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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 AND 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For The Fiscal Year Ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Transition Period From __ To__
Commission File Number: 333-46959
LIBERTY GROUP OPERATING, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 36-4197636
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3000 DUNDEE ROAD, SUITE 203 60062
NORTHBROOK, ILLINOIS (Zip Code)
(Address of Principal Offices)
Registrant's telephone number, including area code: (847) 272-2244
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2): Yes [ ] No [X]
The number of shares outstanding of the registrant's common stock, par
value $0.01 per share, as of March 30, 2004 was 100, all of which is owned by
the parent company of the registrant. There is no public market for the common
stock.
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TABLE OF CONTENTS
PART I
Disclosure Regarding Forward-Looking Statements...................................................................... 3
Item 1. Business................................................................................................. 3
Item 2. Properties............................................................................................... 8
Item 3. Legal Proceedings........................................................................................ 8
Item 4. Submission of Matters to a Vote of Security Holders...................................................... 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................... 9
Item 6. Selected Financial Data.................................................................................. 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................................... 21
Item 8. Financial Statements and Supplementary Data.............................................................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 22
Item 9A. Controls and Procedures.................................................................................. 22
PART III
Item 10. Directors, Executive Officers and Other Key Employees of the Registrant.................................. 22
Item 11. Executive Compensation................................................................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters........... 26
Item 13. Certain Relationships and Related Transactions........................................................... 26
Item 14. Principal Accountant Fees and Services................................................................... 26
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................... 27
(a) 1. Consolidated Financial Statements.................................................................... 27
2. Financial Statement Schedules........................................................................ 27
(b) Reports on Form 8-K...................................................................................... 27
(c) Exhibits................................................................................................. 27
2
PART I
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains certain "forward-looking statements"
(as defined in Section 21E of the Securities Exchange Act of 1934) 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.
See "Risk Factors" beginning on page 18 for a discussion of the above factors
and other such factors. For purposes of this annual report on Form 10-K, 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.
ITEM 1. BUSINESS
OVERVIEW
Liberty Group Operating, Inc. ("Operating Company," "LGO" or
"Registrant") is a Delaware corporation formed on January 27, 1998 for the
purpose of acquiring a portion of the daily and weekly newspapers owned by
American Publishing Company or its subsidiaries ("APC"), a wholly owned
subsidiary of Hollinger International Inc. ("Hollinger"). LGO is a wholly owned
subsidiary of Liberty Group Publishing, Inc. ("Parent" or "LGP"). The
consolidated financial statements include the accounts of Operating Company and
its 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. As of December 31, 2003, the Company owns and operates 301
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 and Northeast United States and in the
Chicago suburban market, which limits its exposure to economic conditions in any
single market or region.
The Company's portfolio of publications is comprised of 65 paid daily
newspapers and 127 paid non-daily newspapers. In addition, the Company publishes
109 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.
INDUSTRY OVERVIEW
Newspaper publishing is the oldest and largest segment of the media
industry. Although there are several major national newspaper companies, the
Company believes that the newspaper publishing industry in the United States is
highly fragmented. Most smaller publications are owned and operated by
individuals whose newspaper holdings and financial resources are generally
limited. Further, the Company believes that relatively few daily newspapers have
been established in recent years due to the high cost of
3
starting a daily newspaper operation and building a franchise identity.
Moreover, most community markets cannot sustain more than one newspaper.
The operating strategy of many newspaper companies has been impacted by
the widespread use of the internet. Most newspapers have internet editions that
deliver the same news and editorial content at no cost to registered users.
However, the Company believes that most customers prefer their newspapers in
printed form.
Advertising revenue is the largest component of a newspaper's total
revenues. Advertising rates at newspapers, free circulars and TMC publications
are usually based on market size, circulation, penetration, demographics and
alternative advertising media available in the marketplace. Readers of
newspapers tend to be more highly educated and have higher incomes than
non-newspaper readers, making the newspaper industry very appealing to
advertisers attempting to reach this demographic group. The Company believes
that newspapers are the most effective medium for retail advertising, which
emphasizes the price of goods, in contrast to broadcast and cable television,
which are generally used for image advertising, or radio, which is usually used
to recall images or brands in the minds of listeners. The Company also believes
that metropolitan and community newspapers represent the dominant medium for
local advertising due to the importance of the information such newspapers
contain in the communities they serve. While circulation revenue is not as
significant as advertising revenue, circulation trends can affect the decisions
of advertisers and advertising rates.
Newspaper advertising revenues are cyclical and are generally affected
by changes in national and regional economic conditions. Classified advertising
is the most sensitive to economic cycles because it is driven primarily by the
demand for employment, real estate transactions and automotive sales.
OVERVIEW OF OPERATIONS
GENERAL
Local Market Focus. As a result of the Company's strategic focus on
local content that emphasizes local names and faces, including youth sports,
community events, business, politics and entertainment, the Company believes
that its newspapers generate reader loyalty, perpetuate their franchise value
and represent the most effective means for local advertisers to reach potential
customers. Each of the Company's publications is tailored to its market to
provide local content that radio, television and large metropolitan newspapers
are generally unable to provide on a cost-effective basis because of their
broader geographic coverage. The Company's publications have several advantages
over metropolitan daily publications, including a lower cost structure, the
ability to publish only on their most profitable days (e.g., midweek and one
weekend day) and the ability to limit expensive investments in wire services and
syndicated feature material. In addition, the Company has relatively low
exposure to fluctuations in newsprint prices due to much lower page counts than
large metropolitan newspapers, with newsprint expense related to its
publications comprising 5% of its total advertising and circulation revenues in
2003.
Approximately 74% of the Company's advertising revenues were derived
from display advertising in 2003 from a broad base of local advertisers. The
Company believes that local display advertising revenues at its publications
tend to be more stable than the advertising revenues of large metropolitan
newspapers because local businesses generally have fewer effective advertising
channels through which to reach their customers. The Company also is
significantly less reliant than large metropolitan newspapers upon classified
advertising, particularly "help wanted," real estate and automotive sections,
and national advertising, which are generally more sensitive to economic
conditions.
Strategic Regional Clustering And Strict Cost Controls. The Company has
acquired and assembled a network of strategically clustered newspapers in
geographically diverse regions. Strategic clustering enables it to realize
operating efficiencies and economic synergies, such as the sharing of
management, accounting and production functions within clusters. The Company
believes that strategic clustering enables its newspapers to generate higher
operating margins than they would otherwise be able to achieve on a stand-alone
basis. In addition, the Company has increased operating cash flows at acquired
and existing newspapers through cost reductions, including labor, page width and
page count reductions, as well as the implementation of revenue-generation and
expense-control best practices throughout the Company.
Business Strategy. The Company continuously seeks to utilize its
dominant distribution capability in the markets the Company serves to expand its
advertising base by targeting new advertisers for its local newspapers and
related publications and introducing new products that attract businesses that
do not typically advertise in its newspapers. These products include shopping
and visitors' guides and niche publications and inserts covering subjects such
as children and parenting, employment, health, senior living and real estate,
that are of interest to residents of particular geographic areas and members of
particular demographic groups. In addition, the
4
Company shares advertising concepts throughout its network of
publications, enabling its advertising managers and publishers to implement
advertising products and sales strategies that have already been successful in
other markets that the Company serves.
The Company also seeks to continue to improve margins through strategic
regional clustering and strict cost controls. The Company has achieved
significant operating efficiencies within its network of strategically clustered
publications, and the Company believes that, as the Company continues to acquire
and integrate additional publications into its network, the Company will be able
to realize incremental operating efficiencies and synergies that will position
it to continue to improve its operating margins. The Company intends to continue
to focus on controlling costs, with a particular emphasis on managing staffing
requirements, leveraging production equipment to improve operating efficiencies
and reducing newsprint consumption.
STRATEGIC REGIONAL CLUSTERS
The Company has acquired, and intends to continue to acquire, community
publications that the Company can integrate into its network of existing
clusters or that can serve as the basis for creating new clusters. Strategic
clustering of its publications enables the Company to realize operating
efficiencies and economic synergies, such as the sharing of management,
accounting and production functions within clusters. Strategic clustering also
enables it to maximize revenues through the cross-selling of advertising among
contiguous newspaper markets. As a result of strategic clustering, the Company
believes that its newspapers are able to obtain higher operating margins than
they would otherwise be able to achieve on a stand-alone basis.
The following chart sets forth information for the Company's
publications by strategic regional clusters as of December 31, 2003. For
purposes of the chart, clusters consist of five or more publications within a
reasonably close proximity to each other.
NUMBER OF NEWSPAPERS AND OTHER PUBLICATIONS
---------------------------------------------------------
FREE
PAID PAID CIRCULATION/TMC
STRATEGIC REGIONAL CLUSTERS DAILY NON-DAILY PUBLICATIONS TOTAL
- ------------------------------------------------------ ----- --------- --------------- -----
Baton Rouge region (Louisiana)........................ 0 4 3 7
Grand Forks region (North Dakota/Minnesota)........... 2 2 2 6
Honesdale region (Pennsylvania)....................... 1 2 2 5
Iowa.................................................. 1 4 4 9
Kansas City region (Kansas)........................... 2 3 2 7
Lake of the Ozarks region (Missouri).................. 3 4 9 16
Northern Missouri..................................... 5 1 6 12
Southern Illinois..................................... 6 9 5 20
Southern Michigan..................................... 3 5 7 15
Southwestern Louisiana................................ 3 1 2 6
Southwestern Minnesota................................ 0 7 4 11
Southwestern Missouri................................. 2 3 6 11
Southwestern New York/Northwestern Pennsylvania....... 4 3 12 19
Suburban Chicago...................................... 0 38 0 38
*Twin Falls region (Idaho)............................ 2 6 2 10
Western Illinois...................................... 5 6 8 19
Wichita region (Kansas)............................... 6 4 7 17
- -----------------------------
* On February 3, 2004, the Company acquired the daily newspaper in
Corning, New York, and Freeport, Illinois and received cash
consideration from Lee Enterprises, Inc. in exchange for the Company's
daily newspapers in Elko, Nevada and Burley, Idaho, as well as its
weeklies in Hailey, Idaho and Jerome, Idaho (which comprised all of the
Twin Falls region).
In 2003, no single strategic regional cluster contributed more than 15%
of the Company's total revenues.
ADVERTISING
Advertising revenue is the largest component of the Company's total
revenues, accounting for approximately 75.8%, 76.2% and 76.2% of its total
revenues in 2001, 2002 and 2003, respectively. The Company derives its
advertising revenues from display (local department stores, local accounts at
national department stores, specialty shops and other retailers), national
(national advertising accounts) and classified advertising (employment,
automotive, real estate and personals). Its advertising rate structures vary
among its publications and are a function of various factors, including local
market conditions, competition, circulation, readership and demographics.
5
Substantially all of the Company's advertising revenues are derived
from a diverse group of local retailers and classified advertisers. The Company
does not rely upon any one company or industry for its advertising revenues. The
Company believes, based upon its operating experience, that its advertising
revenues tend to be more stable than the advertising revenues of large
metropolitan newspapers because its publications rely primarily on local
advertising. Local advertising has historically been more stable than national
advertising because local businesses generally have fewer effective advertising
channels through which to reach their customers. Moreover, the Company is less
reliant than large metropolitan newspapers upon classified advertising,
particularly "help wanted," real estate and automotive sections, and national
advertising, which are generally more sensitive to economic conditions. The
contribution of display, classified and national advertising to its total
advertising revenues for fiscal years 2001, 2002 and 2003 were as follows:
YEAR ENDED
DECEMBER 31,
------------------------
2001 2002 2003
---- ---- ----
Display............................ 73.0% 73.9% 74.4%
Classified......................... 24.6 23.5 22.9
National........................... 2.4 2.6 2.7
----- ----- -----
Total advertising revenues.... 100.0% 100.0% 100.0%
The Company's corporate management works with its local newspaper
management to approve advertising rates and with the advertising staff of each
local newspaper to develop marketing kits and presentations. A portion of its
publishers' compensation is based upon increased advertising revenues. In
addition, the Company shares advertising concepts throughout its network of
publications, enabling its advertising managers and publishers to leverage
advertising products and sales strategies that have already been successful in
other markets that the Company serves.
CIRCULATION
While the Company's circulation revenue is not as significant as its
advertising revenue, circulation trends impact the decisions of advertisers and
advertising rates. Substantially all of its circulation revenues are derived
from home delivery sales of publications to subscribers and single copy sales
made through retailers and vending racks. In order to enhance its circulation
revenues and circulation trends, the Company has implemented quality
enhancements, such as: upgrading and expanding printing facilities and printing
presses; increasing the use of color and color photographs; improving graphic
design, including complete redesigns; developing creative and interactive
promotional campaigns and converting selected newspapers from afternoon to
morning publication.
Circulation revenue accounted for approximately 17.0%, 17.3% and 17.3%
of its total revenues in 2001, 2002 and 2003, respectively. The vast majority of
2003 circulation revenues were derived from subscription sales. The Company owns
and operates 65 paid daily publications that range in circulation from
approximately 1,000 to 15,500, and 127 paid non-daily publications that range in
circulation from approximately 100 to 27,200. The Company's corporate management
works with its local newspaper management to establish subscription and single
copy rates. The Company also implements creative and interactive marketing
programs and promotions to increase readership through both subscription and
single copy sales.
ELECTRONIC MEDIA
All of the Company's daily publications and certain of its weekly
publications have their own free-access websites. The Company's websites have a
consistent format and provide a selection of local and other news together with
classified advertising, feature articles and details of local events and
activities. The Company has also been able to expand the reach of its classified
advertisements, and increase its advertising revenues, by placing advertisements
on-line as well as in the newspapers. The Company believes that its ability to
self-promote its websites in its printed newspapers as internet portals for the
community and its focus on local content limits the competitive threat to its
core newspaper business from new media businesses.
EDITORIAL
The Company's local paid daily and non-daily newspapers generally
contain 8 to 14 pages with editorial content that emphasizes local news and
topics of interest to the communities that they serve, such as local business,
politics, entertainment and culture, as well as local youth, high school,
college and professional sports. National and world news stories are sourced
from the Associated Press. The Company's free circulation and TMC publications
are typically used as a vehicle for delivering pre-printed content and range
from limited to no editorial content.
6
The editorial staff at each of its newspapers typically consists of a
managing editor and several assistant editors and field reporters, who identify
and report the local news in their communities. As of December 31, 2003, the
Company employed approximately 500 full-time editorial personnel and
approximately 100 part-time editorial personnel that the Company believes
provide the most comprehensive local news coverage in the communities the
Company serves.
PRINTING AND DISTRIBUTION
The Company operates 49 printing and distribution facilities, including
31 facilities within its 17 strategic regional clusters. The production
resources located within each cluster are shared by the publications produced in
each region. On average, each of the Company's printing and distribution
facilities is responsible for producing six publications. To the extent the
Company has excess press capacity at these facilities, the Company provides
commercial printing services to third parties, primarily other publishers who do
not have a printing press, on a competitive bid basis. The Company also prints
other commercial materials, including business cards and invitations, to produce
incremental revenue from existing equipment and personnel. Job printing and
other revenue accounted for approximately 7.2%, 6.5% and 6.4% of the Company's
total revenues in 2001, 2002 and 2003, respectively.
The Company's newspapers are generally fully paginated utilizing
image-setter technology, which allows for design flexibility and high-quality
reproduction of color graphics. By clustering its production resources, the
Company is able to reduce the operating costs of its newspapers while increasing
the quality of its small market newspapers that might not typically otherwise
have access to higher quality production facilities. Its consolidated printing
and distribution facilities are generally located within 60 miles of its
newspapers.
The distribution of the Company's daily newspapers is typically
outsourced to independent, third-party distributors, who also distribute a
majority of its weekly and periodic publications. These distributors generally
are independent and locally based within each cluster. Some of the Company's TMC
publications and weekly publications are also delivered via U.S. mail.
NEWSPRINT
Newsprint represents one of the Company's largest costs of producing
newspapers. The Company has no long-term contracts to purchase newsprint. Its
newspapers purchase a portion of their newsprint directly from paper mills and
also make opportunistic spot market purchases within their geographic regions.
The Company believes that its purchasing policies have resulted in its
publications obtaining favorable newsprint prices. The Company incurred
newsprint expense related to its publications of approximately $12.6 million,
$9.1 million and $9.3 million in 2001, 2002, and 2003, respectively, net of
newsprint consumed by six related publications whose assets were sold on January
7, 2002. The Company has relatively low exposure to fluctuations in newsprint
prices due to much lower page counts than large metropolitan newspapers.
Newsprint expense related to its publications as a percentage of its total
advertising and circulation revenues for 2001, 2002 and 2003 was 7.0%, 5.0% and
5.2%, respectively, net of newsprint consumed by six related publications whose
assets were sold on January 7, 2002. The Company also incurred newsprint expense
related to job printing and other revenues of approximately $4.5 million, $3.0
million and $2.8 million in 2001, 2002 and 2003, respectively.
