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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 SEPTEMBER 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
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 November 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 September 30, 2003 (Unaudited)
and December 31, 2002........................................................... 3
Consolidated Statements of Operations for the Three Months and Nine Months Ended
September 30, 2003 and September 30, 2002 (Unaudited)........................... 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2003 and September 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......................... 15
Item 4 Controls and Procedures............................................................ 15
PART II - OTHER INFORMATION
Item 1 Legal Proceedings.................................................................. 15
Item 2 Changes in Securities and Use of Proceeds.......................................... 16
Item 3 Defaults Upon Senior Securities.................................................... 16
Item 4 Submission of Matters to a Vote of Security Holders................................ 16
Item 5 Other Information.................................................................. 16
Item 6 Exhibits and Reports on Form 8-K................................................... 16
Signatures.................................................................................. 17
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
LIBERTY GROUP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
DATA)
ASSETS
Current assets:
Cash and cash equivalents .................................................................... $ 4,300 $ 1,696
Accounts receivable, net of allowance for doubtful accounts of $1,217 and $1,340 at
September 30, 2003 and December 31, 2002, respectively ..................................... 19,670 20,133
Inventory .................................................................................... 2,371 2,639
Prepaid expenses ............................................................................. 1,987 1,361
Deferred income taxes ........................................................................ 1,713 1,713
Other current assets ......................................................................... 269 326
--------- ---------
Total current assets ............................................................................ 30,310 27,868
Property, plant and equipment, net ........................................................... 45,323 48,654
Goodwill ..................................................................................... 185,466 185,447
Intangible assets, net ....................................................................... 227,386 234,317
Deferred financing costs, net ................................................................ 6,324 7,848
Deferred offering costs ...................................................................... -- 1,796
Other assets ................................................................................. 429 395
--------- ---------
Total assets .................................................................................... $ 495,238 $ 506,325
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of Term Loan B ............................................................... $ 744 $ 744
Current portion of long-term liabilities ..................................................... 414 509
Accounts payable ............................................................................. 2,193 2,036
Accrued expenses ............................................................................. 10,298 14,349
Deferred revenue ............................................................................. 8,502 8,591
--------- ---------
Total current liabilities ....................................................................... 22,151 26,229
Long-term liabilities:
Borrowings under revolving credit facility ................................................... 14,938 21,845
Term Loan B, less current portion ............................................................ 71,012 71,756
Long-term liabilities, less current portion .................................................. 888 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) ............................ 5,449 --
Deferred income taxes ........................................................................ 28,061 29,442
Series A 14 3/4% Senior Redeemable Exchangeable Cumulative Preferred Stock, $0.01 par value,
21,000,000 shares authorized, 3,997,485 shares issued and outstanding at September 30, 2003.
Aggregate involuntary liquidation preference $25 plus accrued dividends .................... 102,394 --
Series B 10% Junior Redeemable Cumulative Preferred Stock, $0.01 par value, 250,000 shares
authorized, 115,284 shares issued and outstanding at September 30, 2003 .................... 117,205 --
--------- ---------
Total liabilities .............................................................................. 631,098 418,571
Mandatorily redeemable preferred stock:
Series A 14 3/4% Senior Redeemable Exchangeable Cumulative Preferred Stock, $0.01 par value,
21,000,000 shares authorized, 3,585,978 shares issued and outstanding at December 31, 2002.
