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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
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 Executive Offices)
Registrant's Telephone Number, Including Area Code: (847) 272-2244
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the Company's common stock, par value
$0.01 per share, as of May 17, 2004: 100 shares.
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TABLE OF CONTENTS
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 2004
and December 31, 2003 (Unaudited)............................................. 3
Consolidated Statements of Operations for the Three Months Ended
March 31, 2004 and March 31, 2003 (Unaudited).................................. 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2004 and March 31, 2003 (Unaudited).................................. 5
Notes to Unaudited Interim Consolidated Financial Statements......................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 8
Disclosure Regarding Forward-Looking Statements ..................................... 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk............................... 14
Item 4 Controls and Procedures.................................................................. 14
PART II - OTHER INFORMATION
Item 1 Legal Proceedings........................................................................ 15
Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities......... 14
Item 3 Defaults Upon Senior Securities.......................................................... 14
Item 4 Submission of Matters to a Vote of Security Holders...................................... 14
Item 5 Other Information........................................................................ 14
Item 6 Exhibits and Reports on Form 8-K......................................................... 14
Signatures........................................................................................ 15
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2004 2003
----------------- -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................ $ 5,800 $ 2,036
Accounts receivable, net of allowance for doubtful accounts of $1,513 and
$1,600 at March 31, 2004 and December 31, 2003, respectively...................... 20,063 20,587
Inventory............................................................................ 2,891 2,850
Prepaid expenses..................................................................... 1,465 1,078
Deferred income taxes................................................................ 1,278 1,432
Other current assets................................................................. 175 184
------------ ------------
Total current assets.................................................................... 31,672 28,167
Property, plant and equipment, net................................................... 45,682 45,771
Goodwill............................................................................. 183,872 185,467
Intangible assets, net............................................................... 230,256 226,601
Deferred financing costs, net........................................................ 3,301 3,597
Other assets......................................................................... 432 466
------------ ------------
Total assets............................................................................ $ 495,215 $ 490,069
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Borrowings under revolving credit facility........................................... $ 8,085 $ --
Current portion of Term Loan B....................................................... 744 744
Current portion of long-term liabilities............................................. 480 407
Accounts payable..................................................................... 2,071 1,831
Accrued expenses..................................................................... 11,511 14,028
Deferred revenue..................................................................... 9,216 8,500
------------ ------------
Total current liabilities............................................................... 32,107 25,510
LONG-TERM LIABILITIES:
Borrowings under revolving credit facility........................................... -- 6,338
Term Loan B, less current portion.................................................... 70,641 71,013
Long-term liabilities, less current portion.......................................... 809 865
Senior subordinated notes............................................................ 180,000 180,000
Deferred income taxes................................................................ 26,817 25,518
------------ ------------
Total liabilities....................................................................... 310,374 309,243
STOCKHOLDER'S EQUITY:
Common stock, $0.01 par value, 1,000 shares authorized, 100 shares
issued and outstanding at March 31, 2004 and December 31, 2003.................... -- --
Additional paid-in capital........................................................... 176,879 176,879
Retained earnings.................................................................... 7,962 3,947
------------ ------------
Total stockholder's equity.............................................................. 184,841 180,826
------------ ------------
Total liabilities and stockholder's equity.............................................. $ 495,215 $ 490,069
============ ============
See accompanying notes to unaudited interim consolidated financial statements.
3
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2004 2003
------------ ------------
(UNAUDITED)
REVENUES:
Advertising............................................................................ $ 33,274 $ 31,610
Circulation............................................................................ 8,206 7,780
Job printing and other................................................................. 4,231 2,905
------------ ------------
Total revenues...................................................................... 45,711 42,295
OPERATING COSTS AND EXPENSES:
Operating costs........................................................................ 22,995 20,740
Selling, general and administrative.................................................... 12,697 12,029
Depreciation and amortization.......................................................... 3,270 3,468
Loss on sale of assets................................................................. -- 20
------------ ------------
Income from continuing operations......................................................... 6,749 6,038
Interest expense - debt................................................................... 5,374 5,593
Interest expense - amortization of deferred financing costs............................... 296 293
Write-off of deferred financing costs..................................................... --- 161
------------ ------------
Income (loss) from continuing operations before income taxes.............................. 1,079 (9)
Income tax expense........................................................................ 506 105
------------ ------------
Income (loss) from continuing operations ................................................. 573 (114)
Income from discontinued operations, net of tax........................................... 4,593 67
------------ ------------
Net income (loss)......................................................................... $ 5,166 $ (47)
============ ============
See accompanying notes to unaudited interim consolidated financial statements.