Historically, the price of newsprint has been cyclical and volatile,
reaching approximately $682 per short ton in 1996 and as low as $409 per short
ton in 1993. The average price of newsprint for December 2003, as reported by
Pulp & Paper Week, was approximately $481 per short ton, compared to
approximately $436 per short ton in December 2002. The Company seeks to manage
the effects of increases in prices of newsprint through a combination of
technology improvements, page width and page count reductions, inventory
management and advertising and circulation price increases.
SEASONALITY
The Company's revenues, like those of other newspaper companies, tend
to follow a distinct and recurring seasonal pattern, with high advertising
revenues in months containing significant events or holidays. Accordingly, due
to fewer holidays and more inclement weather as compared to other quarters, the
Company's first fiscal quarter is historically its weakest revenue quarter of
the year. Correspondingly, the Company's fourth fiscal quarter is historically
its strongest revenue quarter because it includes heavy holiday season
advertising. The Company expects that seasonal fluctuations will continue to
affect its results of operations in future periods.
7
COMPETITION
Each of the Company's newspapers competes to varying degrees for
advertising and circulation revenue with local, regional and national
newspapers, shoppers, magazines, radio, broadcast and cable television, direct
mail, the internet and other media sources. Competition for newspaper
advertising revenues is based largely on advertising results, advertising rates,
readership demographics and circulation levels. Competition for circulation
revenue is generally based on the content of the newspaper, its price and
editorial quality.
The Company's newspapers are the dominant sources for local news,
announcements and other information of interest to the communities that the
Company serves. Its publications generally have strong name recognition in their
markets and face limited competition as a result of operating in markets that
are distantly located from large metropolitan areas and that can support only
one primary newspaper, with the exception of its publications in the Chicago
suburban market. However, as with most suburban and smaller daily newspapers,
some circulation competition exists from large daily newspapers published in
nearby metropolitan areas. The Company believes that these larger newspapers
generally do not compete in a meaningful way for local advertising revenues. The
Company provides its readers with community-specific content, which is generally
not available on a consistent basis in nearby metropolitan newspapers. Local
advertisers, especially businesses located within a small community, typically
target advertising towards customers living or working within their own
communities. The Company believes that its daily newspapers generally capture
the largest share of local advertising as a result of its direct and focused
coverage of the market and its cost-effective advertising rates relative to the
more broadly circulated metropolitan newspapers.
Although alternative media may be available, the Company believes that
local advertisers generally regard newspapers and free circulation and TMC
publications as the most cost-effective method of advertising time-sensitive
promotions and price-specific advertisements, as compared with broadcast and
cable television, which are generally used to advertise image, or radio, which
is usually used to recall images or brands in the minds of listeners. The
Company has, however, over the past several years faced increased competition
for classified advertising from online advertising as the use of the internet
has increased. From time to time, the Company competes with companies that are
larger and/or have greater financial and distribution resources than the Company
does.
EMPLOYEES
As of December 31, 2003, the Company employs approximately 2,200
full-time employees and approximately 1,200 part-time employees. Approximately
3% of such employees belong to labor unions. The Company has not experienced a
strike or work stoppage at any of its newspapers during the past five years, and
considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company has 153 operating and production facilities for its
publications in the United States. The Company owns 108 of these facilities and
leases the remaining 45 for terms ranging from one to five years. These
facilities range in size from approximately 1,000 to 55,000 square feet. The
Company's executive offices are located in Northbrook, Illinois, where the
Company leases approximately 4,900 square feet under a lease terminating in
2006. The Company does not believe any individual property is material to its
financial condition or results of operations. The Company believes that its
current facilities are in good condition and are suitable and adequate for the
purposes for which they are used.
ITEM 3. 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
management, is reasonably expected to have a material adverse effect on its
business, financial condition or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION AND HOLDERS
There is no public market for LGO's common stock, par value $0.01 per
share (the "Common Stock"). As of March 30, 2004, all of LGO's issued and
outstanding Common Stock is owned by LGP. LGO has no outstanding capital stock
other than Common Stock, nor are there any outstanding options, warrants or
other rights to purchase LGO capital stock.
DIVIDENDS
LGO, which paid a cash dividend to Parent of approximately $63,000 in
2001, $943,000 in 2002 and $2,102,000 in 2003, is subject to certain covenants
that limit its ability to pay dividends and make other restricted payments. See
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
LGO EQUITY COMPENSATION PLAN INFORMATION AS OF DECEMBER 31, 2003
There are no outstanding options, warrants or other rights to purchase
LGO capital stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data of
the Company. During January 2002, the Company disposed of the assets of six
related publications that the Company acquired in 1999 and, accordingly, the
historical operating results of these publications have been reclassified and
presented below as a discontinued operation. Certain amounts in the prior year's
consolidated financial statements have been reclassified to conform to the 2003
presentation. The data presented below should be read in conjunction with the
consolidated financial statements, including the notes thereto, and with Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing elsewhere in this annual report on Form 10-K.
9
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1999 2000 2001 2002 2003
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT RATIOS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Advertising ................................. $ 120,315 $ 145,787 $ 147,977 $ 146,918 $ 143,958
Circulation ................................. 27,052 30,329 33,228 33,353 32,731
Job printing and other ...................... 12,309 11,887 13,995 12,560 12,145
--------- --------- --------- --------- ---------
Total revenues ................................. 159,676 188,003 195,200 192,831 188,834
Operating costs and expenses:
Operating costs ............................. 76,179 90,541 98,607 90,390 89,807
Selling, general and administrative ......... 42,689 52,799 53,764 53,201 54,018
Depreciation and amortization (1) ........... 16,496 19,193 21,315 17,027 13,912
Loss on sale of assets ...................... -- -- -- 325 104
--------- --------- --------- --------- ---------
Income from continuing operations .............. 24,312 25,470 21,514 31,888 30,993
Interest expense - debt ........................ 24,107 30,895 29,935 23,816 21,915
Interest expense - amortization of
deferred financing costs .................... 1,109 1,237 1,723 1,631 1,210
Impairment of other assets ..................... -- -- -- 223 --
Net gain on exchange and
disposition of properties ................... 6,197 -- -- -- --
Write-off of deferred financing costs .......... -- -- -- -- 161
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes, extraordinary item and
cumulative effect of change in
accounting principle ........................ 5,293 (6,662) (10,144) 6,218 7,707
Income tax expense (benefit) ................... 2,752 491 444 (927) (1,475)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before extraordinary item and
cumulative effect of change in
accounting principle ........................ 2,541 (7,153) (10,588) 7,145 9,182
Income from discontinued operations,
net of tax .................................. 513 1,817 1,508 4,269 --
Extraordinary gain on insurance proceeds ....... 485 -- -- -- --
Cumulative effect of change in
accounting principle, net of tax ............ -- -- -- (1,449) --
--------- --------- --------- --------- ---------
Net income (loss) .............................. $ 3,539 $ (5,336) $ (9,080) $ 9,965 $ 9,182
========= ========= ========= ========= =========
STATEMENT OF CASH FLOWS DATA:
Capital expenditures ........................... $ 5,687 $ 9,654 $ 2,715 $ 2,496 $ 2,249
Net cash provided by
operating activities ........................ 8,499 15,734 12,925 25,167 22,803
Net cash provided by (used in)
investing activities ........................ (60,509) (92,092) (3,330) 23,954 (3,735)
Net cash provided by (used in)
financing activities ........................ 52,845 75,535 (9,157) (48,899) (18,728)
OTHER DATA (UNAUDITED):
EBITDA(2) ...................................... $ 48,003 $ 46,480 $ 44,337 $ 51,512 $ 44,744
Ratio of earnings to fixed charges(3)........... 1.21 0.79 0.68 1.24 1.33
AS OF DECEMBER 31,
-------------------------------------------------------------
1999 2000 2001 2002 2003
--------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents ...................... $ 1,860 $ 1,036 $ 1,474 $ 1,696 $ 2,036
Total assets ................................... 475,881 559,302 540,342 501,649 490,069
Total long-term obligations
including current maturities
(excluding deferred income taxes) ........... 281,418 332,419 323,949 275,993 259,367
Stockholder's equity ........................... 150,985 173,724 164,690 173,729 180,826
- ------------------------
(1) On January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets,"
which replaces the requirement to amortize intangible assets with indefinite
lives and goodwill with a requirement for an annual impairment test. SFAS No.
142 also establishes requirements for identifiable intangible assets. The
transition provisions of SFAS No. 142 require that the useful lives of
previously recognized intangible assets be reassessed and the remaining
amortization periods adjusted accordingly. Prior to adoption of SFAS No. 142,
advertiser and subscriber relationship intangible assets were amortized over
estimated remaining useful lives of 40 and 33 years, respectively. The Company
concluded that, based upon current economic conditions and its current pricing
strategies, the remaining useful lives as of January 1, 2002 for advertiser and
subscriber relationship intangible assets were 30 and 20 years,
10
respectively, and the amortization periods have been adjusted accordingly.
Customer relationships unrelated to newspapers are amortized over 10 years.
Non-compete agreements are amortized over periods of up to 10 years depending on
the specifics of the agreement.
Prior to the adoption of SFAS No. 142, the Company amortized goodwill
and mastheads over 40 years. Upon adoption of SFAS No. 142, the Company ceased
amortization of goodwill. The amortization of mastheads was also discontinued
because it was determined that the useful life of the mastheads is indefinite.
The Company assesses impairment of goodwill and mastheads by using
multiples of recent and projected revenues and EBITDA (earnings before interest,
taxes, depreciation, and amortization) for individual or strategic regional
clusters of 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 revenue 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.
(2) EBITDA is defined as earnings before interest, taxes, depreciation
and amortization as shown in the table below. 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 years ended
December 31, 1999 - 2003.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- --------- -------- --------
(IN THOUSANDS)
Net income (loss) ......................... $ 3,539 $ (5,336) $ (9,080) $ 9,965 $ 9,182
Depreciation and amortization ....... 16,496 19,193 21,315 17,027 13,912
Interest expense .................... 25,216 32,132 31,658 25,447 23,125
Income tax expense (benefit) ........ 2,752 491 444 (927) (1,475)
-------- -------- -------- -------- --------
EBITDA ......................... $ 48,003 $ 46,480 $ 44,337 $ 51,512 $ 44,744
======== ======== ======== ======== ========
(3) See Exhibit 12 included herewith.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE SUMMARY
The Company's mission is to be the leading local news source in the
communities it serves, to provide the most effective means for local advertisers
to reach their potential customers and to create shareholder value. In order to
achieve its long-term objectives, the Company focuses on generating reader and
employee loyalty, expanding local advertising bases and improving margins
through regional clustering and strict cost control measures.
The Company primarily 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.
The Company's long-term strategy is pursued with a portfolio of
properties that serve its customers in print and online. As of December 31,
2003, properties outside the metropolitan areas, also referred to as the
community markets, represented 87% of the Company's 301 publications, while the
group of publications in the western suburbs of Chicago, also referred to as the
Chicago suburban market, accounted for 13% of its publications.
The community market consists of 65 paid daily newspapers, 89 paid
non-daily newspapers and 109 free circulation and "total market coverage," or
TMC, publications. The Company has publications in the community markets of 17
states. In 2003, approximately 76% of the community market's revenues were
derived from advertising. Of this amount, approximately 61% and 19% resulted
from display and classified advertising, respectively. In 2003, approximately
19% of the community market's revenues were from circulation, while the
remainder was derived from job printing and other revenues.
11
The Chicago suburban market consists of 38 paid non-daily newspapers
situated in the western suburbs of Chicago. In 2003, approximately 79% of the
Chicago suburban market's revenues were derived from advertising. Of this
amount, approximately 50% and 46% resulted from classified and display
advertising, respectively. In 2003, approximately 9% of the Chicago suburban
market's revenues were from circulation, while the remainder was derived from
job printing and other revenues.
The Company has not had any material acquisitions of publications since
December 2000 and did not acquire any publications in 2003. The Company did
acquire a printing facility from Midland Communications, in 2003. See Note 2 to
the Consolidated Financial Statements. On February 3, 2004, the Company acquired
daily newspapers in Corning, New York and Freeport, Illinois (and received cash
consideration) from Lee Enterprises, Inc. in exchange for daily newspapers in
Elko, Nevada and Burley, Idaho and weekly newspapers in Hailey, Idaho and
Jerome, Idaho. The Company did not have any dispositions in 2003. On January 7,
2002, the Company disposed of the assets of six related publications (acquired
in 1999) in one transaction for proceeds of $26.5 million (the "Disposition").
RESULTS OF OPERATIONS
The following table sets forth for the years indicated certain revenue
and expense items expressed as a percentage of total revenues.
YEAR ENDED DECEMBER 31,
--------------------------
2001 2002 2003
------ ------ ------
REVENUES:
Advertising ............................................... 75.8% 76.2% 76.3%
Circulation ............................................... 17.0 17.3 17.3
Job printing and other .................................... 7.2 6.5 6.4
----- ----- -----
Total revenues ............................................... 100.0 100.0 100.0
OPERATING COSTS AND EXPENSES:
Operating costs ........................................... 50.5 46.9 47.5
Selling, general and administrative ....................... 27.6 27.6 28.6
Depreciation and amortization ............................. 10.9 8.8 7.4
Loss on sale of assets .................................... -- 0.2 0.1
----- ----- -----
Income from continuing operations ............................ 11.0 16.5 16.4
Interest expense - debt ...................................... 15.3 12.4 11.6
Interest expense - amortization of deferred financing
costs ..................................................... 0.9 0.8 0.6
Write-off of deferred financing costs ........................ -- -- 0.1
Impairment of other assets ................................... -- 0.1 --
----- ----- -----
Income (loss) from continuing operations before
income taxes and cumulative effect of change
in accounting principle ................................... (5.2) 3.2 4.1
Income tax expense (benefit).................................. 0.2 0.5 (0.6)
----- ----- -----
Income (loss) from continuing operations before
cumulative effect of change in accounting principle ....... (5.4) 3.7 4.7
Income from discontinued operations, net of tax .............. 0.7 2.2 --
----- ----- -----
Income (loss) before cumulative effect of change
in accounting principle ................................... (4.7) 5.9 4.7
Cumulative effect of change
in accounting principle, net of tax ....................... -- (0.8) --
----- ----- -----
Net income (loss) ............................................ (4.7)% 5.1% 4.7%
----- ----- -----
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Total Revenues. Total revenues for 2003 decreased by $4.0 million, or
2.1%, to $188.8 million from $192.8 million for 2002. The decrease in total
revenues was comprised of a $3.0 million, or 2.0%, decrease in advertising
revenues, a $0.6 million, or 1.9%, decrease in circulation revenue, and a $0.4
million, or 3.3%, decrease in job printing and other revenue. In the Company's
community newspaper markets, advertising revenues decreased by $0.6 million,
primarily due to lower local display advertising of $0.9 million and lower
classifieds of $0.5 million, partially offset by increases in display
advertising of $0.7 million. Outside of the community newspaper markets, the
Company's advertising revenues declined by $1.6 million, primarily due to lower
classified advertising revenue of $1.0 million and lower display of $0.6
million. Total revenues also decreased due to a reduction in non-newspaper
revenues of $0.8 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 Community and Chicago suburban market.
12
Operating Costs. Operating costs for 2003 were $89.8 million, or 47.5%
of total revenues, which was a decrease of $0.6 million from 2002, when
operating costs were $90.4 million, or 46.9% of total revenues. This decrease
was primarily due to reductions in labor of $0.3 million, external services of
$0.2 million, and newsprint costs of $0.1 million.
Selling, General and Administrative. Selling, general and
administrative expenses for 2003 increased by $0.8 million to $54.0 million, or
28.6% of total revenues, from $53.2 million for 2002 when selling, general and
administrative expenses were 27.6% of total revenues. The increase was primarily
due to higher labor and bad debt expense of $0.2 million each and higher
advertising and insurance costs of $0.1 million each.
Depreciation and Amortization. Depreciation and amortization expense
for 2003 decreased by $3.1 million to $13.9 million from $17.0 million for 2002.
For 2003, the Company recorded $9.1 million in amortization of intangible
assets, compared with $11.9 million for the prior year. The decrease in
amortization is primarily due to a decrease in non-compete intangible
amortization of $2.8 million resulting from certain non-compete assets that are
now fully amortized.
Income from Continuing Operations. Income from continuing operations
for 2003 decreased by $0.9 million, or 2.8%, to $31.0 million from $31.9 million
for 2002. The decrease was primarily due to lower revenues of $4.0 million and,
higher selling, general and administrative expense of $0.8 million, partially
offset by lower depreciation and amortization expense of $3.1 million and lower
operating costs of $0.6 million.