Aggregate involuntary liquidation preference $25 plus accrued dividends .................... -- 91,853
Series B 10% Junior Redeemable Cumulative Preferred Stock, $0.01 par value, 250,000 shares
authorized, 107,053 shares issued and outstanding at December 31, 2002 ..................... -- 108,837
--------- ---------
Total mandatorily redeemable preferred stock ................................................... -- 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 September 30, 2003 and December 31, 2002 ............... 22 22
Additional paid-in capital ................................................................... 16,444 16,444
Notes receivable ............................................................................. (957) (970)
Accumulated deficit .......................................................................... (151,188) (128,251)
Treasury stock at cost, 26,344 shares at September 30, 2003 and December 31, 2002 ............ (181) (181)
--------- ---------
Total stockholders' deficit .................................................................. (135,860) (112,936)
--------- ---------
Total liabilities and stockholders' deficit ..................................................... $ 495,238 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
REVENUES:
Advertising .......................................................... $ 35,996 $ 36,787 $ 106,737 $ 109,314
Circulation .......................................................... 8,219 8,447 24,533 24,985
Job printing and other ............................................... 2,953 3,242 8,979 9,359
----------- ----------- ----------- -----------
Total revenues .................................................... 47,168 48,476 140,249 143,658
OPERATING COSTS AND EXPENSES:
Operating costs ...................................................... 22,481 22,798 66,656 67,206
Selling, general and administrative .................................. 13,892 13,498 39,869 39,813
Depreciation and amortization ........................................ 3,485 4,265 10,648 12,730
Loss of sale of assets ............................................... 136 333 156 333
----------- ----------- ----------- -----------
Income from continuing operations ....................................... 7,174 7,582 22,920 23,576
Interest expense - debt ................................................. 8,180 8,301 24,369 25,051
Interest expense - dividends on mandatorily redeemable preferred stock .. 6,500 -- 6,500 --
Interest expense - amortization of deferred financing costs ............. 466 482 1,363 1,445
Impairment of other assets .............................................. -- 223 -- 223
Write-off of deferred offering costs .................................... -- -- 2,221 --
----------- ----------- ----------- -----------
Loss from continuing operations before income taxes and cumulative
effect of change in accounting principle ............................. (7,972) (1,424) (11,533) (3,143)
Income tax expense (benefit) ............................................ (228) 179 (1,005) 919
----------- ----------- ----------- -----------
Loss from continuing operations before cumulative effect of
change in accounting principle ....................................... (7,744) (1,603) (10,528) (4,062)
Income from discontinued operations, net of tax ......................... -- -- -- 4,342
----------- ----------- ----------- -----------
Income (loss) before cumulative effect of change
in accounting principle .............................................. (7,744) (1,603) (10,528) 280
Cumulative effect of change
in accounting principle, net of tax .................................. -- -- -- (1,449)
----------- ----------- ----------- -----------
Net loss ................................................................ (7,744) (1,603) (10,528) (1,169)
Dividends on mandatorily redeemable preferred stock ..................... -- 5,740 12,409 16,700
----------- ----------- ----------- -----------
Net loss available to common stockholders ............................... $ (7,744) $ (7,343) $ (22,937) $ (17,869)
=========== =========== =========== ===========
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 ......................... $ (3.59) $ (3.40) $ (10.62) $ (9.62)
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 .................. $ (3.59) $ (3.40) $ (10.62) $ (8.28)
=========== =========== =========== ===========
See accompanying notes to unaudited interim consolidated financial statements.
4
LIBERTY GROUP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2003 2002
-------- --------
(UNAUDITED)
(IN THOUSANDS)
Cash flows from operating activities:
Net loss ............................................................ $(10,528) $ (1,169)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ....................................... 10,648 12,730
Amortization of deferred financing costs ............................ 1,363 1,445
Accretion of senior discount debentures ............................. 840 6,976
Interest expense due to affiliates on senior discount debentures
(note 8) ........................................................ 5,449 --
Non-cash compensation ............................................... 13 80
Deferred taxes ...................................................... (1,381) 556
Write-off of deferred offering costs ................................ 2,221 --
Loss on sale of assets .............................................. 156 333
Impairment of other assets .......................................... -- 223
Gain from sale of discontinued operations, net of tax ............... -- (4,342)
Cumulative effect of change in accounting principle, net of tax ..... -- 1,449
Dividends on mandatorily redeemable preferred stock ................. 6,500 --
Changes in assets and liabilities, net of dispositions:
Accounts receivable, net ............................................ 463 713
Inventory ........................................................... 268 316
Prepaid expenses and other assets ................................... (603) (758)
Deferred offering costs ............................................. (264) (1,459)
Accounts payable .................................................... 157 (218)
Accrued expenses .................................................... (4,051) (1,449)
Deferred revenue .................................................... (89) (139)
-------- --------
Net cash provided by operating activities ................................. 11,162 15,287
-------- --------
Cash flow from investing activities:
Purchases of property, plant and equipment .......................... (1,566) (1,673)
Proceeds from sale of publications and assets ....................... 1,050 27,021
Purchase of publication ............................................. (45) --
-------- --------
Net cash provided by (used in) investing activities ...................... (561) 25,348
-------- --------
Cash flows from financing activities:
Net repayments under amended credit facility ........................ (7,651) (36,950)
Payments on long-term liabilities ................................... (346) (426)
-------- --------
Net cash used in financing activities .................................... (7,997) (37,376)
-------- --------
Net increase in cash and cash equivalents ................................ 2,604 3,259
Cash and cash equivalents, at beginning of period ........................ 1,696 1,474
-------- --------
Cash and cash equivalents, at end of period .............................. $ 4,300 $ 4,733
======== ========
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 its subsidiaries
are a leading U.S. publisher of local newspapers and related publications that
are the dominant source of local news and print advertising in their markets.