4
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-------------------------
(UNAUDITED)
2004 2003
---- ----
Cash flows from operating activities:
Net income (loss)................................................. $ 5,166 $ (47)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization..................................... 3,270 3,468
Amortization of deferred financing costs.......................... 296 293
Non-cash compensation............................................. -- 4
Deferred taxes.................................................... 394 --
Loss on sale of assets............................................ -- 20
Write-off of deferred financing costs............................. -- 161
Income from discontinued operations, net of tax................... (4,593) (67)
Changes in assets and liabilities, net of acquisitions and
dispositions:
Accounts receivable, net....................................... 401 1,091
Inventory...................................................... (11) (172)
Prepaid expenses and other assets.............................. (351) (133)
Accounts payable............................................... 240 45
Accrued expenses............................................... (3,087) (4,547)
Deferred revenue............................................... 263 217
--------- ---------
Net cash provided by operating activities............................... 1,992 333
--------- ---------
Cash flow from investing activities:
Purchases of property, plant and equipment........................ (548) (467)
Payments for acquisitions......................................... (32) --
Proceeds from exchange of publications and sales of assets........ 2,184 256
--------- ---------
Net cash provided by (used in) investing activities.................... 1,604 (211)
--------- ---------
Cash flows from financing activities:
Repayments of Term Loan B......................................... (372) (372)
Net borrowings under revolving credit facility.................... 1,747 1,695
Dividends to Parent............................................... (1,151) (174)
Net payments on long-term liabilities............................. (56) (60)
--------- ---------
Net cash provided by financing activities.............................. 168 1,089
--------- ---------
Net increase in cash and cash equivalents.............................. 3,764 1,211
Cash and cash equivalents, at beginning of period...................... 2,036 1,696
--------- ---------
Cash and cash equivalents, at end of period............................ $ 5,800 $ 2,907
========= =========
See accompanying notes to unaudited interim consolidated financial statements.
5
LIBERTY GROUP OPERATING, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(1) THE COMPANY AND BASIS OF PRESENTATION
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 unaudited interim
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 March 31, 2004, the Company owns and operates 294
publications located in 15 states that reach approximately 2.3 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 121 paid non-daily newspapers. In addition, the Company publishes
108 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.
The accompanying unaudited interim consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and note disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations. These unaudited interim
consolidated financial statements reflect all adjustments which are, in the
opinion of management, necessary to present a fair statement of the results of
the interim periods presented. The accompanying unaudited interim consolidated
financial statements as of March 31, 2004 and for the three months ended March
31, 2004 should be read in conjunction with the audited consolidated financial
statements of the Company included in LGO's Form 10-K for the year ended
December 31, 2003 filed with the Securities and Exchange Commission. The
Company's results for the interim periods are not necessarily indicative of the
results to be expected for the full year.
(2) RECLASSIFICATIONS
Certain amounts in the prior year's unaudited interim consolidated financial
statements have been reclassified to conform to the 2004 presentation.
(3) LEE EXCHANGE
On February 3, 2004, the Company acquired the daily newspapers in Corning,
New York and Freeport, Illinois from Lee Enterprises, Inc. in exchange for the
Company's daily newspapers in Elko, Nevada and Burley, Idaho, as well as its
weeklies in Haily, Idaho and Jerome, Idaho (the "Lee Exchange"). In conjunction
with the Lee Exchange, the Company received cash proceeds of $2,184. The Company
used an independent third-party valuation firm to determine the fair value of
the newspaper businesses acquired in the Lee Exchange, which collectively
resulted in a pre-tax gain of $7,661, or a gain of $4,591, net of the tax effect
of $3,070. The Company has accounted for the acquired newspaper businesses using
the purchase accounting method. Accordingly, the purchase price has been
allocated to the assets acquired and liabilities assumed based on their
respective fair values. The independent third-party valuation firm determined
the fair values and estimated remaining useful lives for the advertiser and
customer relationships and masthead intangible assets. Advertiser and customer
relationships are being amortized over remaining useful lives of 30 and 20
years, respectively. Mastheads have not been amortized because their useful life
was determined to be indefinite.