Interest Expense. Interest expense for 2003 decreased by $2.3 million
to $23.1 million from $25.4 million for 2002. The decrease in interest expense
was due primarily to lower interest rates and less outstanding indebtedness
during 2003 as compared to 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 postponed amending its Amended Credit
Facility.
Income Tax Benefit. Income tax benefit for 2003 was $1.5 million
compared to income tax benefit of $0.9 million for 2002. The change between
years is primarily due to a $4.7 million decrease in the Company's valuation
allowance during 2003 based on the Company's assessment of the ultimate
realizability of its deferred tax assets as of December 31, 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 $7.0 million, or a gain of $4.3
million, net of the related tax effect of $2.7 million. As a result of the sale,
the Disposition has been accounted for as a discontinued operation. Discontinued
operations for 2002 consisted solely of the gain on the 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 2002 as a cumulative
effect of change in accounting principle. The Company performed an impairment
test at the end of 2002 and 2003, which indicated that no additional impairment
needed to be recorded. The Company will perform its next impairment test at the
end of 2004.
Net Income. For 2003, the Company recognized net income of $9.2 million
compared to net income of $10.0 million for 2002. The decrease in net income was
primarily attributable to a decrease in income from continuing operations of
$0.9 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.
These increases were partially offset by lower interest expense of $2.3 million
and lower income tax expense of $0.6 million and 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 $1.5 million and the impairment of
other assets of $0.2 million.
EBITDA. EBITDA, (which is defined as earnings before interest, taxes,
depreciation and amortization) for 2003 decreased by $6.8 million, or 13.1%, to
$44.7 million, from $51.5 million for 2002. The decrease was primarily due to
lower revenues of $4.0 million, a write-off of deferred financing costs of $0.2
million, higher selling, general and administration costs of $0.8 million,
partially offset by lower operating costs of $0.6 million and a lower loss on
sale of assets of $0.2 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, partially offset by the inclusion in 2002 of both cumulative effect
of change in accounting principle related to goodwill and masthead impairment
losses of $1.5
13
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 income (loss) to EBITDA.
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2002 2003
--------- -------- --------
(IN THOUSANDS)
Net income (loss) ...................... $ (9,080) $ 9,965 $ 9,182
Depreciation and amortization ..... 21,315 17,027 13,912
Interest expense .................. 31,658 25,447 23,125
Income tax expense (benefit) ...... 444 (927) (1,475)
-------- -------- --------
EBITDA ...................... $ 44,337 $ 51,512 $ 44,744
======== ======== ========
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Total Revenues. Total revenues for 2002 decreased by $2.4 million, or
1.2%, to $192.8 million. The decrease in total revenues for 2002 was comprised
of a $1.1 million, or 0.7%, decrease in advertising revenue, a $0.1 million, or
0.4%, increase in circulation revenue and a $1.4 million, or 10.3%, decrease in
job printing and other revenue. The advertising and printing revenue decrease
was primarily driven by a decrease in classified recruitment and printing
revenues of $2.2 million and $1.0 million, respectively, in the Chicago suburban
market, as well as the discontinuation of two lower margin print jobs in the
Company's community markets, partially offset by an increase in preprint and
national advertising revenues of $0.9 million and $0.2 million, respectively.
Operating Costs. Operating costs for 2002 were $90.4 million, or 46.9%
of total revenues, which was a decrease of $8.2 million from 2001, when
operating costs were $98.6 million, or 50.5% of total revenues. This decrease
was primarily due to a decrease in newsprint costs of $5.0 million, delivery
costs of $1.1 million and labor costs of $1.5 million resulting from a reduction
in operating staff.
Selling, General and Administrative. Selling, general and
administrative expenses for 2002 decreased by $0.6 million to $53.2 million, or
27.6% of total revenues, from $53.8 million for 2001 when selling, general and
administrative expenses were 27.6% of total revenues. The decrease was primarily
due to a decrease in labor costs of $1.6 million resulting from reductions in
administrative staff, partially offset by higher performance-based incentive
compensation of $1.4 million.
Depreciation and Amortization. Depreciation and amortization expense
for 2002 decreased by $4.3 million to $17.0 million from $21.3 million for 2001
as a result of the adoption of SFAS No. 142 on January 1, 2002. For 2002, the
Company recorded $11.9 million in amortization of intangible assets compared
with $15.3 million for 2001. Upon adoption of SFAS No. 142, the Company ceased
amortization of goodwill. The Company also ceased amortization of its mastheads
because it determined that the useful life of its mastheads was indefinite. Had
SFAS No. 142 been adopted on January 1, 2001, income from continuing operations
before income taxes and cumulative effect of change in accounting principle for
2001 would have been increased by $5.7 million had goodwill and mastheads not
been amortized and reduced by $1.9 million due to the change in useful lives of
advertiser and subscriber relationship intangible assets.
Income from Continuing Operations. Income from continuing operations
increased by $10.4 million from $21.5 million, or 11.0% of total revenues, for
2001 to $31.9 million, or 16.5% of total revenues, for 2002. The increase was
primarily driven by decreases in operating costs, selling, general and
administration expenses and amortization expense, partially offset by lower
revenues.
14
Interest Expense. Interest expense decreased by $6.2 million to $25.4
million for 2002 from $31.7 million for 2001. The decrease in interest expense
was due to the reduction of indebtedness resulting from the application of
proceeds from the Disposition and lower interest rates.
Income Tax Expense (Benefit). Income tax expense of $0.4 million for
2001 decreased by $1.4 million to a tax benefit of $0.9 million for 2002. The
decrease in income tax expense was due to a deferred tax benefit recognized in
2002.
Income from Discontinued Operations. Income from discontinued
operations was $4.3 million for 2002 compared to $1.5 million for 2001. The
Disposition on January 7, 2002 resulted in a pre-tax gain of $7.0 million and an
after-tax gain of $4.3 million.
Cumulative Effect of Change in Accounting Principle. Pursuant to the
adoption of SFAS No. 142, an initial impairment test of properties was performed
in the first quarter of 2002. As a result of this test, it was 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 2002 as a cumulative effect of change in
accounting principle.
Net Income (Loss). For 2002, the Company recognized net income of $10.0
million compared to a net loss of $(9.1) million for 2001. The $19.1 million
increase in net income was primarily attributable to an after-tax gain of $4.3
million on the Disposition, lower amortization expense resulting from the
adoption of SFAS No. 142 and lower newsprint, labor, delivery and interest
costs, partially offset by lower revenues and the cumulative effect of change in
accounting principle related to goodwill and masthead impairment losses, as
previously discussed.
EBITDA. EBITDA for 2002 increased by $7.2 million to $51.5 million from
$44.3 million for 2001. The increase was primarily due to the after-tax gain of
$4.3 million on the Disposition, lower newsprint, delivery and labor costs.
Partially offsetting the increases were cumulative effect of change in
accounting principle related to goodwill and masthead impairment losses of $1.4
million, the impairment of other assets of $0.2 million, loss on sale of assets
of $0.3 million and lower revenues. EBITDA as a percentage of total revenues
increased from 22.7% to 26.7%. See "-- Year Ended December 31, 2003 Compared to
Year Ended December 31, 2002" for a reconciliation of net loss to EBITDA for
2002 and 2001.
RECENT DEVELOPMENTS
On February 3, 2004, the Company acquired the daily newspapers in
Corning, New York, and Freeport, Illinois and received cash consideration from
Lee Enterprises, Inc. in exchange for the Company's daily newspapers in Elko,
Nevada and Burley, Idaho, as well as its weeklies in Hailey, Idaho and Jerome,
Idaho. The transaction will be accounted for using the purchase method of
accounting. The purchase price will be allocated to the assets acquired and the
liabilities assumed according to their fair market values at the date of
acquisition. The results of operations will be included in the consolidated
financial statements from the date of acquisition.
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.
On January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets,"
which replaces the requirement to amortize intangible assets with indefinite
lives and goodwill with a requirement for an annual impairment test. SFAS No.
142 also establishes requirements for identifiable intangible assets. The
transition provisions of SFAS No. 142 require that the useful lives of
previously recognized intangible assets be reassessed and the remaining
amortization periods adjusted accordingly. Prior to adoption of SFAS No. 142,
advertiser and subscriber relationship intangible assets were amortized over
estimated remaining useful lives of 40 and 33 years, respectively. The Company
concluded that, based upon current economic conditions and its current pricing
strategies, the remaining useful lives as of January 1, 2002 for advertiser and
subscriber relationship intangible assets were 30 and 20 years, respectively,
and the amortization periods have been adjusted accordingly.
15
Customer relationships unrelated to newspapers are amortized over 10 years.
Non-compete agreements are amortized over periods of up to 10 years depending on
the specifics of the agreement.
Prior to the adoption of SFAS No. 142, the Company amortized goodwill
and mastheads over 40 years. Upon adoption of SFAS No. 142, the Company ceased
amortization of goodwill. The amortization of mastheads was also discontinued
because it was determined that the useful life of the mastheads is indefinite.
The Company assesses impairment of goodwill and mastheads by using
multiples of recent and projected revenues and EBITDA (earnings before interest,
taxes, depreciation, and amortization) for individual or strategic regional
clusters of 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. If
the fair value is less than the carrying value, then the Company will consider
whether a temporary or permanent impairment has occurred based on the specific
facts and circumstances associated with the individual, or strategic regional
clusters of, properties. The multiples of revenue 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.
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The Company assesses the recoverability of its long-lived
assets, including property, plant and equipment and definite lived intangible
assets, whenever events or changes in business circumstances indicate the
carrying amount of the assets, or related group of assets, may not be fully
recoverable. Factors leading to impairment include significant under performance
relative to expected historical or projected future operating losses,
significant changes in the manner of use of the acquired assets or the strategy
for the Company's overall business, and significant negative industry or
economic trends. The assessment of recoverability is based on management's
estimate. If undiscounted future operating cash flows do not exceed the net book
value of the long-lived assets, then a permanent impairment has occurred. The
Company would record the difference between the net book value of the long-lived
asset and the fair value of such asset as a charge against income in the
consolidated statements of operations if such a difference arose.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities. Net cash provided by operating
activities for the year ended December 31, 2003 decreased by $2.4 million to
$22.8 million compared with net cash provided by operating activities of $25.2
million for the year ended December 31, 2002. The decrease is primarily due to a
decrease in income from continuing operations before depreciation and
amortization of $4.0 million. This decrease was partially offset by a decrease
in working capital needs.
Cash flows from investing activities. Net cash used in investing
activities was $3.7 million for the year ended December 31, 2003 compared to net
cash provided by investing activities of $24.0 million for the year ended
December 31, 2002. The decrease of $27.7 million in cash flows was primarily due
to the $26.5 million of proceeds from the Disposition in 2002 and the
acquisition of a printing facility from Midland Communications for $2.5 million
in 2003. For the year ended December 31, 2003, capital expenditures were $2.2
million, or 1.2% of revenues. The Company's capital expenditures consisted of
the purchase of machinery, equipment, furniture and fixtures relating to its
publishing operations. The Company has no material commitments for capital
expenditures. The Company will continue to pursue its strategy of
opportunistically acquiring community newspapers in contiguous markets and new
markets.
Cash flows from financing activities. Net cash used in financing
activities was $18.7 million for the year ended December 31, 2003 compared to
net cash used in financing activities of $48.9 million for the year ended
December 31, 2002. The increase of $30.2 million in cash flows was primarily due
to a repayment during 2002 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") using the Disposition proceeds of $26.5
million.
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. LGP and 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.
16
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. The weighted average interest rate for the Amended Credit
Facility in 2003 was 4.8%. 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 December 31, 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 stockholder's equity, tangible equity and cash
flow. Interest expense for the year ended December 31, 2003 was $23.1 million,
including amortization of deferred financing costs of $1.2 million. The degree
to which the Company is leveraged could have important consequences, including
the following: (1) a substantial portion of the Company's cash flow from
operations must be dedicated to the payment of interest on Operating Company's
$180.0 million aggregate principal amount of 9 3/8% Senior Subordinated Notes
(the "Notes") due February 1, 2008 and interest on other indebtedness, thereby
reducing the funds available to the Company for other purposes; (2) indebtedness
under the Amended Credit Facility is at variable rates of interest, which causes
the Company to be vulnerable to increases in interest rates; (3) the Company is
more leveraged than certain competitors in its industry, which might place the
Company at a competitive disadvantage; (4) the Company's substantial degree of
leverage could make it more vulnerable in the event of a downturn in general
economic conditions or other adverse events in its business; and (5) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired.
As of December 31, 2003, approximately $78.1 million was outstanding
under the Amended Credit Facility and the aggregate principal amount of the
Notes outstanding was $180.0 million.
On July 25, 2003, the Operating Company and 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 its 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 its Senior Discount Debentures.
Liquidity. The Company's principal sources of funds has historically
been, and will be, cash provided by operating activities and borrowings under
its revolving credit facility.
The indentures relating to the Notes and the Amended Credit Facility
impose upon the Company certain financial and operating covenants, including,
among others, requirements that the Company satisfy certain quarterly financial
tests, including a maximum senior leverage ratio, a minimum cash interest
coverage ratio and a maximum leverage ratio, limitations on capital expenditures
and restrictions on the Company's ability to incur debt, pay dividends or take
certain other corporate actions.
Management believes that the Company has adequate capital resources and
liquidity to meet its borrowing obligations, all required capital expenditures
and pursue its business strategy for at least the next 12 months. With the
revolving credit facility maturing in March 2005, the Company is currently
considering various opportunities to refinance or extend the revolving credit
facility, to amend the Amended Credit Facility or to enter into a new credit
facility.
17
CONTRACTUAL OBLIGATIONS
The following table reflects a summary of the Company's contractual
obligations as of December 31, 2003 (in thousands):
TOTAL 2004 2005 2006 2007 2008 THEREAFTER
-------- -------- -------- -------- -------- -------- ----------
Long-term debt (principal only):
9 3/8% senior subordinated notes .... $180,000 $ -- $ -- $ -- $ -- $ 180,000 $ --
Term Loan B ......................... 71,757 744 26,862 35,321 8,830 -- --
Revolving credit facility ........... 6,338 -- 6,338 -- -- -- --
Operating leases:
Real estate lease payments .......... 1,113 357 289 283 118 66 --
Other contractual obligations:
Non-compete payments ................ 1,147 282 282 177 177 121 108
Finder fee payments ................. 125 125 -- -- -- -- --
-------- -------- -------- -------- -------- --------- --------
$260,480 $ 1,508 $ 33,771 $ 35,781 $ 9,125 $ 180,187 $ 108
======== ======== ======== ======== ======== ========= ========
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not engage in off-balance sheet transactions,
arrangements, obligations (including contingent obligations), and other
relationships with unconsolidated entities of other persons that may have a
material current or future effect on its financial condition, changes in
financial condition, revenues, expenses, results of operations, liquidity,
capital expenditures or capital resources.
RELATED-PARTY TRANSACTIONS
The Company paid $1.5 million in management fees in 2001, 2002 and
2003, respectively, and $375,000, $350,000 and $0 in other fees in 2001, 2002
and 2003, respectively, to Leonard Green & Partners, L.P. The Company is also
obligated to pay other fees of $125,000 to Leonard Green & Partners, L.P. at
December 31, 2003, which the parties have agreed will be paid in 2004 without
any penalty or interest. See Item 13 "Certain Relationships and Related
Transactions" for further discussion of this and other transactions.
NEW ACCOUNTING PRONOUNCEMENTS
None.
RISK FACTORS FOR INVESTMENT CONSIDERATIONS
THE COMPANY DEPENDS TO A GREAT EXTENT ON THE ECONOMIES AND THE
DEMOGRAPHICS OF THE LOCAL COMMUNITIES THAT IT SERVES AND IS ALSO SUSCEPTIBLE TO
GENERAL ECONOMIC DOWNTURNS, WHICH COULD HAVE A MATERIAL IMPACT ON ITS
ADVERTISING AND CIRCULATION REVENUES AND ITS PROFITABILITY.
The Company's advertising revenues and, to a lesser extent, circulation
revenues, depend upon a variety of factors specific to the communities that its
publications serve. These factors include, among others, the size and
demographic characteristics of the local population, local economic conditions
in general and the economic condition of the retail segments of the communities
that its publications serve. If the local economy, population or prevailing
retail environment of a community served by the Company experiences a downturn,
its publications, revenues and profitability in that market would be adversely
affected.
The Company's advertising and circulation revenues are also susceptible
to negative trends in the general economy that affect consumer spending. The
advertisers in its newspapers and related publications are primarily retail
businesses, which can be significantly affected by regional or national economic
downturns and other developments. For example, if there is continued
consolidation among the Company's advertisers, such as retailers, grocery stores
and banks, or if large national retailers that rely less on local print
advertising expand their operations to include grocery stores and replace
grocers that presently advertise in its newspapers, the Company's advertising
revenues would decrease. Additionally, due to the Company's substantial
indebtedness, it may be more susceptible to adverse general economic effects
than some of the competitors in its industry, some of which have greater
financial and other resources than the Company does.
