- -- -- 89,000 89,000
11 5/8% senior debentures .............. -- -- -- -- -- 3,306 3,306
Term Loan B ............................ 372 744 26,862 35,320 8,831 -- 72,129
Revolving credit facility .............. -- -- 15,667 -- -- -- 15,667
Non-compete payments ................... 98 282 282 177 177 229 1,245
Real estate lease payments.............. 181 214 92 43 7 -- 537
Finder fee payments .................... 125 -- -- -- -- -- 125
Other .................................. 3 5 -- -- -- -- 8
-------- -------- -------- -------- -------- -------- --------
$ 779 $ 1,245 $ 42,903 $ 35,540 $ 9,015 $272,535 $362,017
======== ======== ======== ======== ======== ======== ========
14
RELATED PARTY TRANSACTIONS
The Company paid $370,000 in management fees for each of the quarters ended
June 30, 2003 and 2002 to Leonard Green & Partners, L.P. The Company paid
$740,000 in management fees for each of the six months ended June 30, 2003 and
2002 to Leonard Green & Partners, L.P. As of June 30, 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.
On August 1, 2003, LGP elected to issue Senior Debentures in lieu of paying
cash interest on the Senior Discount Debentures that were owned by GEI II and
GEI III, affiliates of Leonard Green & Partners, L.P. In conjunction with its
election, LGP issued Senior Debentures to GEI II and GEI III in the amount of
$687,003 and $3,335,247, respectively, which will each accrue interest at an
annual rate of 11 5/8% and become payable on February 1, 2009. See Footnote 8
"Subsequent Events" in the Notes to Unaudited Interim Consolidated Financial
Statements for further discussion.
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 June 30, 2003, Operating Company had borrowings
outstanding of $15.7 million under the revolving credit facility (without giving
effect to $1.5 million 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 June 30, 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 Securities and Exchange Commission'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 for 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 is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As of June 30, 2003, the end of the quarter covered by 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 at the reasonable assurance level.
There has been no change in the Company's internal controls over financial
reporting during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
controls over financial reporting.
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.
15
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
10.1 The Third Amendment to Credit Agreement, dated as of July 25, 2003,
by and among Liberty Group Operating, Inc., Liberty Group
Publishing, Inc., the lenders party thereto, Citibank, N.A. and
Citicorp USA, Inc.
10.2 Form of 11 5/8% Senior Debenture due 2009
31 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K
(1) On April 1, 2003, the Company filed a Current Report on Form 8-K for
the purpose of filing its press release announcing financial results
for the year ended December 31, 2002.
(2) On May 23, 2003, the Company filed a Current Report on Form 8-K for
the purpose of filing the text of its conference call held on May
16, 2003 related to the Company's financial results for the quarter
ended March 31, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2003 LIBERTY GROUP PUBLISHING, 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)
17