The Company (as defined below) owns and operates 302 publications located in 17
states that reach approximately 2.37 million people on a weekly basis. The
majority of the Company's paid daily newspapers have been published for more
than 100 years and are typically the only paid daily newspapers of general
circulation in their respective non-metropolitan markets. The Company's
newspapers generally face limited competition as a result of operating in
markets that are distantly located from large metropolitan areas and that can
typically support only one primary newspaper, with the exception of the
Company's publications in the Chicago suburban market. The Company has
strategically clustered its publications in geographically diverse,
non-metropolitan markets in the Midwest, Northeast and Western United States and
in the Chicago suburban market, which limits its exposure to economic conditions
in any single market or region. No single display advertiser accounted for
greater than 1% of the Company's total revenues during the three and nine months
ended September 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
110 free circulation and "total market coverage," or TMC, publications with
limited or no news or editorial content that it distributes free of charge and
that generally provide 100% penetration in their areas of distribution. The
Company believes that its publications are generally the most cost-effective
method for its advertisers to reach substantially all of the households in their
markets. Unlike large metropolitan newspapers, the Company derives a majority of
its revenues from local display advertising rather than classified and national
advertising, which are generally more sensitive to economic conditions.
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 September 30, 2003 and for the three months and nine months
ended September 30, 2003 and September 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 September 30, 2003, LGP had 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net loss available to common stockholders, as reported ... $ (7,744) $ (7,343) $(22,937) $(17,869)
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) (6) (6)
-------- -------- -------- --------
Pro forma net loss available to common stockholders ...... $ (7,746) $ (7,345) $(22,943) $(17,875)
======== ======== ======== ========
Net loss per share:
Basic and diluted - as reported .......................... $ (3.59) $ (3.40) $ (10.62) $ (8.28)
======== ======== ======== ========
Basic and diluted - pro forma ............................ $ (3.59) $ (3.40) $ (10.63) $ (8.28)
======== ======== ======== ========
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 nine months
ended September 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 $4,469 and $13,342, respectively, for
the three and nine months ended September 30, 2002. These amounts should have
been $4,265 and $12,730, respectively, for the three and nine months ended
September 30, 2002.