18
THE COMPANY'S SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT ITS
FINANCIAL HEALTH AND REDUCE THE FUNDS AVAILABLE TO IT FOR OTHER PURPOSES.
The Company has, and intends to continue to have, a significant amount
of indebtedness. As of December 31, 2003, the Company had total indebtedness of
$259.4 million. The Company expects to incur additional indebtedness to fund
operations, capital expenditures or future acquisitions. The Company's
substantial indebtedness could adversely affect its financial health in the
following ways:
- a substantial portion of the Company's cash flow from
operations must be dedicated to the payment of interest on its
outstanding indebtedness, thereby reducing the funds available
to it for other purposes;
- indebtedness under the Amended Credit Facility is at variable
rates of interest, which causes the Company to be vulnerable
to increases in interest rates;
- the Company is more leveraged than certain competitors in its
industry, which might place it at a competitive disadvantage;
- 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
- the Company's ability to obtain additional financing for
working capital, capital expenditures, acquisitions or general
corporate purposes may be impaired.
In addition, the Amended Credit Facility and other indebtedness contain
financial and other restrictive covenants that limit the Company's ability to
incur additional debt and engage in other activities that may be in its
long-term best interests. The Company's failure to comply with these covenants
could trigger an event of default which, if not waived or cured, could result in
the acceleration of the maturity of its indebtedness. If the Company's
indebtedness is accelerated, it may not have sufficient cash resources to
satisfy its obligations in respect of its indebtedness and the Company may not
be able to continue its operations.
THE COMPANY INTENDS TO CONTINUE TO PURSUE ACQUISITION OPPORTUNITIES,
WHICH MAY SUBJECT IT TO CONSIDERABLE BUSINESS AND FINANCIAL RISK.
The Company has grown through, and anticipates that it will continue to
grow through, acquisitions of paid daily and non-daily newspapers and free
circulation and TMC publications. The Company continually evaluates potential
acquisitions and intends to actively pursue acquisition opportunities, some of
which could be significant. The Company may not be successful in identifying
acquisition opportunities, assessing the value, strengths and weaknesses of
these opportunities and consummating acquisitions on acceptable terms.
Acquisitions may expose the Company to particular business and financial risks
that include:
- diverting management's attention;
- assuming liabilities;
- incurring significant additional capital expenditures,
transaction and operating expenses and non-recurring
acquisition-related charges;
- experiencing an adverse impact on the Company's earnings from
the amortization or impairment of acquired goodwill and other
intangible assets;
- failing to integrate the operations and personnel of the
acquired newspapers and publications;
- entering new markets with which the Company is not familiar;
and
- failing to retain key personnel of the acquired newspapers and
publications.
The Company may not be able to successfully manage acquired newspapers
and publications or improve its business, results of operations or financial
condition from these acquired operations. If the Company is unable to
successfully implement its acquisition strategy or address the risks associated
with acquisitions, or if the Company encounters unforeseen expenses,
difficulties,
19
complications or delays frequently encountered in connection with the
integration of acquired entities and the expansion of operations, its growth and
ability to compete may be impaired, it may fail to achieve acquisition synergies
and it may be required to focus resources on integration of operations rather
than more profitable areas. In addition, the Company may compete for certain
acquisition targets with companies having greater financial resources than it.
The Company anticipates that it will finance acquisitions through cash provided
by operating activities and borrowings under its revolving credit facility,
which would reduce its cash available for other purposes, including the
repayment of indebtedness.
THE COMPANY'S BUSINESS MAY SUFFER IF THERE IS A SIGNIFICANT INCREASE IN
THE PRICE OF NEWSPRINT OR A REDUCTION IN THE AVAILABILITY OF NEWSPRINT.
The basic raw material for newspapers is newsprint. In 2003, the
Company's newsprint consumption related to its publications totaled
approximately $9.3 million, which was 5.2% of its total advertising and
circulation revenues. The Company also incurred newsprint expense related to job
printing and other of approximately $2.8 million in 2003. The Company has no
long-term contracts to purchase newsprint. The Company's inability to obtain an
adequate supply of newsprint in the future could have a material adverse effect
on its ability to produce its publications. Historically, the price of newsprint
has been cyclical and volatile, reaching approximately $682 per short ton in
1996 and as low as $409 per short ton in 1993. The average price of newsprint
for December 2003, as reported by Pulp & Paper Week, was approximately $481 per
short ton, compared to approximately $436 per short ton in December 2002.
Significant increases in newsprint costs could have a material adverse effect on
the Company's financial condition and results of operations. See Item 1.
"Business -- Newsprint."
THE COMPANY COMPETES WITH A LARGE NUMBER OF COMPANIES IN THE MEDIA
INDUSTRY, AND IF IT IS UNABLE TO COMPETE EFFECTIVELY, ITS ADVERTISING AND
CIRCULATION REVENUES MAY DECLINE.
The Company's business is concentrated in newspapers and other
publications located primarily in non-metropolitan markets in the United States.
The Company's revenues primarily consist of advertising and paid circulation.
Competition for advertising revenues and paid circulation comes from local,
regional and national newspapers, shoppers, magazines, broadcast and cable
television, radio, direct mail, the internet and other media. For example, as
the use of the internet has increased over the past several years, the Company
has lost some classified advertising and subscribers to online advertising
businesses and its free internet sites that contain abbreviated versions of its
newspapers, respectively. Competition for newspaper advertising revenues is
based largely upon advertiser results, advertising rates, readership,
demographics and circulation levels, while competition for circulation is based
largely upon the content of the newspaper, its price and editorial quality. The
Company's local and regional competitors are typically unique to each market,
and many of its competitors for advertising revenues are larger and have greater
financial and distribution resources than it. The Company may incur increasing
costs competing for advertising expenditures and paid circulation. The Company
may also experience a decline of circulation or print advertising revenue due to
alternative media, such as the internet. If it is not able to compete
effectively for advertising expenditures and paid circulation, the Company's
revenues may decline. See "Business -- Competition."
THE COMPANY'S QUARTERLY REVENUES AND OPERATING RESULTS FLUCTUATE AS A
RESULT OF A VARIETY OF FACTORS, WHICH MAY AFFECT ITS CASH FLOWS.
The Company's quarterly revenues and operating results have varied
significantly in the past and are expected to fluctuate in the future due to a
number of factors. For example, the timing of new newspaper acquisitions,
related pre-acquisition expenses, losses or charges incurred as a result of
acquisitions, including significant write-downs, write-offs or impairment
charges, and the amount of revenue contributed by new and existing newspapers
may cause its quarterly results to fluctuate. Additionally, the Company's
business is subject to seasonal fluctuations that it expects to continue to
affect its operating results in future periods. The Company's first fiscal
quarter of the year tends to be its weakest quarter because advertising volume
is at its lowest levels following the holiday season. Correspondingly, its
fourth fiscal quarter tends to be its strongest quarter because the fourth
fiscal quarter includes heavy holiday season advertising. Other factors that
affect the Company's quarterly revenues and operating results may be beyond its
control, including changes in the pricing policies of its competitors, the
hiring and retention of key personnel, wage and cost pressures, changes in
newsprint prices and general economic factors. These quarterly fluctuations in
revenues and operating results may affect the Company's cash flows.
20
THE COMPANY IS SUBJECT TO ENVIRONMENTAL AND EMPLOYEE SAFETY AND HEALTH
REGULATION THAT COULD CAUSE IT TO INCUR SIGNIFICANT COMPLIANCE EXPENDITURES AND
LIABILITIES.
The Company's operations are subject to federal, state and local laws
and regulations pertaining to the environment, air and water quality, storage
tanks and the management and disposal of wastes at its facilities. Its
operations are also subject to various employee safety and health laws and
regulations, including those pertaining to occupational injury and illness,
employee exposure to hazardous materials and employee complaints. Environmental
and employee safety and health laws tend to be complex, comprehensive and
frequently changing. As a result, the Company may be involved from time to time
in administrative and judicial proceedings and investigations related to
environmental and employee safety and health issues. These proceedings and
investigations could result in substantial costs to it, divert management's
attention and, if it is determined that the Company is not in compliance with
applicable laws and regulations, result in significant liabilities, fines or the
suspension or interruption of the operations of specific printing facilities.
Future events, such as changes in existing laws and regulations, new laws or
regulations or the discovery of conditions not currently known to the Company,
may give rise to additional compliance or remedial costs that could be material.
THE COMPANY DEPENDS ON KEY PERSONNEL, AND IT MAY NOT BE ABLE TO OPERATE
AND GROW ITS BUSINESS EFFECTIVELY IF IT LOSES THE SERVICES OF ANY OF ITS SENIOR
EXECUTIVE OFFICERS OR IS UNABLE TO ATTRACT QUALIFIED PERSONNEL IN THE FUTURE.
The Company is dependent upon the efforts of its senior executive
officers. In particular, it is dependent upon the management and leadership of
Kenneth L. Serota, the Company's President, Chief Executive Officer and Chairman
of the Board of Directors. The loss of Mr. Serota or other senior executive
officers could affect the Company's ability to run its business effectively.
The success of the Company's business is heavily dependent on its
ability to retain its current management and to attract and retain qualified
personnel in the future. Competition for senior management personnel is intense
and the Company may not be able to retain its personnel. The Company has not
entered into employment agreements with its key personnel, other than with Mr.
Serota, and these individuals may not continue in their present capacity with
the Company for any particular period of time. The Company does not have key man
insurance for any executive officers or key personnel. The loss of any senior
executive officer would require the remaining executive officers to divert
immediate and substantial attention to seeking a replacement. The Company's
inability to find a replacement for any departing executive officer on a timely
basis could adversely affect its ability to operate and grow its business.
ITEM 7A. 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 the 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, the Company's interest
expense will be affected by changes in the Alternate Base Rate or in the
Adjusted LIBO Rate. At December 31, 2003, the Company had borrowings outstanding
of approximately $6.3 million under the revolving credit facility and
approximately $71.8 million under the Term Loan B. The weighted average interest
rate for the Amended Credit Facility in 2003 was 4.8%. A hypothetical 100 basis
point change in interest rates would impact annual interest expense by
approximately $0.8 million based on the amount outstanding at December 31, 2003.
For additional information regarding the Company's Amended Credit Facility, see
Item 7 " Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
Newsprint is a commodity subject to supply and demand market
conditions. See Item 1 "Business - Newsprint" for further discussion.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information in response to this Item 8 is included in the
consolidated financial statements and notes thereto, and related Independent
Auditors' Report, appearing on pages 31-46 of this Form 10-K.
21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 December 31, 2003, 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 quarter ended December 31, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE REGISTRANT
The following table sets forth the name, age and position of LGO's
directors, executive officers and other key employees as of March 30, 2004:
NAME AGE POSITION
- ------------------------------------------------ --- -------------------------------------------------------
EXECUTIVE OFFICERS AND DIRECTORS:
Kenneth L. Serota............................... 42 President, Chief Executive Officer and Chairman of the
Board of Directors
Daniel D. Lewis................................. 41 Chief Financial Officer
Scott T. Champion............................... 44 Executive Vice President and Chief Operating Officer --
Community Division
Gene A. Hall.................................... 52 Senior Vice President
Randy Cope...................................... 43 Executive Vice President
Kelly Luvison................................... 44 Executive Vice President
KEY EMPLOYEES:
Theodore G. Mike................................ 57 Vice President-- Eastern Region
Gerald R. Smith................................. 55 President-- Liberty Group Suburban Newspapers, Inc.
KENNETH L. SEROTA is LGO's President and Chief Executive Officer and
has served in that capacity since January 1998. Mr. Serota is also the Chairman
of the Board of Directors and has been a Director since January 1998. Mr. Serota
has had equivalent titles and responsibilities at LGP during the same time
periods. Previously, he served as Vice President-- Law & Finance and Secretary
of Hollinger from May 1995 to December 1997 and as a director of its APC
Division, which owned the publications initially acquired by us, from 1996 to
1997. Previously, Mr. Serota served as an attorney and a certified public
accountant. Mr. Serota has significant experience negotiating and closing
acquisitions of publications and primarily focuses his efforts on executing the
Company's acquisition functions and overseeing all of its administrative and
finance functions. Mr. Serota received a B.S. in Accountancy and a J.D. from the
University of Illinois.
22
DANIEL D. LEWIS is LGO's Chief Financial Officer with primary
responsibility for its financial and accounting activities. He served as LGO's
Vice President-- Finance and Secretary from May 2001 to May 2002. From September
1999 to May 2001, Mr. Lewis served as LGO's corporate controller. Mr. Lewis has
had equivalent titles and responsibilities at LGP during the same time periods.
Prior to joining us, Mr. Lewis served as a management consultant for
PricewaterhouseCoopers LLP. In addition, Mr. Lewis has held management positions
with Kraft Foods Inc. and Berkshire Hathaway Inc. Mr. Lewis is a certified
public accountant.
SCOTT T. CHAMPION is LGO's Executive Vice President and Chief Operating
Officer -- Community Division and has primary responsibility for all community
publications. Mr. Champion has been a Director of LGP since January 2000. In
1998, he served as LGO's Senior Vice President. Mr. Champion has had equivalent
titles and responsibilities as an executive officer at LGP during the same time
periods. Prior to 1998, he served as Senior Vice President, regional manager,
and district manager of APC and had been employed at APC since 1988. Prior to
his employment at APC, Mr. Champion served as the publisher of a group of
privately owned publications. Mr. Champion has more than 19 years of experience
in the newspaper industry.
GENE A. HALL is LGO's Senior Vice President and has primary
responsibility for publications in the Midwestern region of the United States.
He was appointed LGO's Senior Vice President in January 1998. Mr. Hall has had
equivalent titles and responsibilities at LGP during the same time periods.
Prior to his employment with LGO, he served as a Senior Vice President of APC
from 1992 to 1998. Prior to 1992, he served as a regional manager and had been
employed at APC since 1988. Prior to his employment at APC, Mr. Hall was the
owner and publisher of the Charles City Press, Six County Shopper and The Extra
in Charles City, Iowa, which the Company currently owns. Mr. Hall has more than
33 years of experience in the newspaper industry.
RANDALL W. COPE is LGO's Executive Vice President responsible for
newspaper operations in Missouri, Kansas, Louisiana and Arkansas. Mr. Cope held
the position of Vice President from December 1998 until he was named LGO's
Executive Vice President in April 2002. Mr. Cope also oversees the Company's
national classified advertising network. From 1995 to 1998, Mr. Cope was
regional manager and publisher of the Northwest Arkansas Times in Fayetteville,
Arkansas, which was owned by APC. Mr. Cope has 20 years of experience covering
all areas of newspaper operations.
KELLY M. LUVISON is LGO's Executive Vice President responsible for
newspaper operations in western New York, Pennsylvania and West Virginia. Mr.
Luvison served as regional manager for the Company since January 1998, was
appointed a Vice President in January 2000 and Executive Vice President in April
2002. Prior to January 1998, Mr. Luvison was a regional manager for APC. Since
1996, Mr. Luvison has been publisher of the Evening Tribune in Hornell, New
York, a newspaper the Company currently owns, and recently became the publisher
of The Corning (NY) Leader, acquired by the Company on February 2, 2004, each in
addition to his duties as a regional manager and Vice President.
THEODORE G. MIKE is LGO's Vice President and has primary responsibility
for many of its newspaper operations in the eastern region of the United States.
Mr. Mike served as regional manager since January 1998, and was appointed Vice
President in January 1999. Mr. Mike served as a regional manager for APC from
1992 to 1997. Mr. Mike has also been publisher of The Evening Times in Sayre,
Pennsylvania, a newspaper the Company currently owns, since 1992. Mr. Mike has
more than 35 years of experience in the newspaper industry.
GERALD R. SMITH is President of Liberty Group Suburban Newspapers,
Inc., an indirect subsidiary of the Company. From February 1999 to February
2001, Mr. Smith served as Executive Vice President-- General Manager of Liberty
Group Suburban Newspapers, Inc. Prior to February 1999, Mr. Smith held various
positions over 14 years at the Daily Southtown, a 60,000 circulation daily
newspaper in Chicago including Executive Vice President-General Manager, and was
responsible for day-to-day operations from 1991 to 1999.
AUDIT COMMITTEE FINANCIAL EXPERT
There is currently no Audit Committee of LGO's Board of Directors. The
Board of Directors of Parent has determined that the Audit Committee of Parent
does not have an "audit committee financial expert" as that term is defined by
the applicable rules and regulations of the Securities and Exchange Commission.
However, the Board of Directors of Parent believes that each of the members of
the Audit Committee of Parent have sufficient financial expertise and experience
to effectively and competently discharge such director's responsibilities and
duties as a member of the Audit Committee of Parent.