6
The operating results of the acquired newspaper businesses from the Lee
Exchange have been included in the unaudited interim consolidated financial
statements since the exchange date. The operating results of the newspaper
businesses disposed of in the Lee Exchange have been accounted for as a
discontinued operation and, accordingly, such amounts have been reclassified to
reflect the disposition as a discontinued operation for all periods presented.
Income from discontinued operations for the three months ended March 31, 2004
includes operating income of $2 and a gain on the exchange of $4,591, net of
tax.
A computation of the gain on the exchange is as follow:
Fair value of newspaper businesses acquired........ $24,579
Cash consideration received from Lee............... 2,184
-------
26,763
Net book value of newspaper businesses disposed.... (18,364)
Other liabilities.................................. (270)
Legal and professional fees........................ (468)
-------
Gain on exchange before taxes...................... 7,661
Income tax expense................................. 3,070
-------
Gain on exchange, net of tax.............. $ 4,591
=======
The purchase price allocation for the newspaper businesses acquired is as
follows:
Fair value of newspaper businesses acquired $24,579
=======
Current assets..................................... $ 869
Property, plant, and equipment..................... 3,300
Advertiser customer relationships.................. 7,947
Subscriber customer relationships.................. 2,588
Mastheads.......................................... 3,004
Current liabilities................................ (920)
-------
Remainder (goodwill)...................... $ 7,791
=======
(4) WRITE-OFF OF DEFERRED FINANCING COSTS
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.
7
ITEM 2. 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 March 31, 2004, properties
outside the metropolitan areas, also referred to as the community markets,
represented 87% of the Company's 294 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.
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 "Lee
Acquisition"). In conjunction with the exchange, the Company received cash
proceeds of $2.2 million. The Company used an independent third-party valuation
firm to determine the fair value of the newspaper businesses acquired in the Lee
Exchange, which collectively resulted in a pre-tax gain of $7.7 million, or a
gain of $4.6 million, net of the tax effect of $3.1 million. The operating
results of the acquired newspaper businesses from the Lee Exchange have been
included in the unaudited interim consolidated financial statements since the
exchange date. The operating results of the newspaper businesses disposed of in
the Lee Exchange have been accounted for as a discontinued operation and,
accordingly, such amounts have been reclassified to reflect the disposition as a
discontinued operation for all periods presented. See Note 3 to the unaudited
interim consolidated financial statements included herein.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain revenue and
expense items expressed as a percentage of total revenues:
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
------ ------
REVENUES:
Advertising............................................. 72.8% 74.7%
Circulation............................................. 18.0 18.4
Job printing and other.................................. 9.2 6.9
------ ------
Total revenues............................................. 100.0 100.0
OPERATING COSTS AND EXPENSES:
Operating costs......................................... 50.2 49.0
Selling, general and administrative..................... 27.8 28.4
Depreciation and amortization........................... 7.2 8.2
Loss on sale of assets.................................. -- 0.1
------ ------
Income from continuing operations.......................... 14.8 14.3
Interest expense - debt.................................... 11.8 13.2
Interest expense - amortization of deferred financing
costs.................................................... 0.6 0.7
Write-off of deferred financing costs...................... -- 0.4
------ ------
Income (loss) from continuing operations before
income taxes............................................ 2.4 --
Income tax expense......................................... 1.1 0.2
------ ------
Income (loss) from continuing operations................... 1.3 (0.2)
Income from discontinued operations, net of tax............ 10.0 0.1
------ ------
Net income (loss).......................................... 11.3% (0.1)%
------ ------
8
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
Total Revenues. Total revenues for the quarter ended March 31, 2004
increased by $3.4 million, or 8.1%, to $45.7 million from $42.3 million for the
quarter ended March 31, 2003. The increase in total revenues was comprised of a
$1.7 million or 5.3% increase in advertising revenues, a $0.4 million or 5.5%
increase in circulation revenue, and a $1.3 million or 45.6% increase in job
printing and other revenue. The increase in advertising revenues was primarily
due to higher local display advertising in the Company's community and Chicago
suburban markets of $0.6 million and $0.3 million, respectively, higher preprint
advertising of $0.2 million, the revenues from the newspaper businesses acquired
in the Lee Exchange of $0.9 million, partially offset by a decrease in
non-newspaper revenues of $0.3 million. The increase in circulation revenue was
primarily due to the Lee Exchange of $0.5 million, partially offset by lower
circulation revenues in the Company's community markets of $0.1 million. The
increase in job printing and other revenue was primarily due to an increase in
commercial printing in the Chicago suburban market due to the acquisition of a
print facility in December 2003.
