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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: 333-46959
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 November 14, 2003: 100 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............................................................................. 7
Item 3 Quantitative and Qualitative Disclosures about Market Risk............................... 13
Item 4 Controls and Procedures.................................................................. 13
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........................................................................ 14
Item 6 Exhibits and Reports on Form 8-K......................................................... 14
Signatures.......................................................................................... 14
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
LIBERTY GROUP OPERATING, 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............................................................ 3,884 4,968
Other assets............................................................................. 429 395
---------- ----------
Total assets................................................................................ $ 492,798 $ 501,649
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
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......................................................................... 9,135 13,535
Deferred revenue......................................................................... 8,502 8,591
---------- ----------
Total current liabilities................................................................... 20,988 25,415
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
Deferred income taxes.................................................................... 29,643 27,765
---------- ----------
Total liabilities........................................................................... 317,469 327,920
Stockholder's equity:
Common Stock, $0.01 par value, 1,000 shares authorized, 100 shares issued
and outstanding at September 30, 2003 and December 31, 2002.......................... -- --
Additional paid-in capital............................................................... 176,875 176,862
Accumulated deficit...................................................................... (1,546) (3,133)
---------- ----------
Total stockholder's equity............................................................... 175,329 173,729
---------- ----------
Total liabilities and stockholder's equity.................................................. $ 492,798 $ 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 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 on sale of assets ........................................ 136 333 156 333
--------- --------- --------- ---------
Income from continuing operations ................................ 7,174 7,582 22,920 23,576
Interest expense - debt .......................................... 5,449 5,903 16,545 18,076
Interest expense - amortization of deferred financing costs ...... 306 322 883 965
Impairment of other assets ....................................... -- 223 -- 223
Write-off of deferred financing costs ............................ -- -- 161 --
--------- --------- --------- ---------
Income from continuing operations before income taxes
and cumulative effect of change in accounting principle ....... 1,419 1,134 5,331 4,312
Income tax expense (benefit) .................................... 600 (264) 2,256 (216)
--------- --------- --------- ---------
Income from continuing operations before cumulative
effect of change in accounting principle ...................... 819 1,398 3,075 4,528
Income from discontinued operations, net of tax .................. -- -- -- 4,342
--------- --------- --------- ---------
Income before cumulative effect of change
in accounting principle ....................................... 819 1,398 3,075 8,870
Cumulative effect of change
in accounting principle, net of tax ........................... -- -- -- (1,449)
--------- --------- --------- ---------
Net income ....................................................... $ 819 $ 1,398 $ 3,075 $ 7,421
========= ========= ========= =========
See accompanying notes to unaudited interim consolidated financial statements.
4
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2003 2002
-------- --------
(UNAUDITED)
(IN THOUSANDS)
Cash flows from operating activities:
Net income .................................................... $ 3,075 $ 7,421
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................. 10,648 12,730
Amortization of deferred financing costs ...................... 883 965
Non-cash compensation ......................................... 13 80
Deferred taxes ................................................ 1,878 (577)
Write-off of deferred financing costs ......................... 161 --
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
Changes in assets and liabilities, net of dispositions:
Accounts receivable, net ...................................... 463 713
Inventory ..................................................... 268 316
Prepaid expenses and other assets ............................. (603) (756)
Accounts payable .............................................. 157 (218)
Accrued expenses .............................................. (4,360) (2,668)
Deferred revenue .............................................. (89) (139)
-------- --------
Net cash provided by operating activities ........................... 12,650 15,530
-------- --------
Cash flow from investing activities:
Purchases of property, plant and equipment .................... (1,566) (1,673)
Proceeds from sale of publications and fixed 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)
Dividends to Parent ........................................... (1,488) (243)
Payments on long-term liabilities ............................. (346) (426)
-------- --------
Net cash used in financing activities ............................... (9,485) (37,619)
-------- --------
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 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 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.
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 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
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 $4,469 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 benefit of $495 and $770,
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 benefit for the three and nine months ended
September 30, 2002 has been revised to $264 and $216, 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 nine months ended September 30, 2002
consisted solely of the gain on sale of these publications.
(4) SENIOR DISCOUNT DEBENTURES TO AFFILIATES
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 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.
7
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 increases in 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 financing
costs of $0.2 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.
8
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 income to EBITDA for the three and nine
months ended September 30, 2003 and 2002:
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
decreased by $0.4 million to $5.8 million from $6.2 million for the quarter
ended September 30, 2002. The decrease in interest expense was due primarily to
lower interest rates and less outstanding indebtedness during the quarter ended
September 30, 2003 as compared to the quarter ended September 30, 2003. Interest
expense for the nine months ended September 30, 2003 decreased by $1.6 million
to $17.4 million from $19.0 million for the nine months ended September 30,
2002. The decrease in interest expense was due primarily to 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 Financing Costs. As of March 31, 2003, LGO incurred
$0.2 million in legal and bank fees associated with a proposed amendment to its
Amended Credit Facility (as defined below). 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
September 30, 2003 was $0.6 million compared to income tax benefit of ($0.3)
million for the quarter ended September 30, 2002. The increase of $0.9 million
for the quarter ended September 30, 2003 was primarily due to higher deferred
federal income tax expense recognized by the Company for the quarter ended
September 30, 2003. Income tax expense for the nine months ended September 30,
2003 was $2.3 million compared to an income tax benefit of ($0.2) million for
the nine months ended September 30, 2002. The increase of $2.5 million for the
nine months ended September 30, 2003 was primarily due to an increase in
deferred federal income tax expense 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 Income. The Company reported net income of $0.8 million for the quarter
ended September 30, 2003, compared to net income of $1.4 million for the quarter
ended September 30, 2002. The $0.6 million decrease in net income was primarily
attributable to lower income from continuing operations of $0.4 million and
higher income tax expense of $0.9 million, partially offset by lower interest
expense of $0.5 million and the inclusion in 2002 of an impairment expense of
$0.2 million. The Company recorded net income of $3.0 million for the nine
months ended September 30, 2003, compared to net income of $7.4 million for the
nine months ended September 30, 2002. The decrease in net income was primarily
attributable to an increase in income tax expense of $2.5 million, a decrease in
income from continuing operations of $0.7 million, a write-off of deferred
financing costs 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 inclusion in 2002 of
the cumulative effect of change in accounting principle related to goodwill and
masthead impairment losses in the amount of $1.4 million, lower interest expense
of $1.6 million and the inclusion in 2002 of an impairment expense of $0.2
million.
9
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 to $12.7
million compared with net cash provided by operating activities of $15.5 million
for the nine months ended September 30, 2002. The decrease of $2.8 million in
cash flows was primarily due to a decrease in income from continuing operations
before depreciation and amortization of $2.7 million.
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 $9.5 million for the nine months ended September 30, 2003 compared to net
cash used in financing activities of $37.6 million for the nine months ended
September 30, 2002. The decrease of $28.1 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 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
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
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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 stockholder's equity, tangible equity and cash flow. Interest
expense for the three and nine months ended September 30, 2003 was $5.8 million
and $17.4 million, respectively, including amortization of deferred financing
costs of $0.3 million and $0.9 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), 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 the Amended Credit Facility. The amendment permits Parent 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, 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 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, 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 by 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
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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
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 $ 180,229 $ 268,443
====== ======== ======== ======== ======= ========= =========
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.
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.
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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.
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 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)
14