CODE OF BUSINESS CONDUCT AND ETHICS
The Company has adopted a Code of Business Conduct and Ethics that
applies to its Chief Executive Officer, Chief Financial Officer, Chief
Accounting Officer, Controller and all of its other employees. The Code of
Business Conduct and Ethics is attached as Exhibit 14 to this Annual Report on
Form 10-K.
23
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the cash and non-cash compensation paid
to LGO's chief executive officer and each of the four other most highly
compensated executive officers of LGO who earned more than $100,000 in salary
and bonus during 2003 (each a named executive officer and, collectively, the
named executive officers):
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
----------------------------------------
FISCAL
NAME AND POSITION YEAR SALARY ($) BONUS ($)
- ------------------------------------------------------ ------ ---------- ---------
Kenneth L. Serota..................................... 2003 505,500 150,000
President and CEO 2002 478,008 675,000
2001 455,500 --
Scott T. Champion..................................... 2003 205,500 50,000
Executive Vice President, Chief Operating 2002 204,500 245,000
Officer - Community Division 2001 171,654 30,000
Gene A. Hall.......................................... 2003 150,500 19,300
Senior Vice President - Midwestern 2002 130,500 75,000
Region 2001 150,500 30,000
Randall W. Cope....................................... 2003 160,500 70,000
Executive Vice President - Missouri, 2002 150,500 70,000
Kansas and Arkansas 2001 150,500 25,000
Daniel D. Lewis....................................... 2003 140,500 20,000
Chief Financial Officer 2002 130,500 55,000
2001 117,308 25,000
COMPENSATION OF DIRECTORS
Individuals who are officers of LGO do not receive any compensation
directly for their service on LGO's Board of Directors.
EMPLOYMENT AGREEMENT
Amended and Restated Employment Agreement
LGP, LGO and Kenneth Serota (and GEI I and GEI II for limited purposes
therein) entered into an employment agreement, effective as of January 1, 2003,
whereby Mr. Serota agreed to serve as President, Chief Executive Officer and
Chairman of LGP, LGO and all of LGP's subsidiaries for a period ending on
January 1, 2006 and for additional successive one-year periods thereafter,
unless either LGO or Mr. Serota gives notice to the other 180 days prior to the
end of the current employment term that such term shall not be so extended. For
the term of the employment agreement, Mr. Serota shall also serve as a member of
each of LGP's and LGP's subsidiaries' board of directors and executive or
similar committees that have executive functions or responsibilities. Upon
termination of the employment agreement for any reason, Mr. Serota will be
entitled to all earned and unpaid compensation through the date of such
termination, which does not include any portion of his bonus unless otherwise
noted therein. The employment agreement also provides, subject to certain
exceptions, that (a) upon a termination of Mr. Serota's employment during the
term thereof by LGO without "cause" or by Mr. Serota for "good reason,"
including a "change of control," each as defined therein, LGO will pay Mr.
Serota an amount equal to two years' base salary (or three years' base salary
after a change of control) and a pro rata portion of his annual bonus, or (b)
upon a termination due to the death or disability, as defined therein, of Mr.
Serota, LGO will pay a pro rata portion of his annual bonus. Mr. Serota has no
duty to mitigate any amounts owed resulting from the termination of his
employment agreement.
Mr. Serota will receive (1) an annual base salary of $500,000 until the
end of the term, subject to any increase in salary granted by LGO's board of
directors, (2) a bonus, based on the attainment of realistic applicable
performance standards agreeable to LGO and Mr.
24
Serota, including standards based on revenue growth, EBITDA growth, completion
of reasonably acceptable acquisitions and growth of acquired properties (such
performance standards to be approved by the compensation committee or a
subcommittee thereof) (3) those benefits generally available to LGO's employees,
including life insurance, health insurance, deferred compensation and profit
sharing, (4) payment for business-related organizational or association
memberships, and (5) an automobile allowance of $800 per month.
Additionally, the employment agreement provided for, upon consummation
of the initial public offering, which has since been postponed (1) all
repurchase rights related to certain equity securities owned by Mr. Serota
pursuant to Mr. Serota's previous employment agreement, dated as of November 21,
1997, as amended, will be terminated, and (2) Mr. Serota will receive (a)
200,000 shares of LGP Common Stock pursuant to an incentive award plan and a
restricted stock agreement, and (b) a number of shares of LGP Common Stock equal
to the result of (x) $1,000,000 divided by (y) the median of the range of the
expected initial public offering price per share of the LGP Common Stock set
forth in the Registration Statement immediately prior to the effective date of
the initial public offering.
COMPENSATION PLANS
Defined Contribution Plan
The Parent maintains a defined contribution plan conforming to IRS
rules for 401(k) plans, for all of its employees satisfying minimum service
requirements as set forth under the plan. The plan allows for a matching
contribution at the discretion of the Parent. The Company recorded approximately
$296,000, $0 and $0 in expenses related to the plan in 2001, 2002 and 2003,
respectively.
Deferred Compensation Plans
The Parent maintains three non-qualified deferred compensation plans,
as described below, for certain of its employees.
The Parent maintains the Liberty Group Publishing, Inc. Publishers'
Deferred Compensation Plan, a non-qualified deferred compensation plan for the
benefit of certain designated publishers of its newspapers. Under the
publishers' plan, the Company credits an amount to a bookkeeping account
established for each participating publisher pursuant to a pre-determined
formula that is based upon the gross operating profits of each such publisher's
newspaper. The bookkeeping account is credited with earnings and losses based
upon the investment choices selected by the participant. The amounts credited to
the bookkeeping account on behalf of each participating publisher vest on an
installment basis over a period of 15 years. A participating publisher forfeits
all amounts under the publishers' plan in the event that the publisher's
employment with the Parent or the Company is terminated for "cause" as defined
in the publishers' plan. Amounts credited to a participating publisher's
bookkeeping account are distributable upon termination of the publisher's
employment with the Parent or the Company and will be made in a lump sum or
installments as elected by the publisher. The Company recorded $146,000,
$169,000 and $159,000 of compensation expense related to the plan in 2001, 2002
and 2003, respectively.
The Parent maintains the Liberty Group Publishing, Inc. Executive
Benefit Plan, a non-qualified deferred compensation plan for the benefit of
certain of its key employees. Under the executive benefit plan, The Company
credits an amount, determined in its sole discretion, to a bookkeeping account
established for each participating key employee. The bookkeeping account is
credited with earnings and losses based upon the investment choices selected by
the participant. The amounts credited to the bookkeeping account on behalf of
each participating key employee vest on an installment basis over a period of 5
years. A participating key employee forfeits all amounts under the executive
benefit plan in the event that the key employee's employment with the Parent or
the Company is terminated for "cause" as defined in the executive benefit plan.
Amounts credited to a participating key employee's bookkeeping account are
distributable upon termination of the key employee's employment with the Parent
or the Company, and will be made in a lump sum or installments as elected by the
key employee. The Company recorded $61,000, $61,000 and $77,000 of compensation
expense related to the plan in 2001, 2002 and 2003, respectively.
The Parent maintains the Liberty Group Publishing, Inc. Executive
Deferral Plan, a non-qualified deferred compensation plan for the benefit of
certain of its key employees. Under the executive deferral plan, eligible key
employees may elect to defer a portion of their compensation for payment at a
later date. Currently, the executive deferral plan allows a participating key
employee to defer up to 100% of his or her annual compensation until termination
of employment or such earlier period as elected by the participating key
employee. Amounts deferred are credited to a bookkeeping account established by
the Company for this purpose. The bookkeeping account is credited with earnings
and losses based upon the investment choices selected by the participant.
Amounts deferred under the executive deferral plan are fully vested and
nonforfeitable. The amounts in the bookkeeping account are payable to the key
employee at the time and in the manner elected by the key employee.
25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table provides summary information regarding the
beneficial ownership of shares of Common Stock as of March 30, 2004. Beneficial
ownership of shares is determined under the rules of the Securities and Exchange
Commission and generally includes any shares over which a person exercises sole
or shared voting or investment power.
NUMBER
NAME AND ADDRESS OF BENEFICIAL OWNERS OF SHARES % OWNED
- -------------------------------------------------- --------- -------
Liberty Group Publishing, Inc..................... 100 100%
3000 Dundee Road, Suite 203
Northbrook, IL 60062
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT SERVICES AGREEMENT
On April 18, 2000, LGO entered into a management services agreement
with Leonard Green & Partners, L.P., an affiliate of each of GEI II and GEI III,
which acts as the manager under the agreement. The management services agreement
provides that the manager will provide management, consulting and financial
planning services and transaction-related financial advisory and investment
banking services to LGO. The manager receives an annual fee of approximately
$1.5 million as compensation for its management, consulting and financial
planning services, which is payable in equal monthly installments and is
subordinated in right of payment to the Notes and the Amended Credit Facility.
The annual fee is recorded by the Company as selling, general and administrative
expense within the consolidated statements of operations. The manager also
receives reasonable and customary fees for transaction-related services and is
reimbursed for out-of-pocket expenses. The management services agreement
terminates on January 27, 2010.
The Company paid $1.5 million in management fees in 2001, 2002 and
2003, respectively, and $375,000, $350,000, and $0 in other fees in 2001, 2002,
and 2003, respectively, to Leonard Green & Partners, L.P. The Company is
obligated to pay other fees to Leonard Green & Partners, L.P. of $125,000 at
December 31, 2003, which the parties have agreed will be paid in 2004 without
any penalty or interest.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
KPMG LLP served as the Company's independent public accountants for the fiscal
years ended December 31, 2002 and 2003. The Parent's audit committee has
pre-approval policies and procedures in place that require it to approve all
professional services of KPMG LLP prior to the rendering of such services.
Audit Fees. The aggregate audit fees of KPMG LLP for professional services
rendered in connection with the audit of the Company's annual financial
statements and the reviews of financial statements included in the Company's
quarterly reports on Form 10-Q were approximately $375,000 and $365,000 for the
fiscal years ended December 31, 2002 and 2003, respectively.
Audit Related Fees. The aggregate audit related fees billed by KPMG LLP for
professional services rendered in connection with the audit of the Company's
401(k) plan was approximately $23,000 during each of the fiscal years ended
December 31, 2002 and 2003.
Tax Fees. The aggregate tax fees billed by KPMG LLP for tax compliance, tax
advice, and tax planning professional services were approximately $15,000 and
$0 during the fiscal years ended December 31, 2002 and 2003.
All Other Fees. KPMG LLP did not provide any other professional services during
the fiscal years ended December 31, 2002 and 2003.
26
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements.
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 2002 and 2003.
Consolidated Statements of Operations for the years ended December 31,
2001, 2002, and 2003.
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 2001, 2002, and 2003.
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2002, and 2003.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
All financial statement schedules have been omitted because they are
not required, are not applicable or the information required has been
presented in the aforementioned consolidated financial statements or
notes thereto.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the fourth quarter of
the period covered by this report.
(c) Exhibits.
The exhibits filed as a part of this report are listed in the following
Exhibit Index.
27
INDEX to EXHIBITS
EXHIBIT
NO. ITEMS
- --------- ----------------------------------------------------------------------------------
2.1 Asset Purchase Agreement dated as of November 21, 1997, among Liberty Incorporated by reference to
Group Publishing, Inc., Green Equity Investors II, L.P. (as guarantor), Exhibit 2.1 included on the
Liberty Group Operating, Inc., Hollinger International Inc., APAC-90 Company's Registration
Inc., American Publishing, and APAC-95, Inc. Statement on Form S-4
(Registration No. 333-46957)
(the "Company's S-4").
2.2 Asset Purchase Agreement dated as of November 21, 1997, among Liberty Incorporated by reference to
Group Publishing, Inc., Green Equity Investors II, L.P. (as guarantor), Exhibit 2.2 included on the
Liberty Group Operating, Inc., Hollinger International Inc., American Company's S-4.
Publishing Company of Illinois, APAC-90 Inc., and APAC-95, Inc.
2.3 Exchange Agreement dated as of November 21, 1997, between American Incorporated by reference to
Publishing Company of Illinois and Chicago Deferred Exchange Exhibit 2.3 included on the
Corporation. Company's S-4.
2.4 Qualified Exchange Trust Agreement, dated as of November 21, 1997 among Incorporated by reference to
the Chicago Trust Company, as Trustee under Trust No. 38347501, Chicago Exhibit 2.4 included on the
Deferred Exchange Corporation, and American Publishing Company of Company's S-4.
Illinois.
2.5 Amendment to Asset Purchase Agreement dated as of January 14, 1998, Incorporated by reference to
among Liberty Group Publishing, Inc., Green Equity Investors II, L.P. Exhibit 2.5 included on the
(as guarantor), Liberty Group Operating, Inc., Hollinger International Company's S-4.
Inc., APAL-90 Inc., American Publishing (1991) Inc. and APAC-95 Inc.
2.6 Amendment to Asset Purchase Agreement, dated as of January 14, 1998, Incorporated by reference to
among Liberty Group Publishing, Inc., Green Equity Investors II, L.P. Exhibit 2.6 included on the
(as guarantor), Liberty Group Operating, Inc., Hollinger International Company's S-4.
Inc., American Publishing Company of Illinois, APAC-90 Inc., American
Publishing (1991) Inc. and APAC-95 Inc.
2.7 Amendment to Exchange Agreement, dated as of January 14, 1998, between Incorporated by reference to
American Publishing Company of Illinois and Chicago Deferred Exchange Exhibit 2.7 included on the
Corporation. Company's S-4.
2.8 Amendment to Qualified Exchange Trust Agreement, dated as of January Incorporated by reference to
14, 1998, among The Chicago Trust Company, as Trustee under No. Exhibit 2.8 included on the
38347501, Chicago. Company's S-4.
2.9 Agreement dated as of January 15, 1998, among Liberty Group Publishing, Incorporated by reference to
Inc., Green Equity Investors II, L.P. (as guarantor), Liberty Group Exhibit 2.9 included on the
Operating, Inc., Hollinger International, Inc., American Publishing Company's S-4.
Company of Illinois, APAC-90 Inc., American Publishing (1991) Inc., and
APAC-95 Inc.
2.10 Agreement dated as of January 23, 1998, among American Publishing Incorporated by reference to
Company of Illinois, Chicago Deferred Exchange Corporation and The Exhibit 2.10 included on the
Chicago Trust Company. Company's S-4.
2.11 Agreement dated as of January 26, 1998, among Liberty Group Publishing, Incorporated by reference to
Inc., Green Equity Investors II, L.P. (as guarantor), Liberty Group Exhibit 2.11 included on the
Operating, Inc. Hollinger International, Inc., American Publishing Company's S-4.
Company of Illinois, APAC-90 Inc., American Publishing (1991) Inc., and
APAC-95 Inc.
28
EXHIBIT
NO. ITEMS
- --------- ----------------------------------------------------------------------------------
3.1 Certificate of Incorporation of Liberty Group Operating, Inc. Incorporated by reference to
Exhibit 2.11 included on the
Company's S-4.
3.2 By-laws of Liberty Group Operating, Inc. Incorporated by reference to
Exhibit 3.2 included on the
Company's S-4.
4.1 Indenture dated as of January 27, 1998 among Liberty Group Operating, Incorporated by reference to
Inc. and State Street Bank and Trust Company, as Trustee, including Exhibit 4.1 included on the
form of 9 3/8% Senior Subordinated Notes due 2008. Company's S-4.
*10.1 Employment Agreement dated as of November 27, 1997, between Liberty Incorporated by reference to
Group Publishing, Inc. and Kenneth L. Serota. Exhibit 10.1 included on the
Company's S-4.
*10.2 Amendment to Employment Agreement, dated as of August 11, 2000, between Incorporated by reference to
Liberty Group Operating, Inc., Kenneth L. Serota, Liberty Group Exhibit 10.2 included on the
Publishing, Inc., Green Equity Investors II, L.P. and Green Equity Company's Annual Report on
Investors III, L.P. Form 10-K for the year ending
December 31, 2000 (the
"Company's 2000 10-K").
10.3 Non-Competition Agreement dated as of January 27, 1998 between Liberty Incorporated by reference to
Group Operating, Inc. and Hollinger International, Inc. Exhibit 10.3 included on the
Company's S-4.
10.4 Management Services Agreement, dated as of April 18, 2000, between Incorporated by reference to
Liberty Group Operating, Inc. and Leonard Green & Partners, L.P. Exhibit 10.13 included on the
Company's 2000 10-K.
10.5 Amended and Restated Credit Agreement dated as of April 18, 2000, among Incorporated by reference to
Liberty Group Operating, Inc., Liberty Group Publishing, Inc., the lenders Exhibit 10.14 included on the
party thereto, Citicorp USA, Inc., Citibank N.A., DB Banc Alex Brown LLC, Company's 2000 10-K.
