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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: 333-46959
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 Number)
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: 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 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....................................................................... 7
Item 3 Quantitative and Qualitative Disclosures about Market Risk.......................... 12
Item 4 Controls and Procedures............................................................. 12
PART II - OTHER INFORMATION
Item 1 Legal Proceedings................................................................... 13
Item 2 Changes in Securities and Use of Proceeds........................................... 13
Item 3 Defaults Upon Senior Securities..................................................... 13
Item 4 Submission of Matters to a Vote of Security Holders................................. 13
Item 5 Other Information................................................................... 13
Item 6 Exhibits and Reports on Form 8-K.................................................... 13
Signatures ..................................................................................... 13
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2003 2002
----------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
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 ..................................................... 4,230 4,968
Other assets ...................................................................... 433 395
--------- ---------
Total assets ......................................................................... $ 496,498 $ 501,649
========= =========
LIABILITIES AND STOCKHOLDER'S 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 .................................................................. 11,634 13,535
Deferred revenue .................................................................. 8,567 8,591
--------- ---------
Total current liabilities ............................................................ 23,704 25,415
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
Deferred income taxes ............................................................. 29,135 27,765
--------- ---------
Total liabilities .................................................................... 320,840 327,920
Stockholder's equity:
Common Stock, $0.01 par value, 1,000 shares authorized, 100 shares issued
and outstanding at June 30, 2003 and December 31, 2002 ........................ -- --
Additional paid-in capital ........................................................ 176,870 176.862
Accumulated deficit ............................................................... (1,212) (3,133)
--------- ---------
Total stockholder's equity ........................................................ 175,658 173,729
--------- ---------
Total liabilities and stockholder's equity ........................................... $ 496,498 $ 501,649
========= =========
See accompanying notes to unaudited interim consolidated financial statements.
3
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- --------------------
2003 2002 2003 2002
--------- --------- -------- -------
REVENUES:
Advertising ..................................................$ 38,103 $ 38,686 $70,741 $72,527
Circulation .................................................. 8,236 8,357 16,314 16,538
Job printing and other ....................................... 2,985 3,114 6,026 6,117
--------- -------- ------- -------
Total revenues ............................................ 49,324 50,157 93,081 95,182
OPERATING COSTS AND EXPENSES:
Operating costs .............................................. 22,625 22,716 44,175 44,408
Selling, general and administrative .......................... 13,499 13,646 25,997 26,315
Depreciation and amortization ................................ 3,559 4,283 7,163 8,465
--------- -------- ------- -------
Income from continuing operations ............................... 9,641 9,512 15,746 15,994
Interest expense ................................................ 5,503 6,000 11,096 12,173
Write-off of deferred financing costs ........................... -- -- 161 --
Amortization of deferred financing costs ........................ 284 316 577 643
--------- -------- ------- -------
Income from continuing operations before income taxes
and cumulative effect of change in accounting principle ...... 3,854 3,196 3,912 3,178
Income tax expense (benefit) ................................... 1,551 (85) 1,656 48
--------- -------- ------- -------
Income from continuing operations before cumulative
effect of change in accounting principle ..................... 2,303 3,281 2,256 3,130
Income from discontinued operations, net of tax ................. -- -- -- 4,342
--------- -------- ------- -------
Income before cumulative effect of change
in accounting principle ...................................... 2,303 3,281 2,256 7,472
Cumulative effect of change
in accounting principle, net of tax .......................... -- -- -- (1,449)
--------- -------- ------- -------
Net income ......................................................$ 2,303 $ 3,281 $ 2,256 $ 6,023
========= ======== ======= =======
See accompanying notes to unaudited interim consolidated financial statements.