The Company previously reported income tax expense of $97 and $674,
respectively, for the three and nine months ended September 30, 2002. In
connection with the change in depreciation and amortization expense discussed
above, the Company's income tax expense for the three and nine months ended
September 30, 2002 has been revised to $179 and $919, 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 nine months ended September 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 nine months ended
September 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 nine months ended September
30, 2003, the weighted-average number of shares outstanding for those periods
would have potentially been diluted by 24,125 and 25,700 stock options
outstanding during the respective periods, and had LGP reported net income for
the three and nine months ended September 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 loss per share
computations is as follows (in thousands, except share and per share data):
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------
2003 2002
------------------------------------------ -----------------------------------------
PER PER
LOSS SHARES SHARE LOSS SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
Loss from continuing
operations ............... $ (7,744) $ (1,603)
Less: mandatorily
redeemable preferred stock
dividends ................... $ -- $ (5,740)
Basic and diluted loss
from continuing
operations available
to common stockholders ... $ (7,744) 2,158,833 $ (3.59) $ (7,343) 2,158,833 $(3.40)
=========== =========== ======= =========== =========== ======
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------
2003 2002
------------------------------------------ -----------------------------------------
PER PER
LOSS SHARES SHARE LOSS SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
Loss from continuing
operations ............... $ (10,528) $ (4,062)
Less: mandatorily
redeemable preferred stock
dividends ................... $ (12,409) $ (16,700)
Basic and diluted loss
from continuing
operations available
to common stockholders ... $ (22,937) 2,158,833 $(10.62) $ (20,762) 2,158,833 $(9.62)
=========== =========== ======= =========== =========== ======
(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. Accordingly, the Company's
mandatorily redeemable preferred stock has been classified as a liability on the
balance sheet as of September 30, 2003. The $6,500 of dividends on the
mandatorily redeemable preferred stock for the three months ended September 30,
2003 have been included in operations as additional interest expense for the
three and nine-month periods ended September 30, 2003, respectively. In periods
prior to July 1, 2003, dividends on mandatorily redeemable preferred stock were
reported as an adjustment to net loss to arrive at net loss available to common
stockholders.
(8) SENIOR DISCOUNT DEBENTURES TO AFFILIATES
On July 25, 2003, the Operating Company and LGP entered into an amendment to
the Amended Credit Facility. The amendment permits LGP to issue debt in lieu of
paying cash for 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 by 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, including the additional Senior Debentures, as of September 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 302 publications located in 17
states that reach approximately 2.37 million people on a weekly basis. The
majority of the Company's paid daily newspapers have been published for more
than 100 years and are typically the only paid daily newspapers of general
circulation in their respective non-metropolitan markets. The Company generates
revenues from advertising, circulation and job printing. Advertising revenue is
recognized upon publication of the advertisements. Circulation revenue, which is
billed to customers at the beginning of the subscription period, is recognized
on a straight-line basis over the term of the related subscription. The revenue
for job printing is recognized upon delivery. The Company's operating costs
consist primarily of newsprint, labor and delivery costs. The Company's selling,
general and administrative expenses consist primarily of labor costs.
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
Total Revenues. Total revenues for the quarter ended September 30, 2003
decreased by $1.3 million, or 2.7%, to $47.2 million from $48.5 million for the
quarter ended September 30, 2002. The decrease in total revenues was comprised
of a $0.8 million, or 2.2%, decrease in advertising revenues, a $0.2 million, or
2.7%, decrease in circulation revenue, and a $0.3 million, or 8.9%, decrease in
job printing and other revenue. In the Company's community newspaper markets,
advertising revenues decreased by $0.5 million, primarily due to lower local
display and classified advertising; which were partially offset by increases in
preprint and national advertising. Outside of the community newspaper markets,
the Company's advertising revenues declined by $0.3 million, primarily due to
lower classified and display revenue in the Chicago suburban market of $0.2
million and a reduction in non-newspaper related revenues of $0.1 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 primarily due to lower commercial volume in the Chicago
suburban market. Total revenues for the nine months ended September 30, 2003
decreased by $3.5 million, or 2.4%, to $140.2 million from $143.7 million for
the nine months ended September 30, 2002. The decrease in total revenues was
comprised of a $2.6 million, or 2.4%, decrease in advertising revenues, a $0.5
million, or 1.8%, decrease in circulation revenue, and a $0.4 million, or 4.1%,
decrease in job printing and other revenue. In the Company's community newspaper
markets, advertising revenues decreased by $0.4 million, primarily due to lower
local display and classified advertising, which were partially offset by
increases in preprint and national advertising. Outside of the community
newspaper markets, the Company's advertising revenues declined by $2.2 million
primarily due to lower classified and display revenue in the Chicago suburban
market of $1.5 million and a reduction in non-newspaper related revenues of $0.7
million. The decrease in circulation revenue resulted primarily from a reduction
in subscriber levels in certain community newspaper markets. The decrease in job
printing and other revenue was primarily due to lower commercial volume in the
Chicago suburban market.