Wells Fargo Bank, N.A., and Bank of America, N.A.
10.6 First Amendment to Credit Agreement dated as of May 10, 2001, Incorporated by reference to
among Liberty Group Operating, Inc., Liberty Group Publishing, Inc., Exhibit 99 included on the
the lenders party thereto, Citibank, N.A. and Citicorp USA, Inc. Company's March 31, 2001 10-Q.
10.7 Second Amendment to Credit Agreement and Limited Waiver and Consent Incorporated by reference to
dated as of December 14, 2001 among Liberty Group Operating, Inc., Exhibit 10.7 included on the
Liberty Group Publishing, Inc. the lenders party thereto, Citibank, Company's 2001 10-K.
N.A. and Citicorp USA, Inc.
10.8 Guarantor Pledge and Security Agreement dated as of January 27, 1998 Incorporated by reference to
among Liberty Group Publishing, Inc., Liberty Group Arizona Holdings, Inc., Exhibit 10.6 included on the
Liberty Group Arkansas Holdings, Inc., Liberty Group California Holdings, Company's S-4.
Inc., Liberty Group Illinois Holdings, Inc., Liberty Group Iowa Holdings,
Inc., Liberty Group Kansas Holdings, Inc., Liberty Group Michigan Holdings, Inc.
Liberty Group Minnesota Holdings, Inc., Liberty Group Missouri Holdings, Inc.,
Liberty Group New York Holdings, Inc., Liberty Group Pennsylvania Holdings, Inc.,
Liberty Group Management Services, Inc. and Citicorp USA, Inc.
10.9 Borrower Pledge and Security Agreement dated as of January 27, 1998 Incorporated by reference to
between Liberty Group Operating, Inc. and Citicorp USA, Inc. Exhibit 10.7 included on the
Company's S-4.
29
EXHIBIT
NO. ITEMS
- --------- ----------------------------------------------------------------------------------
10.10 Guaranty, Indemnity and Subordination Agreement, dated as of January Incorporated by reference to
27, 1998, entered into by Liberty Group Publishing, Inc., Liberty Group Exhibit 10.10 included on the
Arizona Holdings, Inc., Liberty Group Arkansas Holdings, Inc., Liberty Company's 2001 10-K/A.
Group California Holdings, Inc., Liberty Group Illinois Holdings, Inc.,
Liberty Group Iowa Holdings, Inc., Liberty Group Kansas Holdings, Inc.,
Liberty Group Michigan Holdings, Inc., Liberty Group Minnesota
Holdings, Inc., Liberty Group Missouri Holdings, Inc., Liberty Group
New York Holdings, Inc., Liberty Group Pennsylvania Holdings, Inc. and
Liberty Group Management Services, Inc., for the benefit of the
Beneficiaries (as defined therein).
*10.11 Liberty Group Publishing, Inc.'s Publisher's Deferred Compensation Plan. Incorporated by reference to
Exhibit 10.10 included on the
Company's Annual Report on
Form 10-K for the period
ended December 31, 1998 (the
"Company's 1998 10-K").
*10.12 Liberty Group Publishing, Inc.'s Executive Benefit Plan. Incorporated by reference to
Exhibit 10.11 included on the
Company's 1998 10-K.
*10.13 Liberty Group Publishing, Inc.'s Executive Deferral Plan. Incorporated by reference to
Exhibit 10.12 included on the
Company's 1998 10-K.
*10.14 Liberty Group Publishing, Inc.'s 1999 Stock Option Plan. Incorporated by reference to
Exhibit 10.15 included on the
Company's 1999 10-K.
*10.15 Amended and Restated Employment Agreement, dated as of February 11, Incorporated by reference to
2003, between Liberty Group Operating, Inc., Kenneth L. Serota, Liberty Exhibit 10.25 included on the
Group Publishing, Green Equity Investors II, L.P. and Green Equity Company's Annual Report on
Investors III, L.P. Form 10-K for the period
ended December 31, 2002.
10.16 The Third Amendment to Credit Agreement, dated as of July 25, 2003, by and Incorporated by reference to
among Liberty Group Operating, Inc., Liberty Group Publishing, Inc., the Exhibit 10.1 included on the
Lenders party thereto, Citibank, N.A. and Citicorp USA, Inc. Company's June 30, 2003 10-Q.
12 Ratio of Earnings to Fixed Charges Included herewith.
14 Code of Business Conduct and Ethics Included herewith.
21 Subsidiaries of Liberty Group Operating, Inc. Incorporated by reference to
Exhibit 21 included on the
Company's 2001 10-K.
31 Certifications Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 Included herewith.
32 Certifications Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 Included herewith.
* Management Contract/Compensatory Plan or Arrangement
The Company has agreed to furnish to the Commission, upon request, a
copy of each agreement defining the rights of holders of long-term debt not
filed herewith in reliance upon the exemption from filing applicable to any such
agreement pursuant to which the total amount of securities authorized does not
exceed 10% of the total consolidated assets of the Company.
30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................................................................. 32
Consolidated Balance Sheets as of December 31, 2002 and 2003............................................. 33
Consolidated Statements of Operations for the years ended December 31, 2001, 2002 and 2003............... 34
Consolidated Statements of Stockholder's Equity for the years ended December 31, 2001, 2002 and 2003..... 35
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002 and 2003............... 36
Notes to Consolidated Financial Statements............................................................... 37
31
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Liberty Group Operating, Inc.:
We have audited the accompanying consolidated balance sheets of Liberty Group
Operating, Inc. and subsidiaries as of December 31, 2002 and 2003, and the
related consolidated statements of operations, stockholder's equity, and cash
flows for each of the years in the three-year period ended December 31, 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Liberty Group Operating, Inc. and
subsidiaries as of December 31, 2002 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, on January 1, 2002.
/s/ KPMG LLP
Chicago, Illinois
March 29, 2004
32
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
----------------------
2002 2003
--------- ---------
Assets
Current assets:
Cash and cash equivalents ............................................................ $ 1,696 $ 2,036
Accounts receivable, net of allowance for
doubtful accounts of $1,340 and $1,600 at December 31, 2002
and 2003, respectively ............................................................ 20,133 20,587
Inventory ............................................................................ 2,639 2,850
Prepaid expenses ..................................................................... 1,361 1,078
Deferred income taxes ................................................................ 1,713 1,432
Other current assets ................................................................. 326 184
--------- ---------
Total current assets .................................................................... 27,868 28,167
Property, plant and equipment, net ................................................... 48,654 45,771
Goodwill ............................................................................. 185,447 185,467
Intangible assets, net ............................................................... 234,317 226,601
Deferred financing costs, net ........................................................ 4,968 3,597
Other assets ......................................................................... 395 466
--------- ---------
Total assets ............................................................................ $ 501,649 $ 490,069
========= =========
Liabilities and stockholder's equity Current liabilities:
Current portion of Term Loan B ....................................................... $ 744 $ 744
Current portion of long-term liabilities ............................................. 509 407
Accounts payable ..................................................................... 2,166 2,920
Accrued expenses ..................................................................... 13,405 12,939
Deferred revenue ..................................................................... 8,591 8,500
--------- ---------
Total current liabilities ............................................................... 25,415 25,510
Long-term liabilities:
Borrowings under revolving credit facility ........................................... 21,845 6,338
Term Loan B, less current portion .................................................... 71,756 71,013
Long-term liabilities, less current portion .......................................... 1,139 865
Senior subordinated notes ............................................................ 180,000 180,000
Deferred income taxes ................................................................ 27,765 25,518
--------- ---------
Total liabilities ....................................................................... 327,920 309,243
Stockholder's equity:
Common stock, $0.01 par value, 1,000 shares authorized, 100
shares issued and outstanding at December 31, 2002 and
2003, respectively ................................................................ -- --
Additional paid-in capital ........................................................... 176,862 176,879
Retained earnings (accumulated deficit) .............................................. (3,133) 3,947
--------- ---------
Total stockholder's equity .............................................................. 173,729 180,826
--------- ---------
Total liabilities and stockholder's equity .............................................. $ 501,649 $ 490,069
========= =========
See accompanying notes to consolidated financial statements.
33
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------
2001 2002 2003
--------- --------- ---------
(IN THOUSANDS)
REVENUES:
Advertising ........................................ $ 147,977 $ 146,918 $ 143,958
Circulation ........................................ 33,228 33,353 32,731
Job printing and other ............................. 13,995 12,560 12,145
--------- --------- ---------
Total revenues ........................................ 195,200 192,831 188,834
OPERATING COSTS AND EXPENSES:
Operating costs .................................... 98,607 90,390 89,807
Selling, general and administrative ................ 53,764 53,201 54,018
Depreciation and amortization ...................... 21,315 17,027 13,912
Loss on sale of assets ............................. -- 325 104
--------- --------- ---------
Income from continuing operations ..................... 21,514 31,888 30,993
Interest expense - debt ............................... 29,935 23,816 21,915
Interest expense - amortization of deferred
financing costs .................................... 1,723 1,631 1,210
Impairment of other assets ............................ -- 223 --
Write-off of deferred financing costs ................. -- -- 161
--------- --------- ---------
Income (loss) from continuing operations before
income taxes and cumulative effect of change
in accounting principle ............................ (10,144) 6,218 7,707
Income tax expense (benefit) .......................... 444 (927) (1,475)
--------- --------- ---------
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle .......................................... (10,588) 7,145 9,182
Income from discontinued operations, net of tax ....... 1,508 4,269 --
--------- --------- ---------
Income (loss) before cumulative effect of change
in accounting principle ............................ (9,080) 11,414 9,182
Cumulative effect of change
in accounting principle, net of tax ................ -- (1,449) --
--------- --------- ---------
Net income (loss) ..................................... $ (9,080) $ 9,965 $ 9,182
========= ========= =========
See accompanying notes to consolidated financial statements.
34
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
RETAINED
COMMON COMMON ADDITIONAL EARNINGS
STOCK STOCK PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------ ------ ---------- ------------ ---------
(IN THOUSANDS)
Balances at 12/31/00 ................... 100 $ -- $ 176,736 $ (3,012) $ 173,724
Net contributions of capital ........ -- -- 109 -- 109
Dividend paid to Company's Parent ... -- -- -- (63) (63)
Net loss ............................ -- -- -- (9,080) (9,080)
--- ---- --------- --------- ---------
Balances at 12/31/01 ................... 100 -- 176,845 (12,155) 164,690
Net contributions of capital ........ -- -- 17 -- 17
Dividend paid to Company's Parent ... -- -- -- (943) (943)
Net income .......................... -- -- -- 9,965 9,965
--- ---- --------- --------- ---------
Balances at 12/31/02 ................... 100 -- 176,862 (3,133) 173,729
Net contributions of capital ........ -- -- 17 -- 17
Dividend paid to Company's Parent ... -- -- -- (2,102) (2,102)
Net income .......................... -- -- -- 9,182 9,182
--- ---- --------- --------- ---------
Balances at 12/31/03 .................. 100 $ -- $ 176,879 $ 3,947 $ 180,826
=== ==== ========= ========= =========
See accompanying notes to consolidated financial statements.
35
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2002 2003
--------- --------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss) ................................................... $ (9,080) $ 9,965 $ 9,182
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ....................................... 21,997 17,027 13,912
Amortization of deferred financing costs ............................ 1,723 1,631 1,210
Non-cash compensation ............................................... 109 17 17
Deferred taxes ...................................................... -- (1,234) (1,966)
Write-off of deferred financing costs ............................... -- -- 161
Impairment of other assets .......................................... -- 223 --
Loss on sale of fixed assets ........................................ -- 325 104
Gain from sale of discontinued operations, net of tax ............... -- (4,269) --
Cumulative effect of change in accounting principle, net of tax ..... -- 1,449 --
Changes in assets and liabilities, net of acquisitions and
dispositions:
Accounts receivable, net ......................................... 1,354 526 91
Inventory ........................................................ 218 49 69
Prepaid expenses and other assets ................................ (314) (202) 454
Accounts payable ................................................. (242) (117) 540
Accrued expenses ................................................. (2,932) (84) (880)
Deferred revenue ................................................. 92 (139) (91)
-------- -------- --------
Net cash provided by operating activities .............................. 12,925 25,167 22,803
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment .......................... (2,715) (2,496) (2,249)
Proceeds from sale of publications and other assets ................. -- 26,703 995
Acquisitions and investments, net of cash acquired .................. (615) (255) (2,481)
-------- -------- --------
Net cash provided by (used in) investing activities .................... (3,330) 23,954 (3,735)
-------- -------- --------
Cash flows from financing activities:
Repayments on Term Loan B ........................................... (1,000) (26,000) (743)
Net repayments under revolving credit facility ...................... (7,065) (21,105) (15,507)
Dividends to Parent ................................................. -- (943) (2,102)
Repurchase of common stock .......................................... (63) -- --
Payments on long-term liabilities ................................... (1,029) (851) (376)
-------- -------- --------
Net cash used in financing activities ............................... (9,157) (48,899) (18,728)
-------- -------- --------
Net increase in cash and cash equivalents .............................. 438 222 340
Cash and cash equivalents, at beginning of period ...................... 1,036 1,474 1,696
-------- -------- --------
Cash and cash equivalents, at end of period ............................ $ 1,474 $ 1,696 $ 2,036
======== ======== ========
Supplemental cash flow disclosure:
Cash interest paid .................................................. $ 32,130 $ 23,810 $ 21,604
Income taxes paid ................................................... 505 480 408
See accompanying notes to consolidated financial statements.
36
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Description of Business
Liberty Group Operating, Inc. ("Operating Company," "LGO" or
"Registrant") is a wholly-owned subsidiary of Liberty Group Publishing, Inc.
("Parent" or " LGP"). The Company ( as defined below) 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. As of December 31,
2003, the Company owns and operates 301 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
and Northeast United States and in the Chicago suburban market, which limits its
exposure to economic conditions in any single market or region.
The Company's portfolio of publications is comprised of 65 paid daily
newspapers and 127 paid non-daily newspapers. In addition, the Company publishes
109 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.
(B) Basis of Presentation
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 ("APC"), a wholly-owned subsidiary of
Hollinger International Inc. ("Hollinger"). LGO is a wholly-owned subsidiary of
LGP. The consolidated financial statements include the accounts of Operating
Company and its consolidated subsidiaries (the "Company"). All significant
intercompany accounts and transactions have been eliminated.
(C) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
(D) Inventory
Inventory consists principally of newsprint, which is valued at the
lower of cost or net realizable value. Cost is determined using the first-in,
first-out (FIFO).
(E) Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Routine maintenance
and repairs are expensed as incurred.
Depreciation is calculated under the straight-line method over the
estimated useful lives, principally 25 years for buildings and improvements and
5 to 10 years for machinery and equipment. Leasehold improvements are amortized
using the straight-line method over the shorter of the lease term or estimated
useful life of the asset.
37
(F) Goodwill and Intangible Assets
Intangible assets consist of subscriber, advertiser and customer
relationships, mastheads, and non-compete agreements with former owners of
acquired newspapers. The excess of acquisition costs over the estimated fair
value of net assets acquired is recorded as goodwill.
On January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets,"
which replaces the requirement to amortize intangible assets with indefinite
lives and goodwill with a requirement for an annual impairment test. SFAS No.
142 also establishes requirements for identifiable intangible assets. The
transition provisions of SFAS No. 142 require that the useful lives of
previously recognized intangible assets be reassessed and the remaining
amortization periods adjusted accordingly. Prior to adoption of SFAS No. 142,
advertiser and subscriber relationship intangible assets were amortized over
estimated remaining useful lives of 40 and 33 years, respectively. The Company
concluded that, based upon current economic conditions and its current pricing
strategies, the remaining useful lives as of January 1, 2002 for advertiser and
subscriber relationship intangible assets were 30 and 20 years, respectively,
and the amortization periods have been adjusted accordingly. Customer
relationships unrelated to newspapers are amortized over 10 years. Non-compete
agreements are amortized over periods of up to 10 years depending on the
specifics of the agreement.
Prior to the adoption of SFAS No. 142, the Company amortized goodwill
and mastheads over 40 years. Upon adoption of SFAS No. 142, the Company ceased
amortization of goodwill. The amortization of mastheads was also discontinued
because it was determined that the useful life of the mastheads is indefinite.
The Company assesses impairment of goodwill and mastheads by using
multiples of recent and projected revenues and EBITDA (earnings before interest,
taxes, depreciation, and amortization) for individual or strategic regional
clusters of 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. If
the fair value is less than the carrying value, then the Company will consider
whether a temporary or permanent impairment has occurred based on the specific
facts and circumstances associated with the individual, or strategic regional
clusters of, properties. The multiples of revenue 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.