Operating Costs. Operating costs for the quarter ended March 31, 2004
increased by $2.3 million, or 10.9%, to $23.0 million from $20.7 million for the
quarter ended March 31, 2003. The increase in operating costs was primarily due
to operating costs from the newspaper businesses acquired in the Lee Exchange
and the print facility acquired in December 2003 of $1.9 million and higher
newsprint costs of $0.2 million.
Selling, General and Administrative. Selling, general and administrative
expenses for the quarter ended March 31, 2004 increased by $0.7 million, or
5.6%, to $12.7 million from $12.0 million for the quarter ended March 31, 2003.
The increase in selling, general and administrative expenses was due primarily
to selling, general and administrative costs from the newspaper businesses
acquired in the Lee Exchange and the print facility acquired in December 2003 of
$0.4 million and higher performance-based incentive compensation of $0.2
million.
Depreciation and Amortization. Depreciation and amortization expense for the
quarter ended March 31, 2004 decreased by $0.2 million to $3.3 million from $3.5
million for the quarter ended March 31, 2003. During the quarter ended March 31,
2004, the Company recorded $2.1 million in amortization of intangible assets,
compared with $2.4 million for the quarter ended March 31, 2003. The decrease in
amortization is primarily due to a decrease in non-compete intangible
amortization of $0.3 million resulting from certain non-compete assets that are
now fully amortized.
EBITDA. The Company recorded net income of $5.2 million for the
quarter ended March 31, 2004, compared to a net loss of $0.1 million for the
quarter ended March 31, 2003. EBITDA (which is defined as earnings before
interest, taxes, depreciation and amortization) for the quarter ended March 31,
2004 increased by $8.2 million, or 85.7%, to $17.7 million from $9.5 million for
the quarter ended March 31, 2003. The increase was primarily due to higher
revenues of $3.4 million and lower depreciation and amortization expense of $0.2
million, partially offset by higher operating costs of $2.3 million and higher
selling, general and administrative costs of $0.7 million. The quarter ended
March 31, 2004 also included a gain of $7.7 million, before taxes, from the
exchange of publications in the Lee Acquisition. The quarter ended March 31,
2003 included write offs of deferred financing costs of $0.2 million. EBITDA is
not a measurement of financial performance under accounting principles generally
accepted in the United States of America, or GAAP, and should not be considered
in isolation or as an alternative to income from operations, net income (loss),
cash flows from operating activities or any other measure of performance or
liquidity derived in accordance with GAAP. EBITDA is presented because the
Company believes it is an indicative measure of the Company's operating
performance and its ability to meet its debt service requirements and is used by
investors and analysts to evaluate companies in its industry as a supplement to
GAAP measures.
Not all companies calculate EBITDA using the same methods; therefore, the
EBITDA figures set forth herein may not be comparable to EBITDA reported by
other companies. A substantial portion of the Company's EBITDA must be dedicated
to the payment of interest on its outstanding indebtedness and to service other
commitments, thereby reducing the funds available to the Company for other
purposes. Accordingly, EBITDA does not represent an amount of funds that is
available for management's discretionary use.
The Company believes that net loss is the financial measure calculated and
presented in accordance with GAAP that is most directly comparable to EBITDA.
The following table reconciles net loss to EBITDA for the three ended March 31,
2004 and 2003:
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---------- ----------
Net income (loss).................... $ 5,166 $ (47)
Depreciation and amortization(1).. 3,320 3,604
Interest expense.................. 5,670 5,886
Income tax expense(2)............. 3,577 105
---------- ----------
EBITDA............................... $ 17,733 $ 9,548
========== ==========
(1) Depreciation and amortization expense for the three months ended March 31,
2004 and 2003 includes approximately $0.1 million related to the newspaper
businesses disposed of as a part of the Lee Exchange.
(2) Income tax expense for the three months ended March 31, 2004 consists of
approximately $3.1 million related to the gain recorded on the Lee Exchange
and approximately $0.5 million related to the loss from continuing
operations. Income tax expense for the three months ended March 31, 2003 is
attributable solely to the income from continuing operations.