9
Operating Costs. Operating costs for the quarter ended September 30, 2003
decreased by $0.3 million, or 1.4%, to $22.5 million from $22.8 million for the
quarter ended September 30, 2002. The decrease in operating costs was primarily
due to reductions in labor of $0.1 million and external services of $0.1
million. Operating costs for the nine months ended September 30, 2003 decreased
by $0.5 million, or 0.8%, to $66.7 million from $67.2 million for the nine
months ended September 30, 2002. The decrease in operating costs was primarily
due to reductions in labor of $0.1 million, external services of $0.2 million
and newsprint costs of $0.2 million.
Selling, General and Administrative. Selling, general and administrative
expenses for the quarter ended September 30, 2003 increased by $0.4 million, or
2.9%, to $13.9 million from $13.5 million for the quarter ended September 30,
2002. The increase in selling, general and administrative expenses was primarily
due to higher insurance costs of $0.2 million. Selling, general and
administrative expenses for the nine months ended September 30, 2003 increased
by $0.1 million, or 0.1%, to $39.9 million from $39.8 million for the nine
months ended September 30, 2002. The increase in selling, general, and
administrative expenses was primarily due to higher insurance costs of $0.2
million and higher promotion expense of $0.1 million, partially offset by lower
compensation of $0.1 million due to a reduction in performance based incentive
compensation.
Depreciation and Amortization. Depreciation and amortization expense for the
quarter ended September 30, 2003 decreased by $0.8 million to $3.5 million from
$4.3 million for the quarter ended September 30, 2002. During the quarter ended
September 30, 2003, the Company recorded $2.3 million in amortization of
intangible assets, compared with $3.2 million for the quarter ended September
30, 2002. The decrease in amortization is primarily due to a decrease in
non-compete intangible amortization of $0.8 million resulting from certain
non-compete assets that are now fully amortized. Depreciation and amortization
expense for the nine months ended September 30, 2003 decreased by $2.1 million
to $10.6 million from $12.7 million for the nine months ended September 30,
2002. For the nine months ended September 30, 2003, the Company recorded $7.0
million in amortization of intangible assets, compared with $8.8 million for the
nine months ended September 30, 2002. The decrease in amortization is primarily
due to a decrease in non-compete intangible amortization of $1.8 million
resulting from certain non-compete assets that are now fully amortized.
Income from Continuing Operations. Income from continuing operations for the
quarter ended September 30, 2003 decreased by $0.4 million, or 5.4%, to $7.2
million from $7.6 million for the quarter ended September 30, 2002. The decrease
in income from continuing operations during the quarter ended September 30, 2003
was primarily due to higher selling, general and administrative expense of $0.4
million and lower revenues of $1.3 million, partially offset by lower
depreciation and amortization expense of $0.8 million, lower loss on sale of
assets of $0.2 million and lower operating costs of $0.3 million. Income from
continuing operations for the nine months ended September 30, 2003 decreased by
$0.7 million, or 2.8%, to $22.9 million from $23.6 million for the nine months
ended September 30, 2002. The decrease was primarily due to lower revenues of
$3.4 million, partially offset by lower depreciation and amortization expense of
$2.1 million and lower operating costs of $0.6 million.
EBITDA. EBITDA (which is defined as earnings before interest, taxes,
depreciation and amortization) for the quarter ended September 30, 2003
decreased by $0.9 million, or 8.3%, to $10.7 million from $11.6 million for the
quarter ended September 30, 2002. The decrease was primarily due to lower
revenues of $1.3 million and higher selling, general and administrative costs of
$0.4 million, partially offset by lower operating costs of $0.3 million, lower
losses on sales of assets of $0.2 million, and the inclusion in 2002 of a $0.2
million impairment of other assets. EBITDA for the nine months ended September
30, 2003 decreased by $7.7 million, or 19.6%, to $31.3 million, from $39.0
million for the nine months ended September 30, 2002. The decrease was primarily
due to lower revenues of $3.4 million and a write-off of deferred offering costs
of $2.2 million, partially offset by lower operating costs of $0.6 million. The
decrease in EBITDA was further attributable to the inclusion in 2002 of an
after-tax gain of $4.3 million on the Disposition (defined below), partially
offset by the inclusion in 2002 of both cumulative effect of change in
accounting principle related to goodwill and masthead impairment losses of $1.4
million and the impairment of other assets of $0.2 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 the Company's 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.