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The Company assesses the recoverability of its long-lived
assets, including property, plant and equipment and definite lived intangible
assets, whenever events or changes in business circumstances indicate the
carrying amount of the assets, or related group of assets, may not be fully
recoverable. Factors leading to impairment include significant under performance
relative to expected historical or projected future operating losses,
significant changes in the manner of use of the acquired assets or the strategy
for the Company's overall business, and significant negative industry or
economic trends. The assessment of recoverability is based on management's
estimate. If undiscounted future operating cash flows do not exceed the net book
value of the long-lived assets, then a permanent impairment has occurred. The
Company would record the difference between the net book value of the long-lived
asset and the fair value of such asset as a charge against income in the
consolidated statements of operations if such a difference arose.
(G) Revenue Recognition
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. Advertising revenue is recognized upon publication of
the advertisements. Revenue for job printing is recognized upon delivery.
(H) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
38
(I)Fair Value of Financial Instruments
The Company has reviewed its cash equivalents, accounts receivable,
accounts payable and accrued expenses and has determined that their carrying
values approximate fair value due to the short maturity of these instruments.
The Company's carrying values for its Term Loan B and its borrowings under the
revolving credit facility approximate fair value due to the variable interest
rates associated with these financial instruments. It is not practical to
determine the fair value of the Notes, as defined below, as such security is not
actively traded.
(J) Cash Equivalents
Cash equivalents represent highly liquid certificates of deposit with a
maximum term at origination of three months or less.
(K) Reclassifications
Certain amounts in prior year's consolidated financial statements have
been reclassified to conform to the 2003 presentation.
(2) ACQUISITION
During December 2003, the Company entered into an agreement with
Midland Communications to acquire a printing facility. The purchase price was
$2,471. The Company has accounted for the acquisition using the purchase method
of accounting. Accordingly, the cost has been allocated to the assets acquired
and liabilities assumed based upon their respective fair values. The purchase
price allocation for the Midland Communications acquisition is as follows:
Cash $2,471
Legal and professional fees and other costs 132
------
Total purchase price $2,603
======
Tangible net assets acquired $1,266
Customer relationship intangible assets 1,337
------
Total purchase price allocation $2,603
======
The customer relationship intangible assets acquired are being
amortized over 10 years. The results of operations are included in the
consolidated financial statements since the date of acquisition.
(3) DISCONTINUED OPERATIONS
The Company disposed of the assets of six related publications in one
transaction on January 7, 2002 for cash proceeds of $26,519, resulting in a
pre-tax gain of $6,997, or a gain of $4,269, net of the tax effect of $2,728
(the "Disposition"). As a result of the sale, the disposition of the assets has
been accounted for as a discontinued operation, and, accordingly, amounts in the
consolidated statements of operations for all periods presented have been
reclassified to reflect the disposition as a discontinued operation. Income from
discontinued operations for 2001 was $1,508, representing the operating results
of the publications sold. Income from discontinued operations for 2002 consisted
of the gain on sale of the publications.
(4) ACCOUNTS RECEIVABLE
Net accounts receivable consisted of the following:
DECEMBER 31,
------------------------
2002 2003
---------- ----------
Accounts receivable............................................. $ 21,473 $ 22,187
Allowance for doubtful accounts................................. (1,340) (1,600)
---------- ----------
$ 20,133 $ 20,587
========== ==========
39
Activity in the allowance for doubtful accounts is summarized as
follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2001 2002 2003
------- ------- -------
Beginning balance ........................ $ 1,523 $ 1,458 $ 1,340
Balance acquired from acquisitions ....... -- -- 238
Balance relieved from dispositions ....... -- (32) --
Bad debt expense ......................... 1,249 1,119 1,295
Write-offs ............................... (1,314) (1,205) (1,273)
------- ------- -------
Ending balance ........................... $ 1,458 $ 1,340 $ 1,600
======= ======= =======
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
DECEMBER 31,
--------------------
2002 2003
-------- --------
Land ............................................... $ 7,864 $ 7,826
Buildings and improvements ......................... 26,853 26,098
Machinery and equipment ............................ 29,965 32,048
Furniture and fixtures ............................. 3,043 3,411
-------- --------
67,725 69,383
Less accumulated depreciation and amortization ..... (19,071) (23,612)
-------- --------
$ 48,654 $ 45,771
======== ========
(6) GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consisted of the following:
AS OF DECEMBER 31, 2002
--------------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
Amortized intangible assets:
Non-compete agreements......... $ 17,542 $ 16,179 $ 1,363
Advertiser relationships....... 195,039 22,438 172,601
Subscriber relationships....... 51,451 7,650 43,801
---------- ---------- -----------
Total............................. $ 264,032 $ 46,267 $ 217,765
========== ========== ===========
Non-amortized intangible assets:
Goodwill....................... $ 185,447
Mastheads...................... 16,552
----------
Total............................. $ 201,999
==========
AS OF DECEMBER 31, 2003
--------------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
Amortized intangible assets:
Non-compete agreements....... $ 17,551 $ 16,989 $ 562
Advertiser relationships..... 195,051 28,383 166,668
Customer relationships....... 1,337 -- 1,337
Subscriber relationships..... 51,454 9,974 41,480
---------- ---------- -----------
Total........................... $ 265,393 $ 55,346 $ 210,047
========== ========== ===========
Non-amortized intangible assets:
Goodwill..................... $ 185,467
Mastheads.................... 16,554
----------
Total........................... $ 202,021
==========
40
Amortization expense for the years ended December 31, 2002 and 2003 was $11,904
and $9,079, respectively.
Estimated amortization expense:
For the year ending December 31, 2004............... $ 8,575
For the year ending December 31, 2005............... 8,534
For the year ending December 31, 2006............... 8,531
For the year ending December 31, 2007............... 8,531
For the year ending December 31, 2008............... 8,403
Thereafter.......................................... 167,473
The changes in the carrying amount of goodwill for the year ended
December 31, 2003 are as follows:
Balance as of January 1, 2003....... $ 185,447
Goodwill from acquisitions.......... 20
-----------
Balance as of December 31, 2003..... $ 185,467
===========
After the Company's initial impairment test performed upon adoption of
SFAS No. 142 on January 1, 2002, it was 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 as of January 1, 2002. In the first quarter of
2002, a pre-tax goodwill and masthead impairment loss of $2,375 was recognized.
The loss, which was $1,449, net of tax, was reported in the Company's
consolidated earnings based on multiples of revenues and EBITDA (earnings before
interest, taxes, depreciation, and amortization) reflected in the purchase
prices of recent sales transactions of newspaper properties similar to those
owned by the Company.
The Company's annual impairment test conducted as of December 31, 2002
and 2003 indicated that no additional impairment would need to be recorded.
The effect on the Company's net income (loss) as a result of the
adoption of SFAS No. 142 is as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2001 2002 2003
--------- ------- --------
Reported net income (loss)............................................... $ (9,080) $ 9,965 $ 9,182
Add back: Goodwill amortization.......................................... 5,186 -- --
Add back: Masthead amortization.......................................... 474 -- --
Adjust: Advertiser relationships amortization (change in useful life).... (1,109) -- --
Adjust: Subscriber relationships amortization (change in useful life).... (797) -- --
-------- ------- ---------
Adjusted net income (loss)............................................... $ (5,326) $ 9,965 $ 9,182
======== ======= =========
(7) ACCRUED EXPENSES
Accrued expenses consisted of the following:
DECEMBER 31,
------------------
2002 2003
------- -------
Accrued payroll ....... $ 2,024 $ 2,212
Accrued vacation ...... 592 684
Accrued bonus ......... 1,692 702
Accrued interest ...... 7,391 7,702
Accrued other ......... 1,624 1,639
------- -------
$13,405 $12,939
======= =======
41
(8) LEASE COMMITMENTS
The future minimum lease payments related to the Company's
non-cancelable operating lease commitments as of December 31, 2003 are as
follows:
2004........................................ $ 357
2005........................................ 289
2006........................................ 283
2007........................................ 118
2008........................................ 66
-------
Total minimum lease payments...... $ 1,113
=======
Rental expense under operating leases was $752, $815 and $786 for the
years ended December 31, 2001, 2002 and 2003, respectively.
(9) SENIOR SUBORDINATED NOTES
The acquisition of 166 newspapers from Hollinger in January 1998 was
financed in part by: (i) $180,000 from the issuance and sale by the Operating
Company of $180,000 aggregate principal amount of 9 3/8% Senior Subordinated
Notes (the "Notes") due February 1, 2008 and (ii) $50,500 from the issuance and
sale by LGP of $89,000 aggregate principal amount of 11 5/8% Senior Discount
Debentures (the "Senior Discount Debentures") due February 1, 2009.
The Notes are general unsecured obligations of the Operating Company,
and are irrevocably and unconditionally jointly and severally guaranteed by each
of the Operating Company's existing and future subsidiaries. As of February 1,
2003 the Notes are redeemable for cash at the option of the Operating Company at
stipulated redemption amounts. In the event of a change in control (as defined
in the Notes) of the Operating Company or the Company, the Company must offer to
repurchase the Notes at 101% of their principal amount.
(10) REVOLVING CREDIT FACILITY AND TERM LOAN B (COLLECTIVELY, THE "AMENDED
CREDIT FACILITY")
On April 18, 2000, the Operating Company entered into an agreement to
amend and restate its $175,000 revolving credit facility. The amendment and
restatement extended the maturity date of the revolving credit facility from
January 2003 to March 2005, and included the issuance of a $100,000 Term Loan B.
The Term Loan B matures in March 2007.
On May 10, 2001, the Operating Company entered into an amendment to its
Amended Credit Facility. The amendment decreased the aggregate commitment
available under the revolving credit facility from $175,000 to $135,000 and
amended the Cash Coverage Ratio and Senior Leverage Ratio as defined within the
Amended Credit Facility.
On October 23, 2002, the Operating Company repaid $25,000 principal
amount of the Term Loan B with the proceeds from the Disposition. The proceeds
of the Disposition were initially used to reduce the outstanding amount under
the revolving credit facility and the Operating Company borrowed such amounts
under the revolving credit facility in connection with the repayment of the Term
Loan B.
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 debt instruments issued by
LGP.
The Term Loan B and the revolving credit facility bear interest at the
Operating Company's option equal to the Base Rate (as defined in the Amended
Credit Facility) or the adjusted LIBO Rate for a eurodollar loan (as defined in
the Amended Credit Facility) plus a margin that varies based upon a ratio set
forth in the Amended Credit Facility. There is an individual margin applicable
to each of the Term Loan B and the revolving credit facility. The Operating
Company pays a fee on the aggregate amount of outstanding letters of credit. The
Operating Company also 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. At December 31, 2003, the Operating Company had utilized
$6,338 of the revolving credit facility and $71,757 was outstanding under the
Term Loan B. The Term Loan B requires annual principal payments of $744 in 2004,
$26,862 in 2005, $35,321 in 2006 and $8,830 in 2007. The average interest rate
on borrowings under the Amended Credit Facility for 2003 was 4.8%.
42
The Amended Credit Facility contains certain financial covenants and
other limitations on LGP and the Operating Company, including restrictions on
the ability of LGP and its subsidiaries, including the Operating Company, to
make investments or other loans or to pay dividends or make other specified
restricted payments. These provisions generally prohibit dividend payments,
loans or advances by LGP or by the Operating Company to LGP without the consent
of the lenders under the Amended Credit Facility.
As of March 31, 2003, the Company had incurred $161 in legal and bank
fees associated with a proposed amendment to its Amended Credit Facility. On
March 31, 2003, the Company wrote off these costs because the Company postponed
amending its Amended Credit Facility.
(11) LONG-TERM LIABILITIES
Long-term liabilities principally represent amounts due under
non-interest-bearing non-compete agreements through 2010 and deferred
acquisition consideration to be paid in 2004.
The aggregate amount of payments related to long-term liabilities at
December 31, 2003 are as follows:
2004 ............. $ 407
2005 ............. 282
2006 ............. 177
2007 ............. 177
2008 ............. 121
Thereafter ....... 108
------
$1,272
======
(12) COMMON STOCK
During January 1998, LGO issued 100 shares of common stock, par value
$0.01 per share ("Common Stock"), to LGP. No shares of Common Stock have been
issued since such time.
(13) INCOME TAXES
Income tax expense (benefit) for the periods shown below consisted of:
CURRENT DEFERRED TOTAL
------- -------- --------
Year ended December 31, 2001:
U.S. Federal ................... $ -- $ -- $ --
State and local ................ 444 -- 444
------- ------- -------
$ 444 $ -- $ 444
======= ======= =======
Year ended December 31, 2002:
U.S. Federal ................... $ -- $ (929) $ (929)
State and local ................ 275 (273) 2
------- ------- -------
$ 275 $(1,202) $ (927)
======= ======= =======
Year ended December 31, 2003:
U.S. Federal ................... $ -- $(1,519) $(1,519)
State and local ................ 491 (447) 44
------- ------- -------
$ 491 $(1,966) $(1,475)
======= ======= =======
43
Income tax expense (benefit) differed from the amounts computed by
applying the U.S. Federal income tax rate of 34% to loss from continuing
operations before income taxes and cumulative effect of change in accounting
principle as a result of the following:
YEAR ENDED DECEMBER 31,
------------------------------
2001 2002 2003
-------- ------- -------
Computed "expected" tax benefit .......................... $(3,449) $ 2,114 $ 2,620
Increase (decrease) in income taxes resulting from:
Amortization of nondeductible goodwill ................ 1,687 -- --
State and local income taxes .......................... 293 1 29
Nondeductible meals and entertainment ................. 95 26 26
Discontinued operations ............................... 513 79 --
Other ................................................. -- -- (159)
Change in Federal valuation allowance ................. (1,305) (3,147) (3,991)
------- ------- -------
$ 444 $ 927 $(1,475)
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2002 and
2003 are presented below:
AS OF DECEMBER 31,
---------------------
2002 2003
-------- --------
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts ................ $ 536 $ 640
Accrued expenses ....................................................................... 1,177 703
Net operating losses ................................................................... 20,795 23,830
-------- --------
Gross deferred tax assets ................................................................. 22,508 25,173
Less: valuation allowance ................................................................. (4,948) (250)
-------- --------
Net deferred tax assets ................................................................ 17,560 24,923
-------- --------
Deferred tax liabilities:
Long-lived and intangible assets, principally due to differences in depreciation and
amortization ......................................................................... 43,612 49,009
-------- --------
Net deferred tax liability ............................................................. $ 26,052 $ 24,086
======== ========
The valuation allowance increased by $7,025 in 2001, decreased by $3,613 in
2002, and decreased by $4,698 in 2003, respectively. In assessing the
realizabitlity of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. In assessing the realizability of the Company's
deferred tax assets, which are principally net operating loss carry-forwards,
management considers the reversal of deferred tax liabilities which are
scheduled to reverse during the carry-forward period and tax planning
strategies.
At December 31, 2003, the Company has net operating loss carry-forwards
for Federal and state income tax purposes of $59,218, which are available to
offset future taxable income, if any. These Federal and state net operating loss
carry-forwards begin to expire in 2019 and 2004, respectively.
(14) EMPLOYEE BENEFIT PLANS
The Parent maintains certain benefit plans for its employees.
The Parent maintains a defined contribution plan conforming to IRS
rules for 401(k) plans, for all of its employees satisfying minimum service
requirements as set forth under the plan. The plan allows for a matching
contribution at the discretion of the Parent. The Company recorded $296, $0,
and $0 in expenses related to the plan in 2001, 2002 and 2003, respectively.
The Parent maintains three non-qualified deferred compensation plans,
as described below, for certain of its employees.
The Parent maintains the Liberty Group Publishing, Inc. Publishers'
Deferred Compensation Plan ("Publishers Plan"), a non-qualified deferred
compensation plan for the benefit of certain designated publishers of the
Company's newspapers. Under the Publishers Plan, the Company credits an amount
to a bookkeeping account established for each participating publisher pursuant
to a pre-determined formula which is based upon the gross operating profits of
each such publisher's newspaper. The bookkeeping account
44
is credited with earnings and losses based upon the investment choices selected
by the participant. The amounts credited to the bookkeeping account on behalf of
each participating publisher vest on an installment basis over a period of 15
years. A participating publisher forfeits all amounts under the Publishers Plan
in the event that the publishers employment with the Parent or the Company is
terminated for "cause" as defined in the Publishers Plan. Amounts credited to a
participating publisher's bookkeeping account are distributable upon termination
of the publisher's employment with the Parent or the Company and will be made in
a lump sum or installments as elected by the publisher. The Company recorded
$146, $169 and $159 of compensation expense related to the plan in 2001, 2002
and 2003, respectively.
The Parent maintains the Liberty Group Publishing, Inc. Executive
Benefit Plan ("Executive Benefit Plan"), a non-qualified deferred compensation
plan for the benefit of certain key employees of the Company. Under the
Executive Benefit Plan, the Company credits an amount, determined at the
Company's sole discretion, to a bookkeeping account established for each
participating key employee. The bookkeeping account is credited with earnings
and losses based upon the investment choices selected by the participant. The
amounts credited to the bookkeeping account on behalf of each participating key
employee vest on an installment basis over a period of 5 years. A participating
key employee forfeits all amounts under the Executive Benefit Plan in the event
that the key employee's employment with the Parent or the Company is terminated
for "cause" as defined in the Executive Benefit Plan. Amounts credited to a
participating key employee's bookkeeping account are distributable upon
termination of the key employee's employment with the Parent or the Company, and
will be made in a lump sum or installments as elected by the key employee. The
Company recorded $61, $61 and $77 of compensation expense related to the plan in
2001, 2002 and 2003, respectively.
The Parent maintains the Liberty Group Publishing, Inc. Executive
Deferral Plan ("Executive Deferral Plan"), a non-qualified deferred compensation
plan for the benefit of certain key employees of the Company. Under the
Executive Deferral Plan, eligible key employees may elect to defer a portion of
their compensation for payment at a later date. Currently, the Executive
Deferral Plan allows a participating key employee to defer up to 100% of his or
her annual compensation until termination of employment or such earlier period
as elected by the participating key employee. Amounts deferred are credited to a
bookkeeping account established by the Company for this purpose. The bookkeeping
account is credited with earnings and losses based upon the investment choices
selected by the participant. Amounts deferred under the Executive Deferral Plan
are fully vested and non-forfeitable. The amounts in the bookkeeping account are
payable to the key employee at the time and in the manner elected by the key
employee.
(15) RELATED-PARTY TRANSACTIONS
The Company paid $1,500 in management fees in 2001, 2002, and 2003,
respectively, and $375, $350, and $0 in other fees in 2001, 2002, and 2003,
respectively, to Leonard Green & Partners, L.P. The Company is obligated to pay
other fees to Leonard Green & Partners, L.P. of $125 at December 31, 2003, which
the parties have agreed will be paid in 2004 without any penalty or interest.
(16) SUBSEQUENT EVENT
On February 3, 2004, the Company acquired the daily newspapers in
Corning, New York, and Freeport, Illinois and received cash consideration from
Lee Enterprises, Inc. in exchange for the Company's daily newspapers in Elko,
Nevada and Burley, Idaho, as well as its weeklies in Hailey, Idaho and Jerome,
Idaho. The transaction will be accounted for using the purchase method of
accounting. The purchase price will be allocated to the assets acquired and the
liabilities assumed according to their fair market values at the date of
acquisition. The results of operations will be included in the consolidated
financial statements from the date of acquisition.
45
(17) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth selected unaudited quarterly financial
information for the years ended December 31, 2002 and 2003. The operating
results for any given quarter are not necessarily indicative of results for any
future period.
2002 QUARTERS ENDED
--------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
-------- -------- -------- --------
REVENUES:
Advertising ....................................... $ 37,604 $ 36,787 $ 38,686 $ 33,841
Circulation ....................................... 8,368 8,447 8,357 8,181
Job printing and other ............................ 3,201 3,242 3,114 3,003
-------- -------- -------- --------
Total revenues ............................................. 49,173 48,476 50,157 45,025
OPERATING COSTS AND EXPENSES:
Operating costs ................................... 23,184 22,798 22,716 21,692
Selling, general and administrative ............... 13,388 13,498 13,646 12,669
Depreciation and amortization ..................... 4,297 4,265 4,283 4,182
Loss (gain) on sale of assets ..................... (8) 333 -- --
-------- -------- -------- --------
Income from continuing operations .......................... 8,312 7,582 9,512 6,482
Interest expense - debt .................................... 5,740 5,903 6,000 6,173
Interest expense - amortization of deferred financing
costs ...................................................... 666 322 316 324
Impairment of other assets ................................. -- 223 -- --
-------- -------- -------- --------
Income (loss) from continuing operations before
income taxes and cumulative effect of change
accounting principle .............................. 1,906 1,134 3,196 (18)
Income tax expense (benefit) ............................... (711) (264) (85) 133
-------- -------- -------- --------
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle ......................................... 2,617 1,398 3,281 (151)
Income (loss) from discontinued operations, net
of tax .............................................. (73) -- -- 4,342
-------- -------- -------- --------
Income before cumulative effect of change
in accounting principle ........................... 2,544 1,398 3,281 4,191
Cumulative effect of change
in accounting principle, net of tax ............... -- -- -- (1,449)
-------- -------- -------- --------
Net income ................................................. $ 2,544 $ 1,398 $ 3,281 $ 2,742
======== ======== ======== ========
2003 QUARTERS ENDED
------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
-------- -------- ------- ---------
REVENUES:
Advertising ............................................. $ 37,221 $ 35,996 $ 38,103 $ 32,638
Circulation ............................................. 8,198 8,219 8,236 8,078
Job printing and other .................................. 3,166 2,953 2,985 3,041
-------- -------- -------- --------
Total revenues ....................................... 48,585 47,168 49,324 43,757
OPERATING COSTS AND EXPENSES:
Operating costs ......................................... 23,151 22,481 22,625 21,550
Selling, general and administrative ..................... 14,129 13,892 13,499 12,498
Depreciation and amortization ........................... 3,264 3,485 3,559 3,604
Loss (gain) of sale of assets ........................... (32) 136 -- --
-------- -------- -------- --------
Income from operations ..................................... 8,073 7,174 9,641 6,105
Interest expense - debt .................................... 5,370 5,449 5,503 5,593
Interest expense - amortization of deferred financing
costs .................................................... 327 306 284 293
Write-off of deferred financing costs ...................... -- -- -- 161
-------- -------- -------- --------
Income from operations before income taxes ................. 2,376 1,419 3,854 58
Income tax expense (benefit) ............................... (3,731) 600 1,551 105
-------- -------- -------- --------
Net income (loss) .......................................... $ 6,107 $ 819 $ 2,303 $ (47)
======== ======== ======== ========
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 30, 2004 LIBERTY GROUP OPERATING, INC. (Registrant)
By /s/ KENNETH L. SEROTA
--------------------------------------
Kenneth L. Serota,
President, Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities on the dates indicated.
Dated: March 30, 2004 /s/ KENNETH L. SEROTA
------------------------------------------
Kenneth L. Serota,
President, Chief Executive Officer and
Chairman of the Board of Directors
(principal executive officer)
Dated: March 30, 2004 /s/ DANIEL D. LEWIS
------------------------------------------
Daniel D. Lewis,
Chief Financial Officer
(principal financial and accounting
officer)
47
INDEX TO EXHIBITS
EXHIBIT
NO. ITEMS
- -------- ---------------------------------------------------------------------------------
2.1 Asset Purchase Agreement dated as of November 21, 1997, among Liberty Incorporated by reference to
Group Publishing, Inc., Green Equity Investors II, L.P. (as guarantor), Exhibit 2.1 included on the
Liberty Group Operating, Inc., Hollinger International Inc., APAC-90 Company's Registration
Inc., American Publishing, and APAC-95, Inc. Statement on Form S-4
(Registration No. 333-46957)
(the "Company's S-4").
2.2 Asset Purchase Agreement dated as of November 21, 1997, among Liberty Incorporated by reference to
Group Publishing, Inc., Green Equity Investors II, L.P. (as guarantor), Exhibit 2.2 included on the
Liberty Group Operating, Inc., Hollinger International Inc., American Company's S-4.
Publishing Company of Illinois, APAC-90 Inc., and APAC-95, Inc.
2.3 Exchange Agreement dated as of November 21, 1997, between American Incorporated by reference to
Publishing Company of Illinois and Chicago Deferred Exchange Exhibit 2.3 included on the
Corporation. Company's S-4.
2.4 Qualified Exchange Trust Agreement, dated as of November 21, 1997 among Incorporated by reference to
the Chicago Trust Company, as Trustee under Trust No. 38347501, Chicago Exhibit 2.4 included on the
Deferred Exchange Corporation, and American Publishing Company of Company's S-4.
Illinois.
2.5 Amendment to Asset Purchase Agreement dated as of January 14, 1998, Incorporated by reference to
among Liberty Group Publishing, Inc., Green Equity Investors II, L.P. Exhibit 2.5 included on the
(as guarantor), Liberty Group Operating, Inc., Hollinger International Company's S-4.
Inc., APAL-90 Inc., American Publishing (1991) Inc. and APAC-95 Inc.
2.6 Amendment to Asset Purchase Agreement, dated as of January 14, 1998, Incorporated by reference to
among Liberty Group Publishing, Inc., Green Equity Investors II, L.P. Exhibit 2.6 included on the
(as guarantor), Liberty Group Operating, Inc., Hollinger International Company's S-4.
Inc., American Publishing Company of Illinois, APAC-90 Inc., American
Publishing (1991) Inc. and APAC-95 Inc.
2.7 Amendment to Exchange Agreement, dated as of January 14, 1998, between Incorporated by reference to
American Publishing Company of Illinois and Chicago Deferred Exchange Exhibit 2.7 included on the
Corporation. Company's S-4.
2.8 Amendment to Qualified Exchange Trust Agreement, dated as of January Incorporated by reference to
14, 1998, among The Chicago Trust Company, as Trustee under No. Exhibit 2.8 included on the
38347501, Chicago. Company's S-4.
2.9 Agreement dated as of January 15, 1998, among Liberty Group Publishing, Incorporated by reference to
Inc., Green Equity Investors II, L.P. (as guarantor), Liberty Group Exhibit 2.9 included on the
Operating, Inc., Hollinger International, Inc., American Publishing Company's S-4.
Company of Illinois, APAC-90 Inc., American Publishing (1991) Inc., and
APAC-95 Inc.
2.10 Agreement dated as of January 23, 1998, among American Publishing Incorporated by reference to
Company of Illinois, Chicago Deferred Exchange Corporation and The Exhibit 2.10 included on the
Chicago Trust Company. Company's S-4.
2.11 Agreement dated as of January 26, 1998, among Liberty Group Publishing, Incorporated by reference to
Inc., Green Equity Investors II, L.P. (as guarantor), Liberty Group Exhibit 2.11 included on the
Operating, Inc. Hollinger International, Inc., American Publishing Company's S-4.
Company of Illinois, APAC-90 Inc., American Publishing (1991) Inc., and
APAC-95 Inc.
48
EXHIBIT
NO. ITEMS
- -------- ---------------------------------------------------------------------------------
3.1 Certificate of Incorporation of Liberty Group Operating, Inc. Incorporated by reference to
Exhibit 2.11 included on the
Company's S-4.
3.2 By-laws of Liberty Group Operating, Inc. Incorporated by reference to
Exhibit 3.2 included on the
Company's S-4.
4.1 Indenture dated as of January 27, 1998 among Liberty Group Operating, Incorporated by reference to
Inc. and State Street Bank and Trust Company, as Trustee, including Exhibit 4.1 included on the
form of 9 3/8% Senior Subordinated Notes due 2008. Company's S-4.
*10.1 Employment Agreement dated as of November 27, 1997, between Liberty Incorporated by reference to
Group Publishing, Inc. and Kenneth L. Serota. Exhibit 10.1 included on the
Company's S-4.
*10.2 Amendment to Employment Agreement, dated as of August 11, 2000, between Incorporated by reference to
Liberty Group Operating, Inc., Kenneth L. Serota, Liberty Group Exhibit 10.2 included on the
Publishing, Inc., Green Equity Investors II, L.P. and Green Equity Company's Annual Report on
Investors III, L.P. Form 10-K for the year ending
December 31, 2000 (the
"Company's 2000 10-K").
10.3 Non-Competition Agreement dated as of January 27, 1998 between Liberty Incorporated by reference to
Group Operating, Inc. and Hollinger International, Inc. Exhibit 10.3 included on the
Company's S-4.
10.4 Management Services Agreement, dated as of April 18, 2000, between Incorporated by reference to
Liberty Group Operating, Inc. and Leonard Green & Partners, L.P. Exhibit 10.13 included on the
Company's 2000 10-K.
10.5 Amended and Restated Credit Agreement dated as of April 18, 2000, among Incorporated by reference to
Liberty Group Operating, Inc., Liberty Group Publishing, Inc., the lenders Exhibit 10.14 included on the
party thereto, Citicorp USA, Inc., Citibank N.A., DB Banc Alex Brown LLC, Company's 2000 10-K.
Wells Fargo Bank, N.A., and Bank of America, N.A.
10.6 First Amendment to Credit Agreement dated as of May 10, 2001, Incorporated by reference to
among Liberty Group Operating, Inc., Liberty Group Publishing, Inc., Exhibit 99 included on the
the lenders party thereto, Citibank, N.A. and Citicorp USA, Inc. Company's March 31, 2001 10-Q.
10.7 Second Amendment to Credit Agreement and Limited Waiver and Consent Incorporated by reference to
dated as of December 14, 2001 among Liberty Group Operating, Inc., Exhibit 10.7 included on the
Liberty Group Publishing, Inc. the lenders party thereto, Citibank, Company's 2001 10-K.
N.A. and Citicorp USA, Inc.
10.8 Guarantor Pledge and Security Agreement dated as of January 27, 1998 Incorporated by reference to
among Liberty Group Publishing, Inc., Liberty Group Arizona Holdings, Inc., Exhibit 10.6 included on the
Liberty Group Arkansas Holdings, Inc., Liberty Group California Holdings, Company's S-4.
Inc., Liberty Group Illinois Holdings, Inc., Liberty Group Iowa Holdings,
Inc., Liberty Group Kansas Holdings, Inc., Liberty Group Michigan Holdings, Inc.
Liberty Group Minnesota Holdings, Inc., Liberty Group Missouri Holdings, Inc.,
Liberty Group New York Holdings, Inc., Liberty Group Pennsylvania Holdings, Inc.,
Liberty Group Management Services, Inc. and Citicorp USA, Inc.
10.9 Borrower Pledge and Security Agreement dated as of January 27, 1998 Incorporated by reference to
between Liberty Group Operating, Inc. and Citicorp USA, Inc. Exhibit 10.7 included on the
Company's S-4.
49
EXHIBIT
NO. ITEMS
- -------- ---------------------------------------------------------------------------------
10.10 Guaranty, Indemnity and Subordination Agreement, dated as of January Incorporated by reference to
27, 1998, entered into by Liberty Group Publishing, Inc., Liberty Group Exhibit 10.10 included on the
Arizona Holdings, Inc., Liberty Group Arkansas Holdings, Inc., Liberty Company's 2001 10-K/A.
Group California Holdings, Inc., Liberty Group Illinois Holdings, Inc.,
Liberty Group Iowa Holdings, Inc., Liberty Group Kansas Holdings, Inc.,
Liberty Group Michigan Holdings, Inc., Liberty Group Minnesota
Holdings, Inc., Liberty Group Missouri Holdings, Inc., Liberty Group
New York Holdings, Inc., Liberty Group Pennsylvania Holdings, Inc. and
Liberty Group Management Services, Inc., for the benefit of the
Beneficiaries (as defined therein).
*10.11 Liberty Group Publishing, Inc.'s Publisher's Deferred Compensation Plan. Incorporated by reference to
Exhibit 10.10 included on the
Company's Annual Report on
Form 10-K for the period
ended December 31, 1998 (the
"Company's 1998 10-K").
*10.12 Liberty Group Publishing, Inc.'s Executive Benefit Plan. Incorporated by reference to
Exhibit 10.11 included on the
Company's 1998 10-K.
*10.13 Liberty Group Publishing, Inc.'s Executive Deferral Plan. Incorporated by reference to
Exhibit 10.12 included on the
Company's 1998 10-K.
*10.14 Liberty Group Publishing, Inc.'s 1999 Stock Option Plan. Incorporated by reference to
Exhibit 10.15 included on the
Company's 1999 10-K.
*10.15 Amended and Restated Employment Agreement, dated as of February 11, Incorporated by reference to
2003, between Liberty Group Operating, Inc., Kenneth L. Serota, Liberty Exhibit 10.25 included on the
Group Publishing, Green Equity Investors II, L.P. and Green Equity Company's Annual Report on
Investors III, L.P. Form 10-K for the period
ended December 31, 2002.
10.16 The Third Amendment to Credit Agreement, dated as of July 25, 2003, by and Incorporated by reference to
among Liberty Group Operating, Inc., Liberty Group Publishing, Inc., the Exhibit 10.1 included on the
Lenders party thereto, Citibank, N.A. and Citicorp USA, Inc. Company's June 30, 2003 10-Q.
12 Ratio of Earnings to Fixed Charges Included herewith.
14 Code of Business Conduct and Ethics Included herewith.
21 Subsidiaries of Liberty Group Operating, Inc. Incorporated by reference to
Exhibit 21 included on the
Company's 2001 10-K.
31 Certifications Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 Included herewith.
32 Certifications Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 Included herewith.
- ------------------
* Management Contract/Compensatory Plan or Arrangement
50