9
Interest Expense. Interest expense for the quarter ended March 31, 2004
decreased by $0.2 million to $5.7 million from $5.9 million for the quarter
ended March 31, 2003. The decrease in interest expense was due primarily to
lower interest rates and less outstanding indebtedness during the three months
ended March 31, 2004 as compared to the three months ended March 31, 2003.
Write-off of Deferred Financing Costs. As of March 31, 2003, the Company
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,
the Company wrote off these costs because the Company postponed amending its
Amended Credit Facility.
Income Tax Expense. Income tax expense for the quarter ended March 31, 2004
was $0.5 million compared to an income tax expense of $0.1 million for the
quarter ended March 31, 2003. The increase of $0.4 million for the quarter ended
March 31, 2004 was primarily due to an increase in deferred federal income tax
expense recognized by LGO for the quarter ended March 31, 2004.
Income from Discontinued Operations. Income from discontinued operations was
$4.6 million for the quarter ended March 31,2004 compared to $0.1 million for
the quarter ended March 31, 2003. The Lee Exchange on February 3, 2004 resulted
in a pre-tax gain of $7.7 million and an after-tax gain of $4.6 million.
CRITICAL ACCOUNTING POLICY DISCLOSURE
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
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 cluster 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.
10
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
The Company's primary cash requirements are for working capital, borrowing
obligations and capital expenditures. 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. The Company's principal sources of funds have 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 working capital needs, 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.
Cash flows from operating activities. Net cash provided by operating
activities for the three months ended March 31, 2004 increased by $1.7 million
to $2.0 million compared with net cash provided by operating activities of $0.3
million for the three months ended March 31, 2003. The increase is primarily due
to an increase in working capital of $1.0 million and income from continuing
operations before depreciation and amortization of $0.5 million.
Cash flows from investing activities. Net cash provided by investing
activities was $1.6 million for the three months ended March 31, 2004 compared
to net cash used in investing activities of $0.2 million for the three months
ended March 31, 2003. The increase of $1.8 million in cash flows was primarily
due to the $2.2 million of proceeds related to the Lee Exchange partially
offset by $0.6 of capital expenditures. The Company's capital expenditures
consisted of the purchase of machinery, equipment, furniture and fixtures
relating to its publishing operations and amounted to 1.1% of revenues.
Cash flows from financing activities. Net cash provided by financing
activities was $0.2 million for the three months ended March 31, 2004 compared
to net cash provided by financing activities of $1.1 million for the three
months ended March 31, 2003. The decrease in cash provided by financing
activities is due to the increase of dividends to parent of $1.0 million. The
Company's financing activities for the three months ended March 31, 2004
reflects increased net borrowings 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").
Amended Credit Facility. The Amended Credit Facility provides for a $100.0
million principal amount Term Loan B that matures in March 2007 and a revolving
credit facility with a $135.0 million aggregate commitment amount available,
including a $10.0 million sub-facility for letters of credit, that matures in
March 2005. The Amended Credit Facility is secured by a first-priority security
interest in substantially all of the tangible and intangible assets of LGO, LGP
and LGP's other present and future direct and indirect subsidiaries.
Additionally, the loans under the Amended Credit Facility are guaranteed,
subject to specified limitations, by LGP and all of the future direct and
indirect subsidiaries of LGO and LGP. The Company is required to permanently
reduce the Term Loan B and/or revolving commitment amount with disposition
proceeds in excess of $1.5 million if the proceeds are not reinvested in
Permitted Acquisitions (as defined under the Amended Credit Facility) within 300
days of receipt of such proceeds.
The Term Loan B and the revolving credit facility bear interest, at LGO's
option, equal to the Alternate Base Rate for an ABR loan (as defined in the
Amended Credit Facility) or the Adjusted LIBO Rate for a eurodollar loan (as
defined in the Amended Credit Facility) plus an applicable margin. The
applicable margin is based on: (1) whether the loan is an ABR loan or eurodollar
loan; and (2) the ratio of (a) indebtedness of LGO and its subsidiaries that
requires interest to be paid in cash to (b) pro forma EBITDA for the 12-month
period then ended. The weighted average interest rate for the Amended Credit
Facility for the three months ended March 31, 2004 was 4.7%. 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 March 2005 maturity date. As of March 31,
2004, the Term Loan B requires principal payments of $0.4 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.