The Company believes that net loss is the financial measure calculated and
presented in accordance with GAAP that is most directly comparable to EBITDA.
The following table reconciles net loss to EBITDA for the three and nine months
ended September 30, 2003 and 2002:
10
THREE MONTHS ENDED SEPT 30, NINE MONTHS ENDED SEPT 30,
--------------------------- --------------------------
2003 2002 2003 2002
------------ ------------- ------------ ------------
Net loss ............................... $ (7,744) $ (1,603) $(10,528) $ (1,169)
Depreciation and amortization ....... 3,485 4,265 10,648 12,730
Interest expense .................... 15,146 8,783 32,232 26,496
Income tax expense (benefit) ........ (228) 179 (1,005) 919
-------- -------- -------- --------
EBITDA ................................. $ 10,659 $ 11,624 $ 31,347 $ 38,976
======== ======== ======== ========
Interest Expense. Interest expense for the quarter ended September 30, 2003
increased by $6.3 million to $15.1 million from $8.8 million for the quarter
ended September 30, 2002. The increase in interest expense was due primarily to
the reclassification of $6.5 million of dividends on mandatorily redeemable
preferred stock as additional interest expense during the quarter ended
September 30, 2003 in accordance with SFAS No. 150, partially offset by lower
interest rates and less outstanding indebtedness during the three months ended
September 30, 2003 as compared to the three months ended September 30, 2002.
Interest expense for the nine months ended September 30, 2003 increased by $5.7
million to $32.2 million from $26.5 million for the nine months ended September
30, 2002. The increase in interest expense was due primarily to the
reclassification of $6.5 million of dividends on mandatorily redeemable
preferred stock as additional interest expense during the quarter ended
September 30, 2003 in accordance with SFAS No. 150, partially offset by lower
interest rates and less outstanding indebtedness during the nine months ended
September 30, 2003 as compared to the nine months ended September 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 benefit for the quarter ended
September 30, 2003 was $0.2 million compared to income tax expense of $0.2
million for the quarter ended September 30, 2002. The decrease of $0.4 million
for the quarter ended September 30, 2003 was primarily due to an increase in
deferred federal income tax benefit recognized by the Company for the quarter
ended September 30, 2003. Income tax benefit for the nine months ended September
30, 2003 was $1.0 million compared to income tax expense of $0.9 million for the
nine months ended September 30, 2002. The decrease of $1.9 million for the nine
months ended September 30, 2003 was primarily due to an increase in deferred
federal income tax benefit recognized by the Company for the nine months ended
September 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 nine months ended September 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.
Net Loss. The Company reported a net loss of $7.7 million for the quarter
ended September 30, 2003, compared to a net loss of $1.6 million for the quarter
ended September 30, 2002. The increase in net loss was primarily attributable to
a decrease in income from continuing operations of $0.4 million, the inclusion
of $6.5 million of dividends on mandatorily redeemable preferred stock as
additional interest expense in accordance with SFAS No. 150, partially offset by
lower income tax expense of $0.4 million, lower other interest expense of $0.1
and the inclusion in 2002 of the impairment of other assets of $0.2 million. The
Company recorded a net loss of $10.5 million for the nine months ended September
30, 2003, compared to a net loss of $1.2 million for the nine months ended
September 30, 2002. The increase in net loss was primarily attributable to a
decrease in income from continuing operations of $0.7 million, the inclusion of
$6.5 million of dividends on mandatorily redeemable preferred stock as
additional interest expense in accordance with SFAS No. 150 and a write-off of
deferred offering costs of $2.2 million, partially offset by lower other
11
interest expense of $0.8 million and lower income tax expense of $1.9 million.