4
LIBERTY GROUP OPERATING, 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 ......................................................... $ 2,256 $ 6,023
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization....................................... 7,163 8,465
Amortization of deferred financing costs............................ 577 643
Non-cash compensation............................................... 8 53
Deferred taxes...................................................... 1,370 (203)
Write-off of deferred financing costs............................... 161 --
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) (1,713)
Accounts payable.................................................... 294 (161)
Accrued expenses.................................................... (1,901) 716
Deferred revenue.................................................... (24) 23
-------- --------
Net cash provided by operating activities................................. 9,477 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)
Dividends to Parent................................................. (335) --
Payments on long-term liabilities................................... (270) (325)
-------- --------
Net cash used in financing activities..................................... (7,154) (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 OPERATING, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(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 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.
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 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 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 $4,487 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 (benefit) of ($408) and
($275), 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 (benefit) for the three and six months
ended June 30, 2002 has been revised to ($85) and $48, respectively.
6
(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 six months ended June 30, 2002
consisted solely of the gain on sale of these publications.
(4) SUBSEQUENT EVENTS.
On July 25, 2003, the Operating Company and Parent entered into an amendment
to its Amended Credit Facility. The amendment permits Parent 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.
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 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 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.
7
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.
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.
8
The Company believes that net income is the financial measure
calculated and presented in accordance with GAAP that is most directly
comparable to EBITDA. The following table reconciles net income 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 ........................................................ $ 2,303 $ 3,281 $ 2,256 $ 6,023
Depreciation and amortization...................................... 3,559 4,283 7,163 8,465
Write-off of deferred financing costs.............................. - - 161 -
Interest expense................................................... 5,787 6,316 11,673 12,816
Income tax expense (benefit)....................................... 1,551 (85) 1,656 48
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 $0.5 million
to $5.8 million from $6.3 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 $1.1 million to $11.7 million from $12.8 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 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 because LGO decided to postpone amending its Amended Credit Facility.
Income Tax Expense (Benefit). Income tax expense for the quarter ended June
30, 2003 was $1.6 million compared to income tax benefit of ($0.1) million for
the quarter ended June 30, 2002. The increase in income tax expense for the
quarter ended June 30, 2003 was primarily due to higher deferred federal income
tax expense recognized by the Company for the quarter ended June 30, 2003.
Income tax expense for the six months ended June 30, 2003 was $1.7 million
compared to income tax expense of $0.1 million for the six months ended June 30,
2002. The increase of $1.6 million for the six months ended June 30, 2003 was
primarily due to higher deferred federal income tax expense 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.
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.
9
Net Income. The Company reported net income of $2.3 million for the
quarter ended June 30, 2003, compared to net income of $3.3 million for the
quarter ended June 30, 2002. The $1.0 million decrease in net income was
primarily attributable to higher income tax expense of $1.6 million partially
offset by higher income from continuing operations of $0.1 million and lower
interest expense of $0.5 million. The Company recorded net income of $2.3
million for the six months ended June 30, 2003, compared to net income of $6.0
million for the six months ended June 30, 2002. The decrease in net
income was primarily attributable to an increase in income tax expense of $1.6
million, a decrease in income from continuing operations of $0.2 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 financing costs of $0.2 million, partially offset by lower interest
expense of $1.1 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 $1.8 million to
$9.5 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 $0.3 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 $7.2 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 $29.1 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.
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.
10
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 $5.8 million and
$11.7 million, respectively, including non-cash interest of $0.3 million and
$0.6 million for amortization of deferred financing costs. 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 (without giving effect to
$1.5 million of outstanding letters of credit as of such date) was outstanding
under the Amended Credit Facility and the aggregate principal amount of the
Notes outstanding was $180.0 million.
On July 25, 2003, the Operating Company and Parent entered into an amendment
to its Amended Credit Facility. The amendment permits Parent 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, Parent 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 Parent 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 the 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, Parent 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 Parent at
least 30 days prior to the next interest payment date.
On August 1, 2003, Parent elected to issue Senior Debentures in lieu of
paying cash interest on the Senior Discount Debentures that were owned GEI II
and GEI III. In conjunction with its election, Parent 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.
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, 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 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
11
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
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 $180,229 $269,711
======== ======== ======== ======== ======== ======== ========
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.
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.
12
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.
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.
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
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 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)