11
The Company is highly leveraged and has indebtedness that is substantial in
relation to its stockholder's equity, tangible equity and cash flow. Interest
expense for the three months ended March 31, 2004 was $5.7 million including
non-cash interest of $0.3 of deferred financing. 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 March 31, 2004, approximately $79.5 million was outstanding under the
Amended Credit Facility (without giving effect to $1.5 million of outstanding
letters of credit as of such date) and the aggregate principal amount of the
Notes outstanding was $180.0 million.
On July 25, 2003, the Operating Company and 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.
SUMMARY DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table reflects a summary of the Company's contractual
obligations as of March 31, 2004 (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....................... 71,385 372 26,862 35,321 8,830 -- --
Revolving credit facility......... 8,085 -- 8,085 -- -- -- --
Operating leases:
Real estate lease payments........ 1,415 357 435 427 123 71 2
Other contractual obligations:
Non-compete payments.............. 1,091 226 282 177 177 121 108
Finder fee payments............... 125 125 -- -- -- -- --
Other............................. 73 73 -- -- -- -- --
--------- ------- -------- --------- ------- --------- ---------
$ 262,174 $ 1,153 $ 35,664 $ 35,925 $ 9,130 $ 180,192 $ 110
========= ======= ======== ========= ======= ========= =========
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 $370,000 in management fees for each of the quarters ended
March 31, 2004 and 2003 to Leonard Green & Partners, L.P. The Company was
obligated to pay other fees to Leonard Green & Partners, L.P. of $125,000 at
March 31, 2004.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain "forward-looking statements" (as defined in
Section 21E of the Securities Exchange Act of 1934, as amended) that reflect the
Company's expectations regarding its future growth, results of operations,
performance and business
12
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 of the Annual
Report on Form 10-K for the year ended December 31, 2003 for a discussion of the
above factors and other factors. For purposes of this Form 10-Q, any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. The Company is not obligated and has no intention to
update or revise these forward-looking statements to reflect new events,
information or circumstances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Operating Company has a $135.0 million revolving credit facility and a
separate Term Loan B that mature in March 2005 and 2007, respectively.
Borrowings under the revolving credit facility and the Term Loan B bear interest
at an annual rate, at Operating Company's option, equal to the Alternate Base
Rate (as defined in the Amended Credit Facility) or the Adjusted LIBO Rate (as
defined in the Amended Credit Facility) plus a margin that varies based upon a
ratio set forth in the Amended Credit Facility. As a result, Operating Company's
interest expense will be affected by changes in the Alternate Base Rate or in
the Adjusted LIBO Rate. At March 31, 2004, Operating Company had borrowings
outstanding of $8.1 million under the revolving credit facility (without giving
effect to $1.5 million of outstanding letters of credit as of such date) and
$71.4 million under the Term Loan B. The weighted average interest rate for the
Amended Credit Facility for the three months ended March 31, 2004 was 4.7%. A
hypothetical 100 basis point change in interest rates would impact quarterly
interest expense by approximately $0.2 million based on the balance outstanding
at March 31, 2004. For additional information regarding the Company's Amended
Credit Facility, see " Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources."
Newsprint is a commodity subject to supply and demand market conditions. See
Item 1 "Business -- Newsprint" in LGO's Form 10-K for the year ended December
31, 2003 for further discussion.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms,
and that such information is accumulated and communicated to the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As of March 31, 2004, the end of the quarter covered by this report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and the Company's Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on the foregoing, the Company's Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective at the reasonable assurance level.
There has been no change in the Company's internal controls over financial
reporting during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
controls over financial reporting.
13
PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved from time to time in legal proceedings relating to
claims arising out of its operations in the ordinary course of business. The
Company is not party to any legal proceedings that, in the opinion of the
Company's management, are reasonably expected to have a material adverse effect
on the Company's business, financial condition or cash flows.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
LGO, which paid a cash dividend to Parent of approximately $2,102,000 in
2003, is subject to certain covenants that limit its ability to pay dividends
and make other restricted payments. See Part I, Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
31 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 17, 2004 LIBERTY GROUP OPERATING, INC.
/s/ KENNETH L. SEROTA
--------------------------------------
Kenneth L. Serota
President, Chief Executive Officer and
Chairman of the Board of Directors
(principal executive officer)
/s/ DANIEL D. LEWIS
--------------------------------------
Daniel D. Lewis
Chief Financial Officer
(principal financial and accounting officer)
15