The increase in net loss was further attributable to the inclusion in 2002 of
the after-tax gain of $4.3 million on the Disposition, partially offset by the
inclusion in 2002 of both the cumulative effect of change in accounting
principle related to goodwill and masthead impairment losses in the amount of
$1.4 million and the impairment of other assets of $0.2 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 nine months ended September 30, 2003 decreased by $4.1
million to $11.2 million compared with net cash provided by operating activities
of $15.3 million for the nine months ended September 30, 2002. The decrease is
primarily due to a decrease in income from continuing operations before
depreciation and amortization of $2.7 million. The additional $1.4 million
decrease was primarily attributable to a decrease in accrued expenses, partially
offset by a reduction in deferred offering costs.
Cash flows from investing activities. Net cash used in investing activities
was $0.6 million for the nine months ended September 30, 2003 compared to net
cash provided by investing activities of $25.3 million for the nine months ended
September 30, 2002. The decrease of $25.9 million in cash flows was primarily
due to the $26.5 million of proceeds from the Disposition in 2002, partially
offset by proceeds from the sale of assets in 2003. The Company's capital
expenditures consisted of the purchase of machinery, equipment, furniture and
fixtures relating to its publishing operations. For the three months and nine
months ended September 30, 2003 capital expenditures were $0.6 million and $1.6
million, or 1.1% and 1.3% of revenues, respectively. The Company has no material
commitments for capital expenditures. The Company will continue to pursue its
strategy of opportunistically acquiring community newspapers in contiguous
markets and new markets.
Cash flows from financing activities. Net cash used in financing activities
was $8.0 million for the nine months ended September 30, 2003 compared to net
cash used in financing activities of $37.4 million for the nine months ended
September 30, 2002. The decrease of $29.4 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 nine
months ended September 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.
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
12
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 September 30, 2003, the Term Loan B requires principal
payments of $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 nine months ended September 30, 2003 was $15.1 million
and $32.2 million, respectively, including non-cash interest of $2.1 million and
$6.3 million, respectively, with respect to the Senior Discount Debentures and
Senior Debentures, amortization of deferred financing costs of $0.5 million and
$1.4 million, respectively, and dividends on mandatorily redeemable preferred
stock of $6.5 million and $6.5 million, respectively. 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 September 30, 2003, approximately $86.7 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 (defined below) was $89.0 million and the
aggregate principal amount of the Senior Debentures (defined below) was $5.4
million.
On July 25, 2003, the Operating Company and LGP entered into an amendment to
the Amended Credit Facility. The amendment permits LGP to issue debt in lieu of
paying cash for 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 were owned by 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 September 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
13
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, excluding interest, as of September 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 ............ -- -- -- -- -- 5,449 5,449
Term Loan B .......................... -- 744 26,862 35,320 8,830 -- 71,756
Revolving credit facility ............ -- -- 14,938 -- -- -- 14,938
Non-compete payments ................. 24 282 282 177 177 229 1,171
Real estate lease payments ........... 91 214 92 43 7 -- 447
Finder fee payments .................. 125 -- -- -- -- -- 125
Other ................................ 1 5 -- -- -- -- 6
-------- -------- -------- -------- -------- -------- --------
$ 241 $ 1,245 $ 42,174 $ 35,540 $ 9,014 $274,678 $362,892
======== ======== ======== ======== ======== ======== ========
14
RELATED PARTY TRANSACTIONS
The Company paid $370,000 in management fees for each of the quarters ended
September 30, 2003 and 2002 to Leonard Green & Partners, L.P. The Company paid
$1,110,000 in management fees for each of the nine months ended September 30,
2003 and 2002 to Leonard Green & Partners, L.P. As of September 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 Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources 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 September 30, 2003, Operating Company had borrowings
outstanding of $14.9 million under the revolving credit facility (without giving
effect to $1.5 million of outstanding letters of credit as of such date) and
$71.8 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 September 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 September 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.
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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
